Book: Super Pumped: The Battle For Uber

Having a lot of time on my hands during bus and train rides to Chicago and back, I decided to read this book. It turned out to be a really interesting and good book about Uber’s history and the list of events that led to where it is now. The growth at all cost mentality and the toxic culture both catapulted Uber into the stratosphere of startup valuation and cost the ride sharing company millions of dollars and a litany of problems. Uber was drowned in so many scandals that it was mind-blowing to see how the governance allowed that to happen. The part in which Benchmark and its allies did everything they could to oust Kalanick was fascinating. If you are interested in one of the most interesting startups of recent times, then I highly recommend it

At the end of the week, Uber’s finance team added it all up. The entire “X to the x” celebration cost Uber more than $25 million in cash – more than twice the amount of Uber’s Series A round of venture capital funding.

The reality was much less noble. As Uber’s insurance costs grew exponentially, the “Safe Rides Fee” was devised to add $1 of pure margin to each trip, according to employees who worked on the addition. That meant for each trip taken in the United States, Uber took in an extra dollar in case. The drivers, of course, got no share of the extra buck. That number added up to hundreds of millions of dollars over years of operation, a sizeable new line of income. After the money was collected, it was never earmarked specifically for improving safety.

When Uber cut rates in 2015, rather than worry about the effects lower income would have on drivers, Kalanick was giddy. To Travis, lowering prices meant raising demand. Growth would explode again, and growth – not the concerns of his drivers – was Travis’ top priority.

It didn’t matter to Kalanick that drivers were logging more trips and picking up more people – basically doing twice the work – to make the same amount of money. It didn’t matter that drivers were commuting absurd distances to busy cities like San Francisco – often from places two hours away, but occasionally as many as six hours away – sleeping in their cars overnight on side streets and empty parking lots for the chance at more rides per hour. It didn’t matter than San Francisco lacked sufficient public bathrooms for drivers, forcing them to find coffee shop bathrooms, or, more often make do elsewhere. And it certainly didn’t matter that drivers pulling dayslong shifts were overworked and under-slept.

Most importantly for Son, SoftBank would purchase those shares at a steep discount from Uber’s valuation earlier in the year. Son and Khosrowshahi settled on a purchase price of $33 per share, pegging Uber’s valuation at about $48 billion – a steal for SoftBank. That meant that the scandals of the previous twelve months had knocked about $20 billion off Uber’s private market value.

To keep the price propped up on paper, the investors did some sleight-of-hand maneuvering. SoftBank would purchase $1.25 billion in additional, newly issued shares at Uber’s previous existing valuation of $68.5 billion. The premise was absurd; the secondary market clearly valued Uber’s shares at far lower than they were before Uber’s 2017 from hell. Yet in the eyes of the market, the maneuver worked; Uber’s valuation would remain at $68.5 billion.

One particularly raucous evening, a bunch of Uber Thailand employees, were up late drinking and snorting coke, a semiregular occurrence at that office. One female Uber employee with the group had decided she didn’t want to do drugs with her colleagues, and tried to abstain. Before she could leave, her manager grabbed the woman and shook her, bruising her. Then he grabbed the back of her head and shoved her face-first into the pile of cocaine on the table, forcing her to snort the drugs in front of them.

The New York office was largely defined by its machismo, sexism and aggression. Sao Paolo saw angry managers throwing coffee cups across the room or screaming at employees when they weren’t happy with results.

AB5 threatens the existence of gig companies like Uber & Lyft

Yesterday, Gizmodo reported that AB5, a bill that is aimed to force gig companies to treat their workers as employees instead of independent contractors as they are now, passed California’s Senate Appropriations Committee and will go to a full vote in the Senate next month. If passed, it is expected to be signed into law by the Governor.

AB5 stems from a decision by a California Supreme Court decision in 2018, which essentially decrees that “Workers must be treated as employees, not independent contractors, if their jobs are central to a company’s core business or if the bosses direct the way the work is done.”, according to LA Times. According to the ruling, ride-hailing businesses cannot exist without drivers and drivers have to follow certain standards to be able to operate on their platforms. Hence, they should be treated as employees.

Ride-sharing companies exist as middlemen between riders and drivers, managing the supply of drivers and demand for rides. Drivers no longer have to drive around to pick up riders. Surge pricing gives drivers incentives to go out at unpopular hours like early in the morning. The argument that these companies make against AB5 is that drivers have flexibility to choose when and where to work, and as a result, shouldn’t be classified as employees. Well, even as employees, drivers can surely negotiate with Uber or Lyft that right. One of my colleagues moved from Omaha to Austin to work remotely so that she can be with her husband. What is at stake here is the bottom lines.

