Yves here. To underscore the point that Hubert Horan is making, you can’t achieve a monopoly if you are a high cost producer who has no prospect of achieving economies of scale or scope in a field with few barriers to entry. As we’ve discussed, Uber’s app is not difficult to replicate, Uber drivers now often work with multiple ride-sharing services, and Uber is particularly vulnerable to local driver consortia where the ownership is mutualized or charges to drivers are set at a level only to defray the cost of operating the enterprise.

By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants



Uber Is Staggeringly Unprofitable, Is the Industry’s High Cost Producer, Cannot “Grow Into Profitability”, and Has no Meaningful Competitive Advantages

Uber is currently the most highly valued private company in the world. Since its start in 2010, Uber has been on a steady path towards domination of an urban car service industry that had been competitively fragmented and structurally stable for over a century.

This series of articles has focused on the question of whether an Uber dominated industry would actually improve the efficiency of the urban car service industry and improve overall economic welfare. Capital markets have invested $13 billion in Uber, producing a venture capital valuation of $69 billion. Have those investors—primarily Silicon Valley billionaires—been making society better off by reallocating resources from less productive to more productive uses?

These articles applied standard financial/competitive analytic approaches used to evaluate the potential impact of major market restructuring caused by new entry or other exogenous forces, and/or major increases in industry concentration on industry efficiency and consumers.

The first article presented the evidence that Uber is a fundamentally unprofitable enterprise, with negative 140% profit margins and incurring larger operating losses than any previous startup. Uber did not achieve any meaningful margin improvement between 2013 and 2015 while the limited margin improvements achieved in 2016 can be entirely explained by Uber imposed cutbacks to driver compensation. Uber’s ability to capture customers and drivers from incumbent operators is entirely due to predatory competition funded my massive investor subsidies—Uber passengers were only paying 41% of the costs of their trips, while competitors needed to charge passengers 100% of actual costs.

The second article provided a breakdown of the taxi industry’s cost structure, and demonstrated that Uber was the industry’s high cost producer, with a significant cost disadvantage in every cost category except fuel and fees where no operator could achieve any advantage. It also explained that Uber could not “grow into profitability” because there were no significant scale economies related to any of these cost categories.

The third article debunked a range of claims about potential sources of Uber competitive advantage that might explain its ability to drive incumbents out of business; none were based on actual evidence of industry economics, and none of the claimed sources had ever had ever produced major competitive impacts in any other industry.

The findings from the three posts are entirely consistent with one another, and consistent with the conclusion that Uber could never generate sustainable profits in a competitive market. Uber’s lack of cost competitiveness explains its massive losses, its lack of scale and network economies explains the lack of margin improvement, the financial and cost evidence is consistent with the finding that Uber lacks meaningful competitive advantages, and the lack of efficiency and competitive advantage is consistent with the finding that Uber’s growth is primarily explained by the predatory use of investor subsidies.

The critical caveat here is “in a competitive market”. This article documents that Uber’s business model is focused on the pursuit of monopoly power. The elimination of competition is always problematic from an economic welfare standpoint, but there are certainly cases in other industries where dominance could be considered welfare enhancing or at least welfare neutral.

But these cases require overwhelming objective evidence that the dominance was created by legitimate economic factors (huge, unmatchable efficiency advantages, powerful scale/network economies) that clearly offset the risks from reduced competition, and evidence that industry economics would create strong incentives for the newly dominant firm to continue to share efficiency gains with consumers. None of these conditions apply to Uber where growth was not driven by superior efficiency or scale/network economies; there are few benefits that could be shared with consumers, and no incentives to share any that might exist.

Uber’s Investors Always Understood That Financial Returns Required the Ability To Exploit Quasi-Monopolistic Industry Dominance, and Provided the Level of Financing Deemed Necessary

Uber’s investors and managers have always been totally focused on earning strong returns on its $13 billion investment base. Two simple questions (that could be applied to any company): what did Uber see as the source of investor returns, and were its actions (spending, management and competitive priorities) strongly focused on pursuing those sources of financial returns?

