September 19, 2016

The Hilarious Unprofitability of Uber

Filed under: capital equipment, philosophy, shartups, software development — Benjamin Vulpes @ 2:29 a.m.

As far as I can tell, Uber and friends have spent an extraordinary amount of money demonstrating that mobile devices are a phenomenal sales channel for traditional businesses directly into millenial pockets. Oh, and to illuminate incontrovertibly Silicon Valley's downright perverse aversion to operating capital equipment.

Uber sets prices unilaterally on both the demand and supply sides of the market for just-in-time butt delivery, controls 'fleet' eligibility criteria, suffers none of the friction of operating its own capital equipment, doesn't eat any depreciation charges, will finance chumps"driver partners" lease of the cars, and can even arrange for operators to rent cars from Enterprise and yet they still cannot make any money. What, as we say, dat? Could Uber be competing to own the vertical and horizontal in a space and failing to bite off an element of the business model that profitability is predicated on the ownership of? Fans of business-gore, like myself, live for moments of fail like this.

Controlling both the cost of goods sold and the price at which those goods are sold ranks right up there with "not letting the employees walk out with your cash" in terms of business fundamentals, and while some degree of authority over these two knobs is important for running a business, normally they're set by a combination of corporate authority and market dynamics, eg the price of similar goods and services, and suppliers ongoing pricing exercises with their goods and services. Uber suffers none of these ugly real-world interferences in their pricing: customers simply ask to be picked up at a place and dropped off at another place, the app does so, and then at the end conveys a price. Pricing, as far as the customer is concerned, is not merely opaque but actually unknowable until services have been rendered in full1, and as (Uber claims...) fares go mostly directly into driver pockets this sets the payout price as well. Uber will gladly provide an estimate, and many-a-website claims to have deep insight into the fee structure, but the fact remains that they slam the numbers around at will, nominally in service of sliding around on the price elasticity manifold.

Intriguingly, the subsidies that apparently account for a large fraction of the company's losses don't even show up in markedly lower prices than traditional cab companies, at least in my entirely un-statistical sampling of a few trips up and down Sandy Boulevard this summer in various traffic situations. Given the whole "disrupt disrupt disrupt" thesis that the application of software can2 make order of magnitude improvements in profitability, how is it that Uber is neither profitable, nor do they deliver services for a tenth what everyone else charges?

That's not all, though! Uber is also willing to help schmucks3 finance the very vehicles they're going to depreciate shuttling app users around. Cursory research indicates interest rates in excess of 20%, so almost definitionally Uber appears intent on leasing vehicles to the least responsible folks around4. Get this though: the billion-dollar line of credit for leasing vehicles to Uber operators is not intended to be a profit center. Some short time after I found that gem out, I began to wonder if they intend to make money or if the whole show is an elaborate way to burn a pile of money to offset wins from other portfolio companies while keeping friends and family employed.

Operating capital equipment is complicated, and Silicon Valley (as demonstrated through Uber's behavior) hates it. The challenge may be stated as: "operate everything for as long as possible, constantly balancing maintenance costs against replacement costs". Cars, unfortunately for the consumers and Uber's vehicle drivers, are not generally designed as capital equipment, but as fashion items. My environmentalist friends love to lament the forced waste of the fashion and technology industries, and how planned obsolescence and ever-changing fashions ensure that American consumers must routinely upgrade both their computers and their clothing to continue deploying the impression of being au courant5 and for the manufacturers to keep on with the making-of-money, but their eyes slide right over the same exact dynamics in the consumer automobile industry. For one example of the difference between designing capital equipment for the road and designing consumer equipment for the road, consider that a consumer car that's been driven for 100,000 miles is worth veeeery little (perhaps a tenth of its MSRP), and a Freightliner Cascadia with 600,000 miles on it goes for just under a quarter of MSRP. There are hints that the Tesla Model T can hit 300,000 miles without much wear and tear, but they're entirely anecdotal and its "refueling technology" renders it entirely useless for the task of JIT butt-schleppment.

Perhaps not even bothering to manage consumer-grade vehicles operated on busted roads by the wonderful people who have the time and inclination in their lives to drive vehicles around to make ends meet is the only way that Uber even makes sense as a business model. On the other hand, grow up, buy real equipment, hire and train labor, and actually run a business instead of a pile of servers.

Just an idea.