Gig companies like Uber or Lyft haven’t made any money despite treating their workers as independent contractors. If the proposal is signed into law, it will mean higher operational costs as these companies will need to pay minimum wages and be responsible for other benefits to their employees. Any chance of profitability will become even slimmer.

To be fair to Uber and Lyft, what they have done so far is perfectly legal as up to now there is no law that regulates the industry. They just take advantage of the situation and the bargaining power that they have over drivers. On the driver side, each cannot fight with these companies. They need lawmakers.

Regarding lawmakers, they have reasons to help both drivers and ride-sharing companies, especially in the US. Regulators that are more concerned about the well-being of drivers, their constituents as well, will support proposals such as AB5. Those who are more concerned about the power of lobbyists and about staying in power will fight against AB5. Since California is a progressive state, there seems to be more proponents than opponents of AB5. I am not sure the same can be said in other less progressive states or the federal administration.

Neither am I sure that collectively laws such as AB5 will benefit our society, but personally I am for it. Drivers should be protected against the abuse of these gig companies. Eventually, it has been proven that there is demand for services such as Uber or Lyft. I am confident there will be startups wanting to tap into the demand. As for Uber or Lyft, they will either adapt and innovate to survive and thrive or fall into the category of “thanks for being the trailblazers, but perhaps your time is up” companies.

Notes from Uber’s earnings call

Uber released their 2019 Q2 results and earnings today. Below are a few things that are worth noting to me

Take rate

Uber defines take-rate as adjusted net revenue divided by Gross Bookings. Basically it is how much Uber takes out of your trip’s fare. Compared to Q2 2018, all take rates went down


Q2 2018Q2 2019
Ridesharing Take Rate21.86%18.99%
Uber Eats Take Rate12.4%9.95%
Total Core Platform Take Rate20.96%17.20%

Part of the reason for the drop in take-rate is the rise of Excessive Driver Incentives. For instance, Uber Eats’ Excessive Driver Incentive this quarter went to 43% of the revenue, compared to 36% in Q2 2018.

Source: Uber

Story of Growth?

It’s no secret that Uber is not profitable and likely won’t be for a while. Their story is one of growth, which is not the case in this quarter as far as I am concerned


Gross BookingsCore Platform Gross BookingsMonthly Active Platform Consumers
Q2 2019 YoY Growth29.67%30.44%30.26%
Q2 2018 YoY Growth48.64%47.92%33%

TripsAdjusted Net RevenueCore Platform Adjusted Net Rev
Q2 2019 YoY Growth35.02%12%7%
Q2 2018 YoY Growth39.71%58%54%

Every metric saw a smaller growth this quarter compared to last year. I do get the laws of big numbers, but when your story is one of growth, this may raise a few concerns.

Among important markets, Latin America saw a 24% decline this quarter despite Buenos Aires becoming the fifth largest city based on trips

Spectacular loss

Uber reported a $5.5 billion loss from Operations. If we take away the stock-based compensation, the loss is still $1.4 billion. While revenue grew by 31%, the operational loss increased by some 89%.

Thoughts

In my opinion, there is nothing in the earnings call from Uber that conveys something remotely close to a clear path to profitability. The story of growth is challenged in this quarter. Perhaps, this is just a bad quarter and the next ones will be better. Or worse. Who knows? Self-driving cars are years and years away, not even 5 years from now. Uber also faces heightened competition in food deliver like Post Mates or Door Dash, companies that attracts big private money as well.

Weekly readings – 8th June 2019

Uber’s Path of Destruction. A critical great read on the challenges that Uber faces due to its business model.

Life hacks from Marcus Aurelius: How Stoicism can help us

Underwater Drones Nearly Triple Data From the Ocean Floor. Fascinating use of drones to explore what is still largely a mystery to us.

An interesting conversation with Naval on various topics such as AI, reading, how to be happy and so on. I do agree with him on AI, yet disagree with him on the way he gave an example of socialism. Nonetheless, it is a conversation worth listening to while driving, on a bus or in a gym

The NBA Finals Have Never Seen a Coach Like Nick Nurse. I find it interesting since I never knew about Nick Nurse, yet he has done a marvelous job guiding Toronto Raptors to one win away from the NBA championship. The team has played really well against the defending champions. His journey in England and learning his crafts in a country where basketball isn’t remotely popular is captivating.

Uber’s Earnings – Is It On The Right Track?

Uber released its first quarterly earnings as a publicly traded company. Let’s take a look how they did.

First of all, I have to say that reading Uber’s earnings isn’t a straightforward task. They make it incredibly confusing and complex. For instance, there are multiple variables concerning the company’s money-generating ability such as Bookings, Revenue, Core Platform Adjusted Net Revenue, Adjusted Net Revenue. I wish they could make it easier for the audience to absorb the information.

