Uber pt.1 - Economics

Well, it's that time of the year again. For this attempt, I am going to do things differently. For the next 30 days, and hopefully many more, I will take an in-depth look at various companies, garner what information I can, and present my findings to you: my beloved audience. As I am extremely new to this and quite frankly, slightly unreliable, I will use this diligence checklist for inspiration and structure. Of course, this is subject to change as I prove my consistency.

For this week's hot take, I want to delve into Uber. I have always found their losses taken to gain market share egregious, although I was rightfully proven wrong as Uber ended 2023 in the black for the first time. Therefore, I find it only fitting for me to finally put some effort into understanding this rideshare giant. Today, we will focus on Uber's economics. Please note that for this, I will almost exclusively focus on the Rideshare side of things.

Does Uber understand its unit economics? In what way can the company influence growth?

Unit economics, in short, is a business model that analyzes a company's per-unit revenue to its cost, essentially determining how much money a business makes from each customer/unit sold. I believe that Uber has a strong understanding of its unit economics. Anecdotally, this is easy to prove. Most would agree that a trip to/from the airport costs significantly more than average, as Uber understands that these travelers often don't have the luxury of time and options. I can also vouch that on a per-minute basis, the rides I take when I go home to London are significantly cheaper than those in Seattle, where the black cabs they compete with are non-existent. Everyone who uses Uber will have similar stories, which goes to show an understanding of monetization on each particular ride.

Digging into the Q1 2024 financials, I believe we can see evidence of this on their Balance Sheet. Compared to Q1 2023, Uber's ride count grew by 21%. Similarly, the gross amount charged for all their rides also grew by 21%. I believe this linear growth shows a strong understanding of per-ride pricing as Uber turns toward profitability. This can especially be seen compared to last year's Q1 balance sheet, where a 24% increase in rides was only matched by a 19% increase in Gross Bookings.

What are the most important complements to what Uber sells? Are they getting more or less abundant?

Uber is generally considered a standalone service. Important complements include network coverage, smartphone usage, and online payments, all of which are ever-increasing in prevalence. These metrics directly increase Uber's accessibility and usability.

What are some feedback loops in Uber's ecosystem?

Uber's entire ecosystem can be looked at as one big feedback loop. It's easy to visualize: as Uber sells more rides, it becomes more enticing for drivers to join the platform. More driver availability reduces wait times and (theoretically) costs. This, in turn, makes Uber's product more attractive for the individual rider.

Are there companies in a structurally better position to pay more for Uber's resources?

Uber's main resource is its drivers, which they compete for against other rideshare and delivery giants. However, just because they compete does not mean it's a bad thing. Many customers of this service are not brand loyal; I don't care if it's an Uber or a Lyft - I take the cheaper one. This provides a strong incentive for rideshare providers to price similarly to drivers and riders. Therefore, drivers aren't loyal to any particular platform and will continue to drive for Uber so long as they maintain the market rates. If someone wants to poach Uber's drivers, they will need to be prepared to burn billions for market share, as Uber did. This seems like a pretty high barrier to entry to me.

How do customers evaluate Uber's product compared to competitors'?

As briefly mentioned in the previous section, customers typically are not loyal to Uber's platform. There's no rewards system to work towards, and every rideshare company offers some version of Uber One's monthly subscription model. A ride is a ride, no matter where it comes from. An interesting observation I have made from speaking to friends and drivers is that recently, at least in Seattle, people are choosing public transport over Uber more often. This change started when Seattle increased the minimum wage for drivers to $26.50/hr, the cost of which was directly passed onto the riders. Although public transit never competed with Uber in price, it seems to be the case for most that the price differential for convenience is no longer justifiable.

What external shocks is Uber unavoidably tied to?

One big external factor Uber is unavoidably tied to is gas prices. Uber does not cover a driver's gas expense, and although tax-deductible, it is not difficult to foresee a climate in which driving Uber at the current rates is not profitable enough. Apart from this, regulatory decisions are a key factor. As mentioned above, a decision to increase the minimum wage for drivers has directly led to a decrease in riders.

That's it for part 1! Thank you for reading.