The first three articles in this series focused on “traditional” product/efficiency based sources of financial returns that are broadly consistent with improving overall economic welfare. If investors can profit by introducing major product/technological process breakthroughs that vastly improve industry efficiency, or if their returns come from providing slightly better service at slightly lower costs in a competitive market, then both consumers and capital accumulators will be better off in most cases.

There is absolutely no evidence that Uber’s investors put $13 billion into the company because they thought they could achieve Amazon type efficiency advantages over incumbent urban car service operators. There is no evidence that Uber’s managers or spending priorities were ever focused on creating welfare-enhancing efficiency improvements or consumer benefits. Unlike past startups, Uber made no effort to provide outsiders with evidence that its business model generated powerful efficiency advantages, or that it could actually produce urban car services at lower cost than incumbents.

From its earliest days, Uber’s investors and managers have always recognized that investor returns would require global industry dominance, and the elimination (or effective nullification) of longstanding laws and regulations designed to protect competition, and to protect consumers from the risks of anti-competitive market power[1]. This presumes that urban car services can be turned into a “winner-take-all-game”, where the winner can earn sustainable rents once quasi-monopoly industry dominance has been achieved. Dominance would also allow Uber to leverage its platform in order to expand into other markets that it could not otherwise profitably enter.

As will be discussed below, the belief that monopoly power can be a major source of financial returns is widely held among the venture capitalists that funded Uber, and its spending priorities and marketplace behavior have been totally consistent with a company pursuing global industry dominance.

But most critically, the staggering $13 billion in cash its investors provided is consistent with the magnitude of funding required to subsidize the many years of predatory competition required to drive out more efficient incumbents. Uber’s investors did not put $13 billion into the company because they thought they could vanquish those incumbents under “level playing field” market conditions; those billions were designed to replace “level playing field” competition with a hopeless battle between small scale incumbents with no access to capital struggling to cover their bear bone costs and a behemoth company funded by Silicon Valley billionaires willing to subsidize years of multi-billion dollar losses. Given Uber’s growth to date, investor expectations that monopoly rents justifies the current level of subsidies and financial risks appears quite plausible.

The Silicon Valley Venture Capital Community Has Long Been Focused on Exploiting Monopolies and Extracting Rents From “Winner-Take-All” Narkets

The belief that exploiting monopoly power from “winner-take-all” industries is widely held in the Silicon Valley venture capital community that funded Uber and other so-called “ridesharing” companies.

Benedict Evans, a partner at venture capital firm Andreessen Horowitz summarized Uber’s strategy as “Fascinating city-by-city algebra to make the numbers work, plus massive burn in a play to conquer the world.”[2] Sherwin Pishevar, formerly a managing director at Menlo Ventures, became an original investor in Uber because he believed the company’s platform could provide the basis for sustainable rent-extraction and the company’s model could scale globally. “Uber is building a digital mesh–a grid that goes over the cities,” Pushover says. “Once you have that grid running, in everyone’s pockets, there is a lot of potential for what you can build as a platform. Uber is in the empire-building phase.”[3] As PayPal founder Peter Thiel (who is a major investor in Uber competitor Lyft) said “Always aim for a monopoly. It’s one big transgressive idea, and you’re not allowed to talk about it… From society’s perspective, it’s complicated. But from the inside, I always want to have a monopoly.”[4] In an article entitled “Competition is for Losers” Thiel argued that “Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away.” [5]

Under this line of thinking, the type of robust market competition designed to maximize economic welfare and ensure the efficient long-term allocation of resources is not integral to capitalism, and is actually the enemy of capital accumulators like Thiel, and needs to be vanquished.

Many Aspects of Uber’s Business model That Add Little Value in Competitive Markets Can Drive Significant Profit Growth With Industry Dominance

With industry dominance, Uber could readily exploit artificial anti-competitive market power that would not exist if it merely achieved a large share of a competitive market. Anti-competitive market power would likely solve much of Uber’ driver cost disadvantage; once alternatives were gone Uber could not only eliminate the pay premiums they needed to fuel growth but they could actually drive driver take-home pay below the $12-17 per hour level traditional operators had paid.

