Uber: Playing the longer game for future gain

Uber's model is 'Business 101', according to an Uber spokeswoman.'You raise money, you invest money, you grow, you make a profit.'

Uber Technologies, a startup with losses that outstrip revenue, is drawing fresh comparisons with another big tech company that has a reputation for spending: Amazon.

Uber had an operating loss of $470 million (€434m) on $415m in revenue in a time period not specified, according to information that’s being shown to potential investors in the ride-sharing service. An Uber spokeswoman called the numbers “substantially old.”

Getting Uber’s car-booking application up and running in cities around the globe isn’t cheap. Its major costs include an international expansion, subsidising rides in new markets, recruiting drivers, hiring engineers, leasing offices and building a lobbying operation.

Similarly, Amazon has favoured hefty investments in delivery services, new businesses and data centres to woo customers and make its service indispensable, instead of focusing on profit growth.

“They’re wise to expand as fast as they can,” said Lou Shipley, a lecturer at the MIT Sloan School of Management. “I would liken it to what Amazon did with books.”

Venture capitalists and academics say that Uber’s business demands scale and density within cities – it needs a lot of people placing orders for lifts on their smartphones and a lot of drivers to come pick them up. That’s something it can only build through aggressive spending on marketing, operations and ride subsidies, and it could take years until San Francisco-based Uber knows whether its business model is sustainable on a global scale.

“For Uber to work, it needs to have enough density that it’s faster and more convenient and they’re able to do that in large cities, so what they’ve tried to do is they lose on every ride in a lot of places to achieve that density,” said Mike Munger, a professor of economics and public policy at Duke University.

Amazon is becoming a popular point of comparison for Uber. For years, the online retailer has been building warehouses and data centres, adding new products and vendors, and offering new services such as media streaming in a bid to keep customers engaged on its website and reliant on its services.

For years, Amazon – which was founded in 1994 and held an initial public offering in 1997 – was unprofitable. In 2000, the e-commerce company reported a net loss of $1.41 billion on $2.76 billion in revenue. The next year, Amazon fired about 15% of its workforce, closed a fulfilment centre in Georgia and two customer-service locations, and slashed capital expenditures by about 60%. The company’s loss narrowed to $567.3 million on sales of $3.12 billion in 2001. It further trimmed losses in 2002 and was profitable in 2003.

Amazon continues to pour money into new businesses and fulfilment operations. Operating expenses in the first quarter were almost equal to what it generated in revenue.

Unlike Amazon, which went public just three years after its founding, closely held Uber doesn’t face pressure from shareholders to rein in losses and cut expenses. Yet both have been willing to forgo more immediate profits in favour of revenue growth.

“This is Amazon writ large,” said venture capitalist Nick Sturiale. “It’s not just winning the current business, it’s probably teeing up future businesses.”

Uber and its investors are betting that as it adds customers in new cities, and tests new features such as messenger services and food delivery, the six-year-old company will become profitable. That’s why the ride-hailing startup is raising so much money – it has a valuation of $50 billion – and growing internationally so quickly.

Uber’s plan to hook customers on its mobile app in new cities includes keeping the cost of its rides low. As anyone who has taken an Uber and talked to the driver knows, sometimes the fare collected from the rider is less than what Uber pays the driver. The company uses the same strategy with its carpooling programme, uberPOOL.

Uber’s model is “Business 101,” said Nairi Hourdajian, an Uber spokeswoman. “You raise money, you invest money, you grow (hopefully), you make a profit and that generates a return for investors.”

Inevitably, when a technology company is spending profusely and losing more money than it makes, people think of the Internet bubble of the late 20th Century.

Anand Sanwal, chief executive officer of venture-capital researcher CB Insights, worked at delivery startup Kozmo.com – a victim of the dot-com bust – as a manager for strategic growth in 2000. Sanwal said: “If you’re spending more than you’re making, it’s hard to say the model is proven out.”

He said it’s still an “open question” whether Uber can successfully expand its model globally: “It could be one of those things that the model works in New York and it works in San Francisco and it works in certain areas, but I think proving it out in all these different markets is still to be done.”

It could take years to know if it is sustainable


Lifestyle

Wesley O’ Regan is the General Manager of Popscene in Voodoo Rooms, Cork city. Popscene opened last November and is Cork’s only themed bar that is dedicated to celebrating the best of the 80s and 90s. https://www.facebook.com/PopsceneCork/You've Been Served: Wesley O'Regan, Popscene

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