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Uber is Breaking Bad

Uber, the darling in the universe of unicorns, had a tough week. News trickled about its continued financial hemorrhaging despite giving up its fight in China against Didi Chuxing. Then it had to walk away from its autonomous cars tests in San Francisco as the regulators showed their displeasure. There is no doubt that Uber disrupted the car-for-hire market. The question is whether its strategy to evolve into a data company and deliver first on fully autonomous transport is viable given the execution risk or just a response to a business model littered with threats.

Source: gratisography.com

At current private market valuation levels, the strategy risk is high. The most recent capital raise valued the company at over $60B. This amount is more than half the total revenues of the entire global car-for-hire market. If you agree with the private markets, Uber will be the only player in the global car-for-hire market or the strategic options it holds for delivery logistics, data on travel patterns, and autonomous cars are the value proposition. Of course, you could agree with the academic valuation, making this valuation argument mute.

Breaking Bad, a popular American television series revolving around an illegal drug business, showed two things are required for a superior business: a good product and good distribution. A good product that doesn’t get to market has little value. Conversely, the wide distribution of an inferior product leaves the market open to the entry of a better product. The combination of strength in both areas can lead to a sustainable business. Uber’s valuation is contingent on the sustainability of its product and distribution strategy.

Uber improves service. Uber replaced the dispatch of the car-for-hire (e.g. limousine) industry. The economic benefits are apparent: improved efficiency in matching driver and customer, while the expansion of supply pressured car-for-hire pricing to the benefit of the consumer. Economics was not the only reason; user experience improved with innovative features including the ability to rate the driver (and passenger), the payment via the app, and capacity to see the location of your driver. While these were minor evolutions, they increased in the ease of use and, for the world traveler, one global access point for a taxi.

Supplying demand. Uber scaled up as a platform as more drivers brought more customers who brought more drivers and reduced wait times. The benefits to drivers were tangible: the freedom to choose your own time, increase the utilization rate of the driver’s largest asset, it is comically easy to join, and even providing financing for their car. Low barriers to entry supplied so many drivers in some cities that it threatened the viability of the traditional car-for-hire market.

Drivers without customers are unhappy employees. Uber subsidized users for their initial use and for referring friends to the app. Constant promotion helps to stimulate customers demand. With the goal of monopolistic pricing, Uber is trying to dominate market share on both sides of the equation.

Economics meet reality. Uber´s ride pricing strategy included innovative surge pricing that raised prices when there was high demand with the belief that this would pull more drivers onto the road. Economists rightly applauded the pricing models for matching supply and demand, while customers were less enthused.

Economics argues that increased demand leads to increased pricing that then leads to increased supply. Research, however, indicated that pricing was not necessarily a motivator for the drivers as they had predetermined targets. Further research reported that they just didn’t like driving in poor conditions. Surge pricing is a time limited trade-off between a marginally higher rate for an unknown period versus the inconvenience of dropping whatever you’re currently doing to try and capture the incentive.

The risk for the driver is whether they can generate sufficient revenue to make the time worth it. The contingent revenue sharing model delivered three-quarters to the driver at little risk to either Uber or the driver. If competition or regulation enter the market, then who will feel the squeeze of margin compression? Probably those unorganized drivers with little bargaining power. Uber’s goal of delivering autonomous driving further strengthens their power. Lower prices, better service: great for customers, not ideal for those employed as drivers.

Driving to data. Uber’s relentless focus on reducing cost and better service is balanced by the necessity to dominate market share and squash competitors. An innovative product has yet to deliver a profitable company as it continues burn cash through perpetual promotion and competition, even with dominant market share and conceding defeat in its most costly battle.

Uber’s goal is to provide a car to people at a lower cost per mile than personal car ownership. As people are the largest drag on the cost structure, getting rid of them would dramatically lower costs. Thus, autonomous cars are the way forward, not just to minimize employee rallies. For Uber the future is not people, it is technology and data. The question is whether Uber is in the future.

Autonomy first. Autonomous cars are already here, and Uber is trying to catch-up by soliciting researchers and buying truck driving companies. Uber’s viability depends on delivering the technology to scale otherwise their business model of coordinating drivers, and customers will disappear. Uber is betting that it will be the only autonomous technology; however, all the major car companies are heading down the same path, and some are already there. The most likely outcome the current vehicle market: many players delivering commoditized variations on a theme with small margins.

Betting on data. Uber envisions a future where data on customer usage patterns from autonomous cars will drive the value proposition. Of course, big data promises insights that the past did not envision. Uber wants to capture all the usage data to optimize travel patterns and dominate the logistics of delivering people and things.

The problem for Uber’s future in data is that location tracking services are already present in everyone’s pockets. The data Google and Apple collect are not limited to just when people need to drive: they know all the travel patterns and can tell you when is the best time to go to the gym. The fact that Uber was dependent on the mapping services of Google explains the recent deal with TomTom. Still, it’s hard to see how they will have better data given their narrower usage data and compared to other logistics competitors who know what customers want.

Distributing success. The autonomous technology and data challenges may not be their largest problem. Uber is dependent on the platforms of Apple and Google to distribute their app and thus make the connection between driver and customer. In the future, it’s not clear the customer or the driver will need Uber. In a world where your identity is on your phone, maps tell you who and what is nearby, online profiles are your brand, and payment is just a thumbprint away, it’s hard to see what Uber brings to the equation.

You already open your phone to find out what’s nearby. It’s a small step to locate drivers with their LinkedIn profile and ratings providing an insight to their quality. Verification of registration and license are done remotely. Complete payment with your mobile based on distance traveled and an agreed upon tariff. The reality for Uber is that everything they do is dependent upon competitor technologies and platforms. The strategy risk to competing with so many well-funded competitors in so many dimensions is formidable. The greatest danger, however, is acting as the bridge in a world that doesn’t need you to connect.

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