As discussed in the second article, Uber has already started making major driver compensation cuts, while continuing to mislead drivers about the true costs and capital risks of providing vehicles. With industry dominance, Uber could drive take-home pay (net of vehicle costs) even lower, while imposing strict employee-type scheduling controls on its “independent” drivers while still refusing to provide the pay and benefits employees are legally entitled to. Industry dominance would also give Uber much greater leverage over other suppliers (insurance companies, taxi manufacturers) than it enjoys today.

Aspects of Uber’s business model that create limited value in a competitive market could be key to rent-extraction with industry dominance. Surge pricing could be used much more aggressively without fear of competitive discipline. Dominance would force anyone who might ever want a cab to carry Uber’s app, converting the app from a benign ordering tool to a monopoly controller of all information about demand, capacity and pricing, driver employment and compensation.[6] Uber could improve utilization by unilaterally imposing much higher prices for peak period and low density neighborhood service, although this would effectively eliminate taxi service for a major segment of (mostly lower income) users. This would convert an piece of publically regulated urban transport infrastructure into a privately owned and controlled discretionary consumer product primarily targeted at wealthier customers. The welfare impact would be analogous to the conversion of urban expressways into privately owned toll-roads. Higher fares would improve product quality for those with more discretionary income (shorter taxi waits on Saturday night, faster rush-hour commutes) but total economic welfare would be worse given the major service quality reduction for those prices out of the market.

Much of Uber’s Oft-Criticized Public Behavior Is Fully Consistent With Its Pursuit of Unregulated Monopoly

Uber has been frequently criticized for behavior outside the norms traditionally observed by companies trying to build large consumer businesses. But these critics invariably make the false assumption that Uber’s long-term returns depend on the loyalty of customers and drivers in competitive markets, and fail to recognize that its behavior is fully consistent with its long-term objective of unregulated monopoly. Uber has unilaterally imposed major compensation cuts on drivers, and left customers exposed to unexpectedly high surge pricing surcharges. Neither had material impacts on Uber’s magnitude of losses (although bad press has forced Uber to contain its surge pricing), and its competitors worked to build trust with drivers and passengers with clear policies limiting both practices. These seemingly high-handed practices are perfectly logical if one assumes that Uber did these things to send an unmistakable signal that it will have complete freedom to impose whatever wages and prices it likes once it achieves market dominance.

As far back as 2010, Uber willfully, openly disregarded local taxi regulations, not only pricing and entry rules, but driver screening, licensing and insurance requirements. A former Uber employee explained that “…it’s not just that Uber has adopted the business school maxim “Don’t ask for permission; ask for forgiveness”—it has instituted a policy of asking for neither.”[7] Uber was not trying to “deregulate” taxi service—“deregulation” or regulatory reform assumes that democratically elected local officials have the authority to determine how local taxi service should be structured, and implies that all competitors should be subject to the same “level playing field” set of rules.

Uber wanted the freedom to evade insurance and other costs that its competitors were still obligated to incur, and wanted to establish that it did not respect the right of democratically elected governments to control local taxi service and could disregard any rules it found inconvenient. Problems with passenger safety and accident risks led to major waves of bad publicity, and the savings from this regulatory arbitrage were not huge. But Uber was determined to establish that local regulators and politicians would (or could) do nothing to seriously rein in a company backed up by Silicon Valley billionaires that was heralded in most local newspapers as a cutting-edge technological innovator. By establishing that it could blow off questions about whether it was exposing passengers to increased risk of theft or assault, or whether it carried legal required levels of liability insurance in its early startup years, it made it clear that a vastly larger and more powerful Uber would feel free to exercise artificial market power with impunity.

Uber worked to sabotage both the fundraising and operations of Lyft and other competitors[8] and initiated specific programs to intimidate journalists, including a program designed to spread details of the personal life of a female journalist who has criticized the company.”[9] Despite attempts by company supporters to dismiss these actions as aberrant “Silicon Valley bro” behavior they were fully consistent with its desire to project an image that it was on an unstoppable march towards global industry domination, and prevent independent scrutiny of its actual competitive economics, or whether consumers would benefit if it achieved global dominance. None of the executives involved were ever disciplined and none of Uber’s investors ever criticized it.

