📰 Grad Paper Example 3

Graduate Paper 3

April 26th, 2021
The Economics of Uber

Uber is a primarily a ride-hailing platform business that also provides food and package delivery services. The Economic Development Research Group (EDR Group) took a closer look on Uber’s economic impact in the United States, and highlights of this were provided at www.uber.com/newsroom.

The first main statistic reported by EDR Group is that Uber supports $17 billion of GDP in the US per year (mid-2016 to mid-2017). Apart from the convenience to the general consumer, Uber improves productivity by saving time for business travel and thus reduces the cost of doing business. Also, many of the Uber trips would not have occurred (especially for visitors) in instances where Uber enables consumers to make trips they may not have otherwise taken. Specifically, according to this report, Uber saves riders $3.1 billion in parking costs and $4.2 billion in time savings. Overall, the driver-partners earn approximately $1.4 billion annually above what they would have earned with their next best alternative. In fact, many of the drivers use Uber to augment their income because of the flexibility of the work hours (EDRG_US_Economic_Impact_Report.pdf).

Uber therefore clearly adds value to drivers and consumers. One of the challenges then for a company like Uber that is adding economic value is why is it not profitable or generating significant shareholder value? The data show that Uber generated $10 billion in losses in the 3 years before its 2019 IPO according to Professor Mihir Desai ( https://www.nytimes.com/2019/05/09/opinion/uber-ipo.html). According to Professor Desai, venture capital funds have bankrolled the Uber fare subsidies that consumers have been benefiting from over the years. The size of the funds become more important to the venture capitalists as their fund managers receive enormous incentives on top of management fees. In his estimation this will end badly, especially for young people, investors and mutual funds chasing returns on assets they know little about.

The business model Uber employs is very challenged as noted by Len Sherman in his four-part series on Uber’s past and future forbes.com ( https://www.forbes.com/sites/lensherman/2019/06/02/can-uber-ever-be-profitable/?sh=145689ea5785). He cites Uber’s ex CEO’s Travis Kalanick’s six key assumptions as to why Uber would transform mobility. However, even the new CEO Dara Khosrowshahi has not been able to succeed (where the past CEO also failed) in stemming the chronic losses and fixing the weak business model.

The first key issue according to Sherman is that Uber is not able to achieve economies of scale as 78% of gross bookings are paid to drivers, and cost of revenue and marketing are directly related to the number of rides. The average cost therefore does not decrease materially with more rides. Also, Network effects are weak as customers can easily choose between Lyft or many of the other small competitors that exist. The ride-sharing model simply does not make the business case for having more persons using the service any more attractive. This is in stark contrast to some platforms such as Facebook or WhatsApp where network effects are immense. Uber faces many other challenges including competition from subsidized transportation, regulatory threats and no recurring revenue or means of locking in customers ( https://www.forbes.com/sites/lensherman/2019/06/02/can-uber-ever-be-profitable/?sh=145689ea5785).

In 2020 Uber lost $6.77 billion albeit an improvement from its loss of $8.51 billion in 2019, but two years of losses following its IPO ( https://techcrunch.com/2021/02/12/will-ride-hailing-profits-ever-come/). COVID-19 impacts have of course limited people moving around and impacted Uber. Nonetheless, the company still seems to have significant challenges generating shareholder value. The questions then are whether they could address the challenges with their economic model in the future and turn this around, and who will be left holding the short end of the stick if this does not materialize.

References:

1. Uber in the economy
   Written by Uber Jul 28 2018
   https://www.uber.com/newsroom/uber-in-the-economy/#:~:text=Uber’s%20products%2C%20partners%2C%20and%20technology,that%20aren’t%20always%20tangible.&text=The%20net%20economic%20value%2Dadd,reported%20amenity%20benefit%20for%20drivers.
2. EDRG_US_Economic_Impact_Report.pdf
   https://drive.google.com/file/d/1P6HMbPc8T91Y8NlYyFGv8NQS9g4ckAq9/view
3. Why You Should Root for the Uber I.P.O. to Fail
   New York Times
   May 9, 2019 by Professor Mihir Desai
   https://www.nytimes.com/2019/05/09/opinion/uber-ipo.html
4. Can Uber Ever Be Profitable
   Len Sherman Jun 2, 2019
   https://www.forbes.com/sites/lensherman/2019/06/02/can-uber-ever-be-profitable/?sh=145689ea5785
5. Will ride-hailing profits ever come?
   Alex Wilhelm Feb 12, 2021
   https://www.forbes.com/sites/lensherman/2019/06/02/can-uber-ever-be-profitable/?sh=145689ea5785