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Friday, 13 January 2017

Is Uber following the Jeff Bezos model?

Is Uber following the Jeff Bezos model? Uber has lost USD 2.2 bn in nine months, according to Bloomberg. In fact, Uber lost money every year since it was founded in 2009, writes Timothy Lee for Vox. This could suggest that Uber’s core business is unsound and may never show a clear path for profitability, instead only subsidizing people’s taxi rides using USD 11 bn it raised from venture capitalists. Every year between 1994 and 2000, Amazon lost more money than the year before as a result of founder Jeff Bezos’ aggressive investment in growth. By offsetting short term profit, Amazon was able to reduce its costs per book sold far below a conventional bookstore or retail outlet. The case for Uber suggests they have an even more ambitious version of the Jeff Bezos Amazon model, with expansions to new geographic locations and investing into self-driving cars, but it’s tough to say without access to financial results – which Uber is not obliged to publish.

A five-part series blog by transportation industry analyst Hubert Horan delves deeper into the skepticism. Uber just doesn’t have the cost advantage Amazon did, says Horan. Amazon ditched the expensive retail store and clerks, but Uber still has to use cars, drivers, and fuel. So while consumers might feel Uber is cheaper than a conventional taxi, Horan suggests this could merely be a result of Uber subsidizing the cost through its venture capital while taking a loss on every ride. Why? To drive the competition out of business and enjoy a robust monopoly in the taxicab market, of course. Ultimately, it might not matter who wins the conventional ride-hailing market because self-driving cars will disrupt the entire market within the coming decade, says Lee. Driver compensation accounts for over half of a cab ride, so the real prize is becoming the customer’s gateway into the self-driving car market. With good reason to think self-driving cars will be hailed on demand rather than privately owned by each driver, the profitability of the company’s existing ride-hailing business might be beside the point. Even if Uber can never turn a profit charging its current fares with human drivers, the company will definitely be able to turn a profit renting self-driving cars at those rates.

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