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Will Uber ever be profitable?

Professor Howard Yu on how today’s biggest companies survive without profits

By Professor Howard H. Yu

Professor Howard Yu was recently interviewed by the leading French-speaking Swiss newspaper Le Temps on Uber and its business model. Extracts below:

Uber seems to have the same strategy as Amazon: to accept losses in order to gain market share, what can you say about this comparison?

Howard Yu: Amazon’s CEO Jeff Bezos likes to say: “Your margin is my opportunity”. Amazon built its empire selling books, CDs, and DVDs. Next came video streaming, then the Kindle, and then its audiobook company, Audible, and more recently, the voice-controlled speaker, Alexa. At every turn, Amazon forewent profitability. No wonder, then, that when the Whole Foods acquisition was announced last year, share prices for Wal-Mart, Kroger, and Costco all plummeted. The New York Times described Amazon as a “new breed of Silicon Valley conglomerate”.

That new breed of Silicon Valley conglomerate is essentially one that prioritizes long-term growth over short-term profitability. Uber does resemble Amazon in this regard, at least on the surface. In 2017, Uber had revenues of $7.5 billion and had a loss of $4.5 billion. The company argued that it was in “investment mode” particularly in overseas markets such as India. The business model of Uber, however, is far simpler than Amazon’s. Uber remains, first and foremost, a peer-to-peer ridesharing company. It has one single, dominant operation. Amazon meanwhile, has B2B businesses like AWS, subscription services like video and music streaming, logistics services for third parties, brick-and-mortar retail, and e-commerce. Having a diverse collection of operating models is important, because it helps the company to get the maximum out of market dynamics while providing a cushion for the worst.   

Are there other companies with the same strategy?

Howard Yu: Yes. Tesla is another example where profitability is far behind the company’s prospect for future growth. Tesla was publicly listed in 2010. Its share price has since been on the upswing, making the company the No. 2 US carmaker by market value, despite making zero profit. For a brief period, Tesla even surpassed GM as America’s most valuable car maker. Netflix is another example. Valued at $121 billion, Netflix has a price-to-earnings ratio exceeding 200. At General Electric that ratio is about 14.

Could Uber be profitable within 2-3 years?

Howard Yu: This is a difficult question. Amazon has not been making significant profits for almost 20 years. More troublesome for Uber is that its business model is relatively easy to imitate. The company has few fixed assets besides an algorithm. Most of its money is spent on marketing and sales. Uber faces fierce competition from companies like Didi in China, Grab in south East Asia, and even Lyft in the U.S.  

Can we expect a competitor to take market share from Uber?

Howard Yu: The most significant threat to Uber would be a competitor that came with vertically integrated fleet management and provided ridesharing at scale. Someone like Tesla could one day poise a significant threat, assuming they achieve rolling out completely autonomous vehicles faster than Uber. Still, Uber’s biggest problem is largely self-inflicted. It is not a very likeable company. It turns out business success depends as much on a visionary leader as the company’s public reputation. The company’s legislative woes – from restriction of some of its services to its outright ban in many countries – is the result of mismanagement of Uber’s corporate image. It’s a self-inflicted problem that opens the door for other competitors to take market share from it.

Howard Yu is professor of strategy and innovation at IMD Business School with campuses in Switzerland and Singapore.

Professor Howard Yu on how today’s biggest companies survive without profits
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