How Did Uber Just Manage To Lose $5 Billion in Three Months?

There are no profits without barriers to entry or switching costs. At the moment, Uber and virtually all of its competitors, have neither. JL


Will Bedingfield reports in Wired:

The issue goes to the heart of the ride-sharing market, which is flooded with competitors. “The taxi services they are looking to disrupt aren't profitable without regulation. What made them profitable in the first place was controlling the competition. “So it's funny that these new companies are trying to take market share, assert dominance, and remove competitors, but when they take away regulation there's no profit to be had and zero barriers to entry.” Amazon and Alibaba, operate in markets with a much higher entry cost. When Uber tries to raise prices growth disappears.

Uber is the largest ride-hailing app in the world – valued at upwards of $80 billion (£66bn) – but it has never turned a profit.

Now, the company has posted its biggest-ever quarterly loss, a staggering $5.24bn (£4.3bn) in the three months to the end of June. This news, coupled with the company’s slowest-ever revenue growth in the same quarter, have caused its shares to slide 10 per cent.

“To say that earnings were disappointing would be an understatement,” says Alyssa Altman, transportation lead at digital consultancy Publicis Sapient. “Uber has turned into the magical money burning machine.”

So what has happened? How did Uber lose more than $5bn in such a short space of time?

Across the world, Uber is facing massive competition from a saturated market in both its ride-sharing and food delivery services. Lyft in the US – which reported better, but still poor, results of a $644 million (£533m) loss during the same quarter – Bolt in the UK, Ola Cabs in India and Yandex Taxi in Russia are among those challenging Uber on the ride-sharing front. For the food delivery side of its business it's facing Deliveroo and JustEat in the UK and in the US it's seeing fierce competition from GrubHub, Postmates and DoorDash.

About $3.9 billion [£3.2 billion] of the shortfall was stock-based compensation that Uber recently paid its employees, so a loss was expected, but not one this large. It should not be a surprise, says Aaron Shields, executive strategy director at FITCH, a retail brand consultancy. “Uber is a company that's probably never raised so much cash and had such big losses,” he says.

The issue goes to the heart of the ride-sharing market, which is flooded with competitors. “The taxi services they are looking to disrupt or replace simply aren't profitable without regulation. What made them profitable in the first place was controlling the competition,” he says. “So it's a funny thing that these new companies are trying to take market share, assert dominance, and remove competitors from the market, but when they take away regulation there's no profit to be had and zero barriers to entry [for other competitors].”

Other monolithic firms, such as retailers Amazon and Alibaba, operate in markets with a much higher entry cost. “They can put in distribution centres, win the market with quite involved consumer products, blow competitors out, and then because of the high cost of entry these competitors stay out.”

Another issue for the ride-hailing industry, Shields explains, is the lack of “switching costs” between the various apps: the costs (whether in time, or effort) that a consumer incurs as a result of changing to another service. For instance, you might not want to lose the convenience of Amazon’s one-click shopping, or you might prefer Alibaba because you don’t want to pay for the product until it arrives at your door.

But with ride-sharing, there’s no consumer involvement like this to keep them from switching. “If I look down at my phone I've literally got six ride-hailing apps on there, and five bike-sharing apps, and drivers are the same – they'll just go with whoever is busy or wherever they can get the peak pricing,” says Shields. “The competitors on the market are taking advantage of switching costs – they’re dividing up a market and making it more saturated.”

This is a gift for consumers, he says, who now have more choice and fewer costs, but this convenience involves taking profits from the ride-hailing companies, who have to subsidise rides to keep costs down and offer drivers greater incentives.

Food delivery services are slightly better when it comes to cultivating customer loyalty. “You trust somebody to get to your food more quickly, and the broader menus ranges also come into it,” says Shields.

In a sense, says Shields, all of the ride-sharing apps are in the same unenviable boat. “You can lump Uber and Lyft in the same pile as Didi in China and Ola in India,” he says. “They’re all operating the same model and operating with the same losses, and they reduce their losses when they do things like take away some of the drivers’ profits, which Lyft did recently.”

John Colley, a professor at Warwick Business School, agrees. “Uber’s disruption of the industry has not changed switching costs or entry barriers – competition remains fierce as virtually all taxi businesses have an app and the supply of drivers to the industry is almost infinite,” he says. “Anyone with a roadworthy car and a driving licence who can pass a criminal record search is a potential driver for a taxi ride hailing business. Whenever Uber tries to raise prices growth virtually disappears.”

Yet Uber continues to grow in some respects – it completed 1.68bn rides and delivery trips in the same quarter, slightly more than the 1.65bn analysts predicted. And the company will continue to venture into new markets, explains Altman, as with its partnership with Cargo, a startup that allows drivers to sell goods like gum, phone chargers and snacks in their cars. “The move into e-commerce with the launch of Cargo is a logical step in order to capitalise on a previously untapped sector,” she says. The rather major issue, is Uber’s competitor in this area, “the giant of giants – Amazon.”

Regardless, moving into new markets is essential for the company going forward. It has to be something that has higher switching costs, says Shields. “It might be autonomous driving, it might be cargo – it's probably not things like food delivery. But unless they start owning vehicles or finding a new model, you have to do something to raise the cost of entry, or raise the switching costs”. While the ride-sharing business has given Uber scale and capital, this needs to be invested in something with structural profitability. “Otherwise,” says Shields, “they’re just going to run out of road.”