Uber: The Next Empire

Uber is an online taxi service, except it owns no cabs and has no cab drivers as employees. Like Alicia Silverstone in the movie Clueless, the San Francisco based company is a matchmaker – pairing up drivers with people who need a ride.

Since its founding in 2009 the service has exploded.  The first round of funding brought in $10 million, valuing Uber at $60 million. By October 2011 the company was estimated at a worth of over $300 million. The summer of 2014 saw that number skyrocket to $17 billion and only six months later it would more than double to $40 billion!

However, the ascent has not come without its fair share of drama.

In a traditional taxi service a standard fixed rate is charged no matter what; Uber is attempting to patent their “surge pricing” model, where the price of a ride changes according to how much demand there is.

The practice has attracted a lot of criticism.

On December 15 a man with a shotgun held up a Lindt chocolate café in Central Sydney. When passengers looking to flee the area turned to Uber, they were confronted with a surge price of four times the normal rate.

Source: Uber.com
Source: Uber.com

After facing up to a deluge of denigration, Uber quickly agreed to refund all who had paid surge fares but this wasn’t the first time the company has been accused of exploiting people in emergency situations. Surge pricing went into effect during Hurricane Sandy – which prompted Uber to turn off surge pricing during natural disasters or emergencies…in the U.S.

The app-based taxi service has also had to face up to traditional taxi companies and government regulators.  Taxi drivers in London, Berlin and Paris staged protests against Uber – voicing their concerns over the perceived threat to their livelihood.

The company has also never been one to “follow the rules”, rolling out their app in many cities in spite of regulations that might forbid a service such as Uber.

In most cities and countries cab services are heavily regulated. Competition is discouraged and instead a system of controlled prices and extensive licensing costs is put in place. In Spain a taxi license can cost up to €200,000! And because Uber is a tech company they do not have to be licensed like other cab services, naturally bringing them into conflict with regulators looking to preserve the status quo.

As a result of this friction the ride-sharing service is currently banned in the Netherlands, India and Thailand – with ongoing legal troubles in many other cities and countries.

Source: businessintelligence.com
Source: businessintelligence.com

Dirty Deeds

Uber also has a track record of ruthless cut-throat-ism. Predictably, the company has spawned competitors such as Lyft, Sidecar and Curb, and Uber has been aggressive in dealing with their challengers.

The CEO, Travis Kalanick, has admitted his attempts to kneecap Lyft, scheduling funding rounds right around the same time as Lyft so that investors would be forced to choose between the two ridesharing services. In August, it came out that 177 Uber employees had ordered and cancelled over 5000 rides via Lyft.

The list of dirty tactics is long, including paying Lyft riders to convert to Uber, introducing price cuts to push out other players and offering drivers cash incentives to join Uber.

Where does Uber go from here?

All the controversy doesn’t seem to have slowed the app-based ride sharing service; it now offers service in over 200 cities, up from 60 just a year ago, and their current valuation of $40 billion is enormous.

Just for comparison here a few publicly traded companies that command such a similar price tag.

Delta Air Lines, Inc. (NYSE: DAL)

Market Capitalization: 39.6 billion

FedEx (NYSE: FDX)

Market Capitalization: 49.4 billion

Adobe Systems Incorporated (NASDAQ: ADBE)

Market Capitalization: 37.1 billion

In fact, Uber’s valuation is so big that only 15 tech companies have a larger sticker price, including giants such as Microsoft, Apple, Google and Facebook.

Naturally one has to ask, with one eyebrow raised – is it really worth all that money?

A leaked financial report indicates that Uber regularly brought in $20 million a week in revenue for October 2013. If it did that every week, that works out to $1 billion a year.

That doesn’t say anything about how profitable the service is and it probably didn’t make $1 billion in revenue, especially considering the company estimated in August 2013 that they were on track to bring in $125 million in total revenue.

That $20 million/week figure likely represents all the money coming in from fares. Factor in Uber’s 20% cut and that $1 billion/year shrinks to $200 million. That number makes a lot more sense.

Source: Valleywag.gawker.com
Source: Valleywag.gawker.com

So let’s review.

Uber estimated revenues of $125 million in 2013. Around the same time their valuation was $3.5 billion. Put another way, the company was worth about 30 times revenues.

To put that number into perspective consider that FedEx, with annual revenues of $45 billion and a market cap of nearly $50 billion is only worth 1.11 times revenue.

FedEx Financials

Source: Google Finance

So it seems crazy but we have to keep in mind that in the second half of 2013 Uber nearly doubled its presence, going from 35 to 60 cities.

In 2014 that number went from 60 to 250, and that explosive growth is really the key to understanding the incredible valuation that Uber enjoys because Uber’s market is potentially and quite literally, the entire world.

The global taxi service market is estimated to be $100 billion a year and that’s where Uber could quite conceivably be headed.

The Future

The future looks bright for Uber if it can get a handle on its regulatory setbacks. Furthermore it has the potential to be more than just a car service.  It could potentially leverage its global network to become a tech version of logistics companies like Fedex or UPS. Think about it, if you can deliver a car to someone standing on a random street corner in 5 minutes, what else could you deliver?

Who knows what the future holds for Uber. In 20 years there may not even be drivers in the cars.

A day after Google showed off their driverless car, Uber CEO Travis Kalanick was excited about the idea of a fleet of driverless cars and remarked “The reason Uber could be expensive is because you’re not just paying for the car – you’re paying for the other dude in the car”.

The times – they are a-changin’.

Source: theotherpress.ca
Source: theotherpress.ca
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