Friday, June 3, 2016

Uber and "Business Plans: Keep it Pimpin' Edition"

That headline from one of our 2010 posts was the first thing I thought of when I started reading Izabella Kaminska's latest.
Here's how that long ago story begins: 
Speaking of great amateur literature, here’s a detailed business plan from a pimp that outlines his strategy to expand business and “take care my bitches more better” titled, “Keep it Pimpin’.”...
...Judging from this guy’s lofty goals, we can only assume he’s small time and probably deals primarily in broken-ass hoes who don’t yield a high rate of return right now, but if he follows through with his plan to “discover hoes from all over (jail house, small cities),” and stays “high in pursuit, looking for a prostitute,” his goal–to take his “game to the next level (from the concrete streets, to executive suites)”...MORE
Now, insert Travis Kalanick into the above and compare/contrast with some seriously insightful analysis from FT Alphaville:

Why Uber’s capital costs will creep ever higher
So Saudi Arabia has invested $3.5bn in Uber, the ride-hailing app, making it the largest single investment ever made in a private company.

Talk of war chests and global expansion abounds. But perhaps what the above really implies is that Uber’s famous capital-light model is about to get much more capital intensive — especially as it moves towards rolling out the much hyped self-driving fleet. If that’s the case, investors need to pay attention. Along with capital intensity come limitations to the exponential growth rates investors have come to expect.

So far, of course, the genius of Uber’s business model has been all about transferring capital costs to partner drivers. Uber terms and conditions do their utmost to ensure you the customer understands the service-providing relationship is between you and the driver, not Uber. Drivers utilise their own cars, pay their own costs including petrol, maintenance, parking fees/fines, insurance, licensing costs. They run their own risks too.

This indeed is how Uber gets away with calling itself an intermediary, not an employer.

Going against that, though, is Uber’s control of the prices contractors get to charge customers and its reluctance to offer exclusivity terms to drivers with respect to rivals (the driver network is notoriously open-ended). As a result, contractors haven’t the power to price their services according to demand, or even in ways that cover their cost of operation.

Once costs are properly accounted for, many drivers contend Uber’s pricing strategies and uncapped driver policy — which sees drivers added irrespective of market demand — result in take home pay which amounts to a minimum wage or less.
But there are other factors in play too.

Uber’s driver network, for example, has always been made up of vehicle owners and vehicle renters. The distinction is important because being able to draw on a large pool of pre-funded private capital (a.k.a people who own cars and want to put them to use) has been key to Uber’s price-cutting tactics in the market.

That pool of capital, however, is limited not least because the sort of people who can afford the quality cars Uber demands for many of its services are not the sort to be satisfied with minimum wage earnings for long.

As the number of car owners who look to Uber for a means to a more flexible type of employment or a means to bolster earnings runs dry, so too does Uber’s capacity to undercut the competition and keep growing.

Uber’s growth model instead becomes increasingly dependent on attracting the latter sort: vehicle renters.

If Uber’s driver network is to keep growing on that basis someone somewhere must put up the capital drivers can’t afford to put up themselves — a service that’s unlikely to be offered pro bono.

In that context Uber’s rates simply can’t stay low forever: the aggregate earnings of the network must cover the aggregate operating costs of the network inclusive of insurance, minimum wage and capital interest owed. 

So what does a capital-light app that wants to keep its driver network growing without hiking ride prices to cover capital rental and interest costs to do?
Answer: deploy its reputation in drivers’ name so as to fetch them better deals with manufacturers and credit providers than they could fetch alone.

Uber is thus no longer a ride-hailing unicorn. It’s well on its way to becoming an auto-leasing company — complete with all the capital costs and credit exposures that come with it....MORE