Can't compete against a service that "sells" $2 worth of labor for $1. Now that the VC-funded subsidies are running out, we'll see how competitive Uber really is.
Uber definitely competes on price. Their fares are almost always the lowest of any competitor, especially compared to traditional cabs. That's essentially their only strategy other than allowing mobile hailing & payment (which is not particularly hard to replicate). The reason Uber is blowing through so much venture capital is because they are bleeding cash in all directions on fare subsidies.
The subsidizing happens to find drivers and passengers. When Uber came to my city, it was months before I paid for a ride, and drivers told us all about how they were getting cash bonuses for working high traffic times.
No matter how optimistic you are about the product, Uber isn't worth a fraction of its valuation without the constant expansion, and the constant expansion is impossible without very inexpensive money that is VC.
And those competitors are also subsidizing rides. In many cases they are also paying drivers better to the point you'll get uber drivers recommending other services. The winner is whoever can pump more investor money in the longest, and even the can be disrupted by new rounds of investors.
Uber is demonstrating that they can sell $2 bills for a buck and that there's demand for that. They've not demonstrated they can establish a real business here in what has turned into a pure commodity market.
In competitive markets a lot of "me too" competitors pop up all the time. When you see consumers just picking the one that's the cheapest (i.e. with the most VC cash subsidizing the ride) and drivers rocking up with multiple phones on the dashboard as they too game these companies it's clearly all a fools game. This industry is a race to the bottom, but at least people get to enjoy cheap VC-subsidized rides while the party's still on!
Seems quite fair to me. Uber is using VC money to crush competition without worrying about making money. It is also true that traditional taxis suck. This is an orthogonal fact.
The company continues to heavily subsidize per-ride costs to inflate its value to investors and undercut existing options, despite bleeding billions of dollars. “Uber is effectively a middleman for a money transfer from venture-capital (VC) firms to consumers,” writes James P. Sutton in National Review. Simply put, effectively supplanting the taxi industry wasn’t enough: Uber plans on undercutting public transit to finally turn a profit.
If Uber can undercut public transit, I'll be impressed. Fares tend to cover 30-40% of operational costs of public transit, and if you include capital costs, it will be even less. With the amounts of subsidies public transit gets from the taxpayer, even the venture capitalists can hardly compete.
Some of the ride cost is VC subsidy. Some of the ride expense is Uber corporate (thousands of programmers, pay for officers, managers, building rent, etc).
Do we know which is greater? Maybe there is room for an app with low overhead to compete.
The real question is whether Uber can ever make money without subsidizing rides with investor capital. At some point, they have to raise prices. This make them vulnerable to competition.
The good news is that if Uber goes under, it's easy to replace them. Uber and Lyft pulled out of Austin TX last May over required fingerprinting of drivers. Ten competitors sprang up to replace Uber and Lyft. They're doing fine.[1]
>But the "cheaper" part is largely because rides are being subsidized by VC money no?
Uber is a private company so their accounting isn't publicized but as far we can tell, the VC subsidies target a very specific situation: the low prices from competition such as Lyft/Didi
Leaving out the "price wars" aspect, the unsubsidized higher Uber fares would still be lower than:
1) taxis (especially out to the suburbs)
2) the TOC (Total Cost Ownership) of owning a car if consumers make a behavioral change from buying their own car and instead, switch to an on-demand "car as a service". E.g. using Uber 10 to 20 times a month is less than purchase price of car + loan interest + taxes + annual registration + insurance + parking garages.
Here's what I'm not understanding about Uber. There' nothing they provide that couldn't be cloned. It's clear there's no way to grow into profitability so once the VC subsidies go away Uber will have to significantly raise prices to survive, putting them in the same price range as traditional car services. At that point, what's to stop Yellow Cab from creating their own Uber clone and eating Uber's lunch?
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