The Uber Bubble

Uber is one of the worst Venture Capital (VC) investments since Webvan. Uber is in a low margin business that can only scale through the net addition of more drivers. This is not a business model that will turn out well for the VC firms that have pumped billions into Uber.

Uber is sometimes compared to another thinly profitable business, Amazon. But this comparison has no basis in reality.

Amazon is a company built on leveraging infrastructure. Amazon started as an on-line bookseller and came to dominate this market. Once Amazon built the infrastructure to warehouse and ship books, they leveraged it to becoming the “everything store”. To support Amazon’s ever growing retail operation, Amazon built computing and software infrastructure that they have leveraged to build Amazon Web Services, which has grown into a multi-billion dollar business.

Amazon requires people to operate their infrastructure, but incremental growth in Amazon revenue does not require adding additional people.

In contrast, every dollar in commission that Uber receives comes directly from a driver who has carried a passenger from one location to another. Uber’s growth depends on a net increase in the number of drivers who use Uber’s phone app.

Revenue growth for a taxi company also relies on hiring additional taxi drivers. Uber, however, is not just signing up drivers. They must attract “independent contractors” who are willing to bear the cost of their vehicles, their gasoline and insurance. In some cities, the drivers must also risk fines for operating a taxi without a taxi medallion.

In the early days Uber attracted drivers by holding out the promise that Uber offered a technology that would allow an Uber driver to build a profitable independent business, in return for the driver’s capital investment in their vehicle. Uber also offered subsidies and low commissions.

In the San Francisco Bay Area, where Uber has become strongly established, the subsidies have disappeared and the commission charged by Uber has increased. At the some time, Uber continues to sign up drivers. This has created a race-to-the-bottom where inexperienced drivers are competing with early Uber drivers. These early Uber drivers have seen their income drop. On NPR (June 18, 2015) an Uber driver said that he felt trapped by the expense he incurred buying a car to drive for Uber.

Many Uber drivers are active on discussion boards. If it becomes apparent that Uber’s promise of a good income is nothing but a mirage, Uber will have a hard time attracting new drivers. This, in turn, will mean that Uber will have a hard time growing their revenue.

Over time, Uber may come to resemble a taxi company, with better software. The taxi business is not known for its high margins. Venture capital firms do not invest in taxi companies. Yet they have invested in Uber. The only question now is whether the VCs will be able to unload Uber in a stock offering.

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