Mit study on Uber Lyft ola

A recent MIT study on Uber and Lyft driver earnings has made me put my thinking cap on again. We don’t have a parallel to this study for Uber and Ola in India but you speak to any of the owner-drivers and their income is shrinking, while Uber and Ola continue to grow. Yet continue to be unprofitable. Strategically we will examine whether they ever will be profitable. Irrespective of scale.

Dropping driver earnings

It is important to visit this, before looking at their overall business model, to see if there is profit in the future. We are not going to split hairs over whether the MIT methodology was right or wrong. First, we have to understand that driver earnings are dropping

Just pulled this out of a Bloomberg article In 2012, Uber Black cost riders $4.90 per mile or $1.25 per minute in San Francisco. In March 2017, Uber was charging $3.75 per mile and $0.65 per minute. Here is a conversation that ex CEO Kalanick had with one of his drivers named Kamel.

“You’re raising the standards, and you’re dropping the prices.”

Kalanick: “We’re not dropping the prices on black.”

Kamel: “But in general the whole price is—”

Kalanick: “We have to; we have competitors; otherwise, we’d go out of business.”

Kamel: “Competitors? Man, you had the business model in your hands. You could have the prices you want, but you choose to buy everybody a ride.”

Kalanick: “No, no no. You misunderstand me. We started high-end. We didn’t go low-end because we wanted to. We went low-end because we had to because we’d be out of business.”

Kamel: “What? Lyft? It’s a piece of cake right there.”

Kalanick: “It seems like a piece of cake because I’ve beaten them. But if I didn’t do the things I did, we would have been beaten, I promise.”

The two bat that idea around and Kamel brings the conversation back to his losses.

Kamel: “But people are not trusting you anymore. … I lost $97,000 because of you. I’m bankrupt because of you. Yes, yes, yes. You keep changing every day. You keep changing every day.”

Kalanick: “Hold on a second, what have I changed about Black? What have I changed?”

Kamel: “You changed the whole business. You dropped the prices.”

Kalanick loses his shirt and eventually his job

Though not for this incident. It’s a sore point and at the heart of the business. But does his famed successor do any better? See how defensively he reacts to an MIT study which just quantified the earnings impact. His chief economist lays out some rationale. The big point being earlier reports gave higher earnings or earnings underestimated. However, the big point for our argument is that earnings of drivers are dropping and not rising whether by report or anecdotally as above.

Dara Khosrowshahi also loses his sense of humour

The market begins to notice and retaliate

Industry experts question the model again

Uber | Ola India driver earnings

Its no secret that driver earnings in India have dropped dramatically with more Uber and Ola cars on the road, Lured by incentives many drivers chucked a steady job and launched their own cars, sometimes two or three, assisted by loans facilitated by Uber and Ola. Now most of them are making less than they used to and are working at least 12 to 14 hours without overtime. They have a car loan to service (India car loans are not cheap) with falling incomes. Drivers with diesel cars are more stressed on mileage and maintenance. The only semi-happy souls are the ones with a Maruti Wagon R with a CNG engine. This is happening because the companies are artificially generating demand by keeping prices lower than auto fares. The drivers subsidise through longer hours driving and lower returns, and the VC’s fund the rest

At least one of the attractions for me is to get an AC car ride at autorickshaw fares. Is this really possible given the real cost of service ?

Positioning | Why buy me?

From a marketing standpoint, neither Uber or Ola have a position or USP. This conversation with Uber CEO and his driver says it all. Both Uber and Ola choose to buy everyone a ride. Even in yellow taxi cab and autorickshaw, long distance and short, rideshare. Keep generating demand by increasing supply and dropping fares with venture-funded money. Uber did mean elite once but got lost as a designer brand gone mass.

Kamel: “Competitors? Man, you had the business model in your hands. You could have the prices you want, but you choose to buy everybody a ride.”

Kalanick: “No, no no. You misunderstand me. We started high-end. We didn’t go low-end because we wanted to. We went low-end because we had to because we’d be out of business.”

What does driver earnings have to do with Uber | Ola profitability?

Uber and Ola are brokerages or a marketplace. They need drivers to attract customers. To attract drivers, they threw a lot of incentives buy viagra new zealand online. They increased their frequency of orders and value through incentives. As more drivers rushed in to service the demand, The frequency dropped down and so did the incentives. If Uber and Ola take up the pricing the demand will shrink (maybe not in user base, but definitely in frequency). This will have a big impact on the drivers since they will feel the income impact. The market will correct and lots of them will go back to being private taxis.

You can make a sustainable profit when your ability to price more is higher than direct competition or substitutes or when your cost of services delivery or product is substantially lower.

