Casual-labour powered carpool dispatcher Uber lost $1.27bn in the first half of 2016, or almost $7m a day. And the losses are increasing.
Losses in Q2, which saw Uber throw in the towel in China, were $750m, according to insiders who whispered to Bloomberg.
So how did Uber manage to lose so much money? The company owns no vehicles and its drivers are casual, paid only when they’re making a journey. Uber thus evades most of the labour costs of traditional business, while the overheads of maintaining a fleet are borne by the drivers.
In the words of Broadstuff analyst Alan Patrick, Uber is not a car business, but a “wage arbitrage” business.
CEO Travis Kalanick explains that Uber increased subsidies – discounts and credits – to compete with Lyft in the United States. It seems to have worked, but at a cost. Last week Uber bought a stake in Autononmous vehicle startup Otto for $680m.
But it isn’t the cash burn that’s the problem, according to Professor of Finance at the Stern School of Business at NYU, Aswath Damodaran, who has blogged illuminatingly on the business.
“What allowed these companies to grow incredibly fast is getting in the way of converting revenues to profits, since there are no moats to defend,” he notes, but that’s now changing. Ominously, if you’re an Uber investor, it’s now spending not to grow the business, but to tread water: “a significant portion of their expenses are associating with maintaining revenues rather than growing them,” in Damodaran's words.
“Do you think that the pieces are in place for these companies to generate profits? I don't think so, as ride prices keep dropping, new ride sharing businesses pop up and the costs continue to increase?”
Uber’s goal is to achieve a monopoly, at which point it can reduce discounts to drivers and increase rates to passengers.
“One of their senior executives has said that Uber currently take 20 per cent of every ride but they’ll take 30 per cent of every ride where they can, “‘because we can’” author Tom Slee told us in an interview earlier this year. Slee’s book What’s Yours Is Mine: Why The Sharing Economy Isn’t takes casual labour networks Uber to task. ®