Previous startups focused their external communication programs on explaining product advantages to target customers and explaining future profit potential to the investment community and avoided PR and lobbying spending until a strong market position had been secured. Uber made PR and lobbying one of its top spending priorities from the outset, and emphasized virulent attacks on incumbent operators and regulators. In 2014 Travis Kalanick described Uber as a band of heroic tech innovators who would provide massive benefits for consumers and drivers but for the overwhelming political power of taxi owners and regulators. “…. [W]e are in the middle of a political campaign and it turns out the candidate is Uber” and the opponent is “an asshole named taxi….Our opponent — the Big Taxi cartel — has used decades of political contributions and influence to restrict competition, reduce choice for consumers, and put a stranglehold on economic opportunity for its drivers”.

Uber’s PR provided no information about how their alleged innovations actually benefited customers or drivers, did not mention the multi-billion subsidies that were the actual source of those benefits, did not explain how a highly fragmented and competitive industry constituted a “cartel”, and did not explain why the public should see Silicon Valley billionaires pursuing industry dominance as the disadvantaged underdog in a battle with those fragmented and disorganized incumbents. Uber brought in high-powered political operatives who had worked at the highest levels of government;[10] in Las Vegas Uber spent more on lobbyists than the entire casino industry, and in California had a larger lobbying team than any bank.[11] These major expenditures would have made no sense for a startup that was actually technology based or a transportation company focused on near-term profitability in competitive markets, but were fully consistent with Uber’s strategic objective of eliminating (or nullifying) legal and regulatory obstacles to its eventual exercise of quasi-monopoly market power.

All of Uber’s actions represented a radical departure from past consumer product startups. Whatever Amazon’s strengths and weaknesses as a company, it did not demonize incumbent booksellers, make false claims about industry cartels and how its independent contractors earned $90,000 a year, its initial growth was not based on massive PR expenditures designed to prevent outsiders from understanding their actual competitiveness, or on massive lobbying programs led by close advisors to Presidents and Prime Ministers, and it was not using these techniques to drive more efficient booksellers out of business.

Uber’s Business Model is Entirely Based on the Destruction of Overall Economic Welfare, and the Transfer of Wealth from Consumers and Suppliers to Silicon Valley Billionaires.

This series of articles has focused on the economics of Uber, and presented evidence that its current operations are staggeringly unprofitable, that it is far less efficient than the incumbent operators it has been driving out of business, that it has not introduced any product/technological/process breakthroughs that could explain its rising market share, and that all of its growth to date is explained by predatory investors subsidies.

There is no evidence it could ever earn sustainable profits in a competitive market and he returns its investors are seeking depend entirely on achieving quasi-monopoly industry dominance and eliminating or nullifying regulations that might limit its ability to exploit anti-competitive market power. The unprecedented size of its investment base and all of the strategies it has been pursuing over the years fully support its objective of unregulated monopoly.

If it reaches its objectives, the long-term impact of Uber on consumer welfare and efficiency of the urban car service industry would combine the impact of replacing today’s urban car service industry with a higher cost, less efficient Uber operation, and the impact of replacing today’s regulated industry competition with a completely unregulated monopoly. Since Uber would require $3-4 billion a year more than it is currently earning to provide investor returns, and has extremely limited scale economies, it will need to extract a significant fraction of that amount from consumers, drivers and suppliers via the exercise of anti-competitive market power. The growth of Uber reflects a massive failure of capital markets who have been reducing overall economic efficiency by reallocating resources from more productive to less productive uses.

Even though none of Uber’s services or operations are particularly innovative, and even though Uber has done little to “disrupt” the traditional economics of providing urban car services, Uber could easily establish itself as one of the most innovative, disruptive companies in history. It is disrupting the idea that private wealth creation requires the development of companies with superior products and superior efficiency than existing competitors.

A key innovation is the use of massive private funding to block the signals that markets require to efficiently allocate resources, to overwhelm more efficient competitors and to nullify the laws and regulations that democratic governments had enacted to ensure that taxi services benefited a wide range of citizens, and to protect those citizens from the risks of anti-competitive market power. It is of course unclear at this point whether Uber’s business model, if proven successful, could be readily replicated in other industries, but many investors will undoubtedly pursue the possibility

No startup in history had ever created massive corporate value—much less the $69 billion Uber has created to date—with products and operations that were less efficient that were less efficient that the companies they were driving out of business. Uber’s willingness to use its $13 billion cash to fund predatory competition was its most important “innovation” but money alone cannot explain its seemingly unstoppable progress towards industry domination.

