Uber is not doomed

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com

Here is an article that offers a long laundry list of reasons why Uber is doomed. A lot of the article consists of silly stuff like “The employees don’t like it there.” But come on, there have been a million companies where the employees hate the place, and the place still does well. Just recently we learned of the extremely abusive and sexually predatory nature of Kay’s Jewelry. And yet that company has been doing great, for decades. Sad to say, abusive leadership rarely kills a company (the best option for the employees, always, is to form a labor union. Only a labor union can protect their rights).

The one part of the article that did sound serious to me is where it suggests that Uber lacks economies of scale.

The problem with Uber, Horan argued, is that it doesn’t have a powerful economy of scale — that is, the savings in cost that are produced when production increases, particularly through fixed costs being spread out. Unlike Amazon, which had significant fixed costs, Horan said that 85 percent of Uber’s costs are variable.

“Uber cannot expand into new markets at very low cost since it faces unique driver recruitment, political lobbying and competitive marketing challenges in each city,” Horan said.

Gordon said that’s why the typical approach by venture capitalists with Uber probably won’t work.

“They don’t have an economy of scale,” he said. “So, every day, venture capitalists fund loss-making companies, but not one [with] a model you can’t see how it’s going to flip twice as many rides that you keep losing money on. You’re not going to start making twice as much money because you’re doing twice as much rides. It’s not like a factory [with fixed costs].”

Maybe Kalanick knows something we all don’t. Maybe Uber has a secret team of genius scientists who’ll surpass all expectations of driverless cars and, somehow, have a fully-automated fleet of vehicles for the company to use everywhere within a few years. Maybe billionaire investors are actually fine with propping up a money-losing venture into perpetuity.

But until Uber can prove it has found a sustainable model—or, perhaps, stop the investor leaks of its financials—there’s little to suggest it has the bandwidth to survive. Whether it’s sold, drastically shrinks its market footprint, or just outright shutters, it’s untenable for Uber to exist long term as the tech juggernaut it is today.

That is important. I personally think Uber will do fine, in the long run, but if it truly lacks economies of scale, then it is doomed.