Let’s view Uber and Ola through two filters 1. Brand pricing power 2. Cost of goods. Clearly, both have not built themselves as brands with more pricing power then yellow and black cabs as yet. Then lets put the telescope on 2. Cost of Goods sold. Currently, its reducing earnings of its drivers, without in any way influencing the cost of delivery and expenses. It controls the demand side. Both maintain their commission and grow earnings from a larger customers base, but have reduced overall earnings per driver. Yet the driver’s cost base has grown with more expenses and working hours. Uber and Ola technology savings from scale do not impact its real cost base which is off their books. It’s no different from a Hindustan Unilever or Product company that is doing third-party manufacturing for its Product and Brand. Can Uber and Ola pay less and less for every taxi ride it sells, without helping the cab owner reduce the cost of servicing that ride? Look at it this way. The cost of running a taxi continues to go up. Cab earnings go down. Eventually, the supply side will break. Unless Uber and Ola can find a way to increase revenue for both its supply side and the company on an ongoing basis, the companies will fail eventually. Look at the branding a Hindustan Unilever or Procter and Gamble can generate. They can easily price 30% to 50% more than the unorganised and local competition. Uber and Ola are doing it by pricing below the local competition. This implies no Brand Strength despite crores in marketing spends

Here is an old headline. Losses are due to Marketing 🙂 or price wars. There is no branding. No reason why someone will pay a Rs 1/- more for Ola over Uber

Ola’s revenue surges seven-fold, but loss widens to Rs 2,313.66 crore in FY16

Success will depend on the business economics of the whole ecosystem and not Uber and Ola in isolation.This is the reason both Kalanick and Dara reacted aggressively to driver earnings. Unless it can churn a reasonable profit for their drivers, the model is headed to its logical end.

Uber’s true net loss, is $1.46 billion in the third quarter 2017

Uber’s loss from continuing operations is on track to significantly surpass the $3.2 billion achieved in 2016.

Here is an interesting Pricing chart for Uber. Fares have been 30% cheaper. To attract independent taxi operators in India, both Ola and Uber promised high pay, flexible hours and top up income. That’s all but disappeared. There never was a reason to price 30% cheaper as the cost of service with payouts and commission to Uber and Ola have gone up and not down.

Bottom line its a fundamentally flawed model.

Pre Uber and Ola Taxi operators through its unions and state intervention have maintained profitability in a regulated market. Keeping the supply in check. Uber and Ola have fundamentally not changed the inherent cost and profitability of this market. They have shown the capacity to be aggregators at scale and absorbed the loss from this effort. But are they creating a viable business? I don’t think so. Hopefully, the investors can bail out with a public listing and leave the thinking to retail investors.

ADDENDUM

Here is some more data. Just found some financial data on uber. Check link for attribution

Uber financials 2012 to 2017

Ever wonder what Uber is doing on an $11,428 Million annual expense. Let me see self-driving cars, uber eats, uber health uber India? What does it tell you a) They are spending way too much in the future when they have not tied up the present or there is no scalability? Where is the efficiency of technology?

See how they have gone back to an 80% margin 2017 after reducing driver share 2015&2016. They had a 94% attrition rate in a year and were forced to improve driver earnings for retention.

India Uber | Ola driver earnings pre incentive rationalisation. Anecdotally Rs 20K

Check the link above for attribution

Crunchtime. $ 7.25 Billion runway to IPO for Uber in 2019

With the recent fund infusion, most of that was stake sale by Uber.(Jan 2018) . Its boom or bust, with a 5 million burn in a year. Uber literally has little headroom left. The $7.5 Billion is again anecdotal. I believe they have $6 Billion left and with another $1.25 Billion of fresh cash. They better get their wet dream of a driverless car to kick in if they want the listing to happen. Most likely we will see a deal happening between Ola and Uber. Maybe Uber will exit and leave local ops to local teams with a stake share. They cannot carry the burn into an IPO listing. Interestingly all legal cases have been settled, including the Google wrangle on driverless cars with Google. They were given stakes in the settlement. So Google is invested in Uber

Deal Rumours Ola and Uber India January 20, 2018

Rajeev Misra Board member Softbank, and tipped to join Uber board. Comments to Financial Times and reported in a Business Standard Article

Misra told the Financial Times that Uber would have a faster path to profitability if it returned to its core markets such as the US, Europe, Latin America and Australia.

Dara Khosrowshahi on developing markets ( no second guess it is India ) Remarks February 20, 2018, touched speculation Uber is quitting India

One is the amount that we are investing in developing markets, that’s a significant negative but that is an optional investment for us…….if someone says, ‘Forget about all this stuff, all I want is the core and just sell all the stuff or stop investing all the stuff,’ you would have a business that for a quarter was cash flow breakeven.”

With Board Investors and CEO rumbles, looks like a deal with Ola and Uber is imminent

This has touched off speculation that Uber will exit India and or a deal with Ola and Uber is imminent

This article originally appeared on my profile in Linkedin

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