The company lost more than $1bn in the first quarter mainly due to bigger cost of revenue and S&M expense

Source: Uber

Bookings, revenue and net revenue increased, but at a much slower clip than Q1 2018

Source: Uber
Source: Uber
Source: Uber

Monthly trips per user are stagnant while contribution margin is negative

Source: Uber
Source: Uber

Uber Eats revenue grew by 89%, but Uber tripled the driver incentives for the segment

Source: Uber
Source: Uber

In terms of segments, Vehicle Solutions and Latin America market performed poorly compared to Q1 2018

Source: Uber

Ride-sharing’s revenue grew while incentives contracted; which is good news

Source: Uber

Thoughts

Uber seems to be a story of contradiction. While the CEO claimed that “Sometimes simplicity is a beautiful thing”, the business, by no means, is presented in a simple fashion. It’s complex and the terms used by the executives don’t necessarily facilitate easy understanding.

Uber CEO also said “Our job is to grow fast at scale and more efficiently for a long, long time.” Bookings, users and all metrics increased indeed. Yet, as presented above, they grew at a slower clip than one year ago. The tripled incentives used to fuel growth in Uber Eats aren’t exactly evidence for the efficiency he mentioned, and neither is the S&M expense.

The company lost $1bn and the business model doesn’t seem to change much. Also, I don’t believe in the short term feasibility of autonomous vehicles’ impact on Uber. It’s unclear how the company can tackle the profitability question. On the earnings call, Dara mentioned competing on brand and products instead of pricing with competitors. Well, whether that plan comes into beings still remains to be seen.

Are autonomous vehicles the answer to many businesses’ problems?

It’s not uncommon nowadays that businesses mention autonomous vehicles as an opportunity for growth and profitability. Unless their vehicles are self-driven, ride-sharing services such as Lyft or Uber don’t particularly promise a sure path to profitability at the moment. In an article published last week, the CEO of AT&T mentioned self-driving cars as a reason for his optimism

Even Warren Buffett quails at the prospect of competing in such a powerful field of rivals. “Everybody has just got two eyeballs, and they’ve got x hours of discretionary time … maybe four or five hours a day,” he said recently at a charity event, speaking generally about the entertainment industry. “You’ve got some very, very, very big players that are going to fight over those eyeballs. The eyeballs aren’t going to double. You have very smart people with lots of resources trying to figure out how to grab another half-hour of your time.” His assessment: “I would not want to play in that game myself. That’s too tough for me.”

Any business that Buffett wants to avoid sounds unpromising, but Stephenson rejects the legendary investor’s premise. Acknowledging that “there are only 16 waking hours in the day,” he says, “Well, we haven’t filled up the 16 hours yet.” He nods toward his office window over Commerce Street with its busy traffic, which he says will ease when 5G networks enable autonomous cars. “When you have the lion’s share of those cars autonomous, for the average person that’s another two hours of availability of screen time, consuming video.”

AT&T Has Become a New Kind of Media Giant

Are autonomous cars the answer though?

Let’s say, generously speaking, 10 years from now all the cars would be self-driving. What would it look like? If the cars don’t carry passengers, without drivers, where would the cars go? Would all the cars keep driving endlessly till they are called to pick up passengers? Would the cars park on the street and if so, would there be enough space to accommodate all the cars? If the cars park in a garage somewhere, how would the garages be planned and constructed so that the garages are all well spread throughout a decently big area?

There can be many more questions that would result from having mainly autonomous vehicles on the streets. I can’t think of them all, but you get the idea. Right now, we don’t even have many on the streets yet, let alone answering questions and tackling problems that ensue the arrival of self-driving cars. Additionally, I personally don’t believe that we can have all cars or the majority of the cars self-driven on the streets in the next 10 years. I wrote something about it here.

If it takes a long time for self-driving cars to be realized and populated, can the likes of AT&T, Uber or Lyft wait till that time? AT&T’s debt is almost $200 billion and as Warren Buffett said above, and I agreed with his view, that the competition for eyeballs wasn’t going to get any easier. Uber or Lyft keeps losing money operationally and will be expected to continue that path, unless self-driving cars come along. 10-15 years of losing millions, if not billions, of dollars every year doesn’t seem a sort of business that investors like. And before any comparison between Uber and Amazon is raised, the two are far from being similar to each other. Look at their respective operating income.

Source: Wall Street Journal

Obviously, some years from now, it is possible that I may be embarrassed for saying all this and the fine folks in Silicon Valley or that somewhere in the US can deliver the miracle. Until then, I prefer being pragmatic to venturing out too far into fiction and imagination.