Friday, August 26, 2016

Uber is betting billions on two very big ifs

Until now, I haven't paid much attention to Uber's business model, but this article made me think about it, and the entire company's future seems to be built on two very big ifs. I have trouble seeing both of these ifs breaking their way.

Uber isn't making any money with its current business plan. In fact, it is losing money at an alarming rate. It lost $1.27 billion in the first half of this year. The company is not charging nearly enough to be able to cover the cost of their human drivers, the biggest expense at the moment. What Uber is doing now is completely unsustainable, but their plan is to burn through a huge amount of money to grow quickly and make money later.

The problem is that the main way Uber plans to make money later, apparently, is by replacing its drivers with much cheaper self-driving cars. For this to work, though, two big things need to go Uber's way.

1) True self-driving cars need to be developed fast enough that regulators will let them travel without human supervision before Uber runs out of cash. So far the technology is looking promising, but there are reasons to be skeptical.

2) The bigger bet is that once this self-driving technology is developed, people will keep using Uber. While people currently associate Uber with getting a ride, people also associate cars/travel with a lot of companies. When people think of cars, they think of the big car companies. When people think of finding directions, they think of Google and Apple maps. When people think of finding places to go, they think of companies like Yelp and Aroundme. There is no reason to think Ford, Tesla, Google, Apple, or even Yelp can't launch their own equally successful ride app once the self-driving cars are ready to make autotaxi services profitable.

Uber is probably getting some great data about millions of people's travel patterns, but that data isn't unique. Obviously map programs like Google maps, as well as apps that are almost always on like Facebook, probably have a decent or even better body of travel data to draw from.

It seems Uber's plan is to lose billions mainly so at some point in the future people will automatically think of them as "the ride app." My question is: do you think all this will beat Google, Apple, or Samsung just deciding to include their own default ride app on their new phones? It is possible, but it's a big if.

In poker terms, Uber seems to be betting billions on the flop hoping they can pick up two spades on the turn and the river to make their flush. That is normally considered a fool's bet. The fact that there is so much money in Silicon Valley willing to get behind such bets should raise wider questions.


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