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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.


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.