The next article in this series will consider other Uber “innovations” focusing on how Uber got broad portions of the mainstream media to enthusiastically support its efforts to eliminate competition so that it could transfer wealth from consumers to (already extremely wealthy) investors. Why would the overwhelming majority of the financial and business media applaud the growth of this specific private company, and make absolutely no effort to investigate whether its growth was based on actual efficiency or competitive breakthroughs, or whether its industry dominance would actually benefit consumers? Why would major newspapers and magazine celebrate a company that was openly disobeying democratically established laws in order to transfer a portion of urban transport infrastructure to the exclusive, unregulated control of private capital accumulators?

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[1] Artificial anti-competitive market power is used in this paper to refer to the ability to reduce consumer welfare by holding prices above (and/or holding output below) supra-competitive levels, without the risk that new market entry would discipline such behavior in a thorough or timely fashion. For a useful introduction to market power issues see Krattenmaker, T. G., Lande, R. H., & Salop, S. C. Monopoly Power and Market Power In Antitrust Law, Geo. Lj, 76, 241 (1987). Most analysis occurs in antitrust cases where market power is created or enhanced by mergers or collusion, while the Uber case presents a case of market power created by predatory behavior by a single, extremely well financed firm.

[2] Johnson, Bobbie, How to Get Away with Uber, Medium, 22 Nov 2014

[3] “The idea: Uber doesn’t just set passengers up with drivers. It’s a company starting to dream of becoming a logistical nervous system for cities.” Lagorio-Chafkin, Christine, Resistance Is Futile, Inc. Magazine, Jul 2013..

[4] Cook, J., Peter Thiel: ‘Always aim for a monopoly. I always want to have a monopoly’, Business Insider, 2 May 2015.

[5] Thiel, Peter, Competition Is for Losers, Wall Street Journal, 12 Sep 2014.

[6] In a competitive market Uber’s ordering app would be considered its “platform”, but with quasi-monopolistic dominance “platform” would refer to its control of the rules that govern providers, customers and all other market participants. Control of a market is a “natural monopoly” even though the industry marketplace is not. White, A., & Weyl, E. G. Insulated platform competition (2012). Available at SSRN 1694317. With dominance the app would provide the basis for controlling “a rent-extraction business of the highest middle-man order.” Kaminska, Izabella, The Sharing Economy Will Go Medieval On You, Financial Times, 21 May 2015.

[7] Cushing supra note 64

[8] Fiegerman, Seth, Uber CEO admits he tried to undermine Lyft’s fundraising efforts, Mashable, 5 Nov 2014. D’Orazio, Dante, Uber employees spammed competing car service with fake orders, Verge, 24 Jan 2014. Erica Fink, Uber’s dirty tricks quantified, CNN Money, 12 Aug 2014.

[9] Smith, Ben, Uber Executive Suggests Digging Up Dirt On Journalists, Buzzfeed, 17 Nov 2014., Lacy, Sarah, The moment I learned just how far Uber will go to silence journalists and attack women, Pando Daily, 17 Nov 2014.

[10] Including David Plouffe, Barack Obama’s former Chief of Staff, and Rachel Whetstone, who had been a major advisor to British Prime Minister David Cameron Swisher, Kara, Uber Hires Top Obama Adviser David Plouffe as New “Campaign Manager, Recode 19 Aug 2014; Swisher, Kara, Google Comms and Policy Head Rachel Whetstone Takes Over That Job at Uber, Recode, 13 May 2015; Carr, Paul, Bright Young Flacks: “Cameron’s Cronies” now drive Silicon Valley’s most sinister propaganda machine, Pando Daily, 17 May 2015.

[11] Figler, David, Viva Disruption! How Uber outspent the casinos to buy Vegas, Pando Daily, 22 Jun 2015, “Uber now spends more on lobbyists in California than Wal-Mart, Bank of America or Wells Fargo.” Kirkham, C. & Lien T., Facing regulatory roadblocks, Uber ramps up its lobbying in California, Los Angeles Times, 26 Jul 2015.