I don’t see what is that you would argue about if not about these particular questions one of which might become a double-crux at some point.
If Steve has a coherent claim for us to argue about, then you’re right. But a surprisingly large amount of people, such as the specific Steve I chose for this dialogue, don’t have enough substance to their belief-state to qualify as a “claim”, despite their ability to say an abstract sentence like “Uber exploits its workers” that sounds like it could be a meaningful claim. In this case, specificity demolishes their argument, making them go back to the drawing board of what claim they desire to put forth, if any.
If Uber was making $1/h out of their workers and paying them $14/h, that clearly would not have been exploitation, but if it makes $28/h, then it is, regardless of them being profitable. The question is how much every particular worker brings to the company, it doesn’t matter whether it’s enough for the viability of their business model.
My meta-level response: This is more than what the Steve in the dialogue had in mind. The specific Steve in the dialogue just thinks “Hm, I guess I don’t know in what sense my specific-example guy is being exploited. I’d have to think about this more.”
My object-level response: What specifically do you mean by “Uber making $X/hr”? Contribution margin before (huge) fixed costs? Or net profit margin? Because right now Uber has a negative net profit margin, so its shareholders are subsidizing the drivers’ wages and the riders’ low prices.
On the meta level I agree with you, and I am happy to see the updated title, which makes the post feel less like attacking this sort of questions.
With regards to the object-level response, I surely mean “contribution margin before (huge) fixed costs”. Net profits are not very relevant here, see Amazon, a booming business with close-to-zero net profits. It is also clear that while Uber doesn’t have profits, it surely has other gains, such as market share, for example. I.e., if the company decides that it wants to essentially exchange money for other non-monetary gains, it should not affect our opinion on their relationship with their workers.
That said, I acknowledge that it is slightly more nuanced, and that simply looking at the contribution margin is not enough.
Well, I’m guessing Uber’s current contribution margins are hovering around slightly negative or slightly positive, and that’s before accounting for fixed costs like engineering that we can probably agree should be amortized into the “fairness equation”.
In my personal analysis, I don’t see how Uber is being unfair in any way to their drivers. It seems like Uber is a nice shareholder-subsidized program to put drivers to work and give riders convenient point-to-point transportation.
Since I’m pretty sure Uber’s net margins are negative, there must be a net transfer of wealth from people who buy Uber shares to Uber’s drivers, employees, vendors and/or customers (I believe it’s to all of them).
Ah because they think that in the next 5-20 years, Uber will figure out how to widen their contribution margin, get leverage on their fixed costs, and eventually make so much total profit that it compensates for all the money burned along the way (currently losing $5B/quarter btw).
One way this could happen is if Uber is able to keep their prices the same but replace their human-driven cars with self-driving cars. This scenario is possible but I’d give it less than 50% chance. But we don’t need to try to predict the exact win scenario, we can just assign some probability that there will be some kind of win scenario.
Facebook IPO’d in 2012 at a $104B market cap before anyone knew by what mechanism they’d generate profits. They only hit the jackpot figuring out a highly profitable advertising engine around 2014.
I personally don’t think Uber is an appealing investment, but I’m not confident about that assessment, because they’re in a unique position where they’re embedded deeply in the lives of many millions of customers, and they might also hit some kind of unforeseen jackpot to become the next Facebook.
Not invested either, but I thought its view of the future where, in general, people moved from owning transportation capital (cars) to one of an on demand use of transportation service seems to have some sense to it. Coupled with the move toward rental of personal assets while not used, like the AirBnB model it looks a bit better too (perhaps as a transition state...?)
That does seem to depend on more than merely the technical and financial aspect. I suspect there is also the whole cultural and social (and probably the legal liability and insurance aspects for the autonomous car) part that will need to shift to support that type of market shift.
Not sure if this is a move in the similar direction but one of the big car rental companies just launched (or will) a new service for longer term rental. Basically you can pay a monthly fee and drive most of the cars they offer. The market here seemed to be those that might want a difference car every few weeks (BMW this month, Audi next, any maybe Lexus a bit later...). In the back of my mind I cannot help be see some time of signaling motivation here and wonder just how long that lasts if everyone can do it—all the different cars you are seen driving no long signals any really type of status. Still, there are clearly some functional aspects that make it appealing over having to own multiple vehicles.
I don’t quite understand, if even the contribution margin of an individual driver is negative (before fixed costs), then I don’t see how this model can become viable in the future.
My understanding is that contribution margins are obviously positive (Uber gets at least a half of the trip fare on average), but there is also a cost of investment in engineering and in low fares (which buy market share), that have not yet been covered.
The viability of the business model, thus, comes from the fact that future (quite positive) income from the provided services will continue to cover investments in non-monetary gains, such as brand, market share, assets and IP.
I don’t quite understand, if even the contribution margin of an individual driver is negative (before fixed costs), then I don’t see how this model can become viable in the future.
The hope is that they’ll hit on something big like self-driving car technology that fundamentally improves Uber’s marginal profit.
I run a service busines with a financial model kind of similar to Uber’s, and I can tell you there’s not much qualitative difference between reporting −20% vs +20% “contribution margin”, because it depends on how much you decide to amortize all kinds of gray-area costs like marketing, new-driver incentives, non-driver employees, etc, into the calculation of what goes into “one ride”.
I use the ambiguous term “marginal profit” to mean “contribution margin with more overhead amortized in”, and I’m pretty sure Uber’s is quite negative right now, maybe in the ballpark of −20%.
If Steve has a coherent claim for us to argue about, then you’re right. But a surprisingly large amount of people, such as the specific Steve I chose for this dialogue, don’t have enough substance to their belief-state to qualify as a “claim”, despite their ability to say an abstract sentence like “Uber exploits its workers” that sounds like it could be a meaningful claim. In this case, specificity demolishes their argument, making them go back to the drawing board of what claim they desire to put forth, if any.
My meta-level response: This is more than what the Steve in the dialogue had in mind. The specific Steve in the dialogue just thinks “Hm, I guess I don’t know in what sense my specific-example guy is being exploited. I’d have to think about this more.”
My object-level response: What specifically do you mean by “Uber making $X/hr”? Contribution margin before (huge) fixed costs? Or net profit margin? Because right now Uber has a negative net profit margin, so its shareholders are subsidizing the drivers’ wages and the riders’ low prices.
On the meta level I agree with you, and I am happy to see the updated title, which makes the post feel less like attacking this sort of questions.
With regards to the object-level response, I surely mean “contribution margin before (huge) fixed costs”. Net profits are not very relevant here, see Amazon, a booming business with close-to-zero net profits. It is also clear that while Uber doesn’t have profits, it surely has other gains, such as market share, for example. I.e., if the company decides that it wants to essentially exchange money for other non-monetary gains, it should not affect our opinion on their relationship with their workers.
That said, I acknowledge that it is slightly more nuanced, and that simply looking at the contribution margin is not enough.
Well, I’m guessing Uber’s current contribution margins are hovering around slightly negative or slightly positive, and that’s before accounting for fixed costs like engineering that we can probably agree should be amortized into the “fairness equation”.
In my personal analysis, I don’t see how Uber is being unfair in any way to their drivers. It seems like Uber is a nice shareholder-subsidized program to put drivers to work and give riders convenient point-to-point transportation.
Could you explain why shareholders are subsidizing Uber drivers, in your opinion?
Since I’m pretty sure Uber’s net margins are negative, there must be a net transfer of wealth from people who buy Uber shares to Uber’s drivers, employees, vendors and/or customers (I believe it’s to all of them).
Right, but what’s their motivation for transferring their wealth in this way?
Ah because they think that in the next 5-20 years, Uber will figure out how to widen their contribution margin, get leverage on their fixed costs