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Tuesday, December 23, 2014

Uber shits on drivers

We have been talking to Uber drivers and riders. While both love the service they have some concerns.  1 concern is a driver shows up to pick up a client and the client cancels the driver doesn't receive the any part of the cancelation fee. We are wondering why? 2 they don't allow any driver to use Frod Crown Victoria,  Mercury Grand marquis, and Lincoln Town car.  They say the city of Chicago regulations state that drivers can't.  We asked the city and they sent a letter stating that statement from Uber is untrue.  So what gives. 
Well this is what Forbes had to say about Uber. On June 3, news reports carried the story that multiple investors (including big name institutional investors like Wellington & Fidelity) had invested $1.2 billion into Uber, a technology company that matches consumers to car services in many cities around the globe. Based on the investment (and the percentage of ownership that these investors were getting in exchange), the imputed value for Uber (pre-money, i.e., prior to the influx of $1.2 billion) was $17 billion, a mind-boggling sum for a business that generates a few hundred million in revenues and has little to show in terms of operating income. That said, Uber has lots of company in this high-value space, with Airbnb and Dropbox being two other companies that in recent months have been valued at more than $10 billion by investors. With all these companies, the key selling point is disruption, the latest buzzword in strategy, with company owners arguing that they are upending existing ways of doing business (hailing a taxi, with Uber, and finding lodging, with Airbnb) and given the sizes of the businesses that they were disrupting, that the sky is the limit on value. If you are old enough to remember market fevers from past booms, you are probably inclined to dismiss both the claims and the valuations as fantasy. I do believe, however, that there is a kernel of truth to the disruption argument though I think investors are being far too casual in accepting it at face value. As I attempt to attach a value to Uber, I have to confess that I just downloaded the app and have not used it yet. I spend most of my of life either in the suburbs, where I can go for days without seeing a taxi, or in New York City, where I find that the subways are a vastly more time-efficient, cheaper and often safer mode of transportation than taxis. Uber is not in the taxi business, at least in the conventional sense, since it owns no cabs and has no cab drivers as employees. Instead, it plays the role of matchmaker, matching a driver/car with a customer looking for a ride and taking a slice of the fare for providing the service. Its value comes from the screening that it does of the drivers/cars (to ensure both safety and comfort), its pricing/payment system (where customers choose the level of service, ranging from a car to a SUV, are quoted a fare and pay Uber) and its convenience (where you can track the car that is coming to pick you up on your phone screen). The figure below captures the steps in the Uber business model, with comments on what it is that Uber offers at each stage and whether that offering is unique:
Uber business model
Uber has been able to grow at exponential rates since its founding in 2009 by Garrett Camp and Travis Kalanick, with the latter (who is new CEO) claiming that it is doubling its size every six months. While we have no access to the company’s financials, there have been periodic leaks of information about the company that allow us to get a sense of its growth. Here, for instance, was a picture that was widely dispersed in December 2013 of a five-week period in late 2013:

Uber historical numbers

While the company claimed to be outraged by the leak, it played nicely into the narrative of growth that it was selling to its investors. In fact, the December leaks suggested that the company generated gross receipts (the fares paid by customers for cab rides) of $1.1 billion, which would translate into revenues of $220 million (based on the 20% slice that Uber claims for itself). That was a few months ago and at the rates at which the company is growing, I would not be surprised if the updated values for both numbers are higher; I will be using $1.5 billion for the gross receipts and $300 million as revenues for Uber as base year numbers.

There was no information that I could find on the company’s expenses and income, but according to public sources, the company has 900 employees in its different locations and that it pays them reasonably well. Uber has been active in both marketing its service and offering deals to attract firms time customers and has an active technology department (doing the equivalent of R&D). In summary, these expenses are likely to have been much larger than the revenues (of $300 million) posted during the period. Since the company can legitimately argue that some of these expenses (such as the R&D and customer acquisition costs) are more in the nature of capital expenditures than operating expenses, I will assume (generously) that the company generated an operating income of $10 million in the most recent 12 months. (The effect on value of changing this number is relatively small).

The Washington post writes
The ride-sharing service Uber has, once again, been getting some bad press coverage over its surge pricing. The latest outrage occurred when Uber quadrupled its prices due to a surge in demand in central Sydney. The cause of that surge? A hostage siege was unfolding in a Lindt chocolate shop in Sydney’s central business district and people wanted to get out of there, fast.

Though Uber backed down when it realized that this was a mistake, once again, Uber’s surge pricing was called into question. Is it right for companies to engage in what some call “price gouging?”

Specifically, should CEO Travis Kalanick consider “fairness” when making Uber’s business decisions?

The answer is yes, but it’s complicated.

That’s because whereas policymakers look at their choices through two lenses, one that focuses on efficiency and one that focuses on fairness, businesses tend to have one goal in mind: Will the decision maximize profits?

Policymakers take a different approach.  First, they figure out whether there’s a reason for the government to intervene, such as to fix a market failure. Classic textbook examples of market failures are negative externalities, such as pollution and drunk driving, or positive externalities, such as education.

This analysis has nothing to do with fairness. The policy maker simply wants to get rid of the market failure in the most efficient way possible. It can do this with taxes, quotas, price ceilings, and so forth.

Would surge pricing qualify as a market failure calling for government intervention?

It depends, which brings fairness into play.

Fairness becomes an issue when the policy maker begins to take into consideration who will benefit and who will be hurt by the policy.

When Uber engages in surge pricing, it’s simply a response to an imbalance between supply and demand. As Uber explains, when demand suddenly increases, Uber raises the prices for a ride as a way to get more drivers, i.e., supply, on the road. No need for anyone to figure out what price will work because if prices are too high, demand will fall, whereas if prices are too low then supply will fall. At some point, the invisible hand of the market gets the prices just right so that there are enough Uber drivers to take riders where they want to go.

Economists might say there’s nothing wrong because that’s how markets work. Matthew Feeney at the Cato Institute, for example, recently wrote a vigorous defense of the economics of Uber’s surge pricing.

So our thing is Uber ripping off the driver and customer? Does Uber regulate what kind of cars people can drive? Why aren't the people getting a portion of the cancelation fee?  All of what we asked Uber. Stay tuned for their response.