  1. This is amusingly similar to the market practice of many freelance software development organizations and individuals, wherein the potential customer is told that a thing is "So easy! Right up our alley! We do this all the time! You'll have it in 2 weeks!", and then two months and sixty thousand dollars later, the customer realizes they've been fleeced by con artists well-practiced in the art of delivering just enough to keep the mark convinced that delivery in full is just around the corner of another ten grand. I attribute a large part of my abject failure to stuff cubicles with commodity labor and churn out software all day long to how willing I am to tell people that there's no way my or any other team can shit out a responsive mobile banking "web app" with all those features in six weeks, that that other feature is a piece of braindamage your sales team only determined that it wanted after a potential customer (no doubt one of the smaller who won't even buy your system in the end after jerking you around for months during the sales cycle) casually asked if your thing did whatever, and that shit dog are we even going to talk about how much friction there's going to be collaborating with a 12-hour offset team that owns the server-side? So yeah let's just say four months and a half million dollars, and we still won't have bitten off the dumb shit at the bottom at that point. Hey, buddy, did we kill that deal yet? []
  2. Computronium, particularly in the context of user-interface development and the current environment of Apple-flavored C, Google-flavored Java and the traditional hell of HTML CSS and JS all executed together to make buttons happen in browsers, is dangerous shit, not to be touched by children or individuals not trained to shoot creeping complexity in the face at first sight. If a business operator isn't careful, designers and developers can waste untellable fortunes building egotronic affordances that don't make any sense either from the user's perspective, or the perspective of designing within the UI toolkit's paradigm to reduce complexity, and that will never feel right anyways because it disregards entirely how UI widgetry is built for the target platform (oh and I'm just talking about pathologies I've seen in working for one platform. Shit gets even more unruly and out of hand if people try to make sensible UI's for wildly divergent base operating systems. As one example of sanity, when one ports Civ from DOS to Mac, it comes pre-baked with its own menu system, so porters don't have to struggle with "how do I best express this application's basic thesis to Mac users when it was written for Windows?", instead the app carries all of its own UI widgetry along with it. This is a downright sensible approach, because it neatly carves off the entire discussion of how best to design for $OPERATING_SYSTEM's inane conceits. It's also a very tough sale, except if you import the cost of writing your UI layer in the browser hell, in which case nobody will mind that it's nonsensical and impossible to maintain.). A few quarters of this kind of behavior is guaranteed to drain budgets and emit entirely unmaintainable code. []
  3. "Why do you keep insulting Uber drivers, Benjamin? They're nice people just like you!" Because if you are pulling less than thirty dollars an hour to both be busy and cover the depreciation of your vehicle, you are failing to price approximately the whole world into your cost basis. Keep in mind that Uber imposes pretty strict "must be newer than" requirements on vehicles in their 'fleet', which entirely rules out operating the capital equipment after it's depreciated off the books, a topic worth thinking about in some small amount of detail. []
  4. Yes, yes. "Credit scores aren't people, Benjamin!" Sure, whatever. While some people with bad credit may be victims of the paint-by-numbers governance of the US population, the vast majority are actually bad credit risks. If the king demands that you show up for church every Sunday or be ineligible for crown subsidies, your options are to a) do it, b) kill the king and take his money and c) not show up. Know, though, that the latter two options aren't going to set you up for good loan terms. Getting upset at the insanity of your local power structure and opting out means you opt out. Just because nearly-anonymous-credit-approval-by-the-numbers is stupid doesn't mean that one may ignore it without repercussions. []
  5. As of approximately a year and a half ago, I cooled my wardrobe by a few hundred K to contain a formal outfit and an informal outfit. The formal outfit is a black suit, and the informal outfit consists of a particular brand of black V-neck t-shirt that I've already somehow managed to get differently-fitting versions of despite buying the same brand, same model every time, black Levi 511s, and a pair of black ankle-height shoes (in the spirit of maximizing the clothing's lifespan, there's also an outfit for the 10 miles of "vigorous bicycling" (to quote one calorie-tracking app of no particular note) between the office and the house, but that's cobbled together and not holistically designed. It's for sweating in, not for coordinating with the rest of the family.). Minimizing cognitive overhead is a lifestyle optimization. Some days, I'm tempted to place an order for a pallet of MREs and live off of that at the office. It'd be not just a reduction in the cost of figuring out where to lunch (which is always complicated by deferring the eating until my blood glucose levels drop below the 'useful human' level), but also vastly cheaper than eating lunch in downtown Portland! I'm milking this cheap-ass-motherfucker schtick to great effect in many aspects of my life. Highly recommended, especially if you're the hardworking-yet-broke, but-somehow-stupid-enough-to-be-family-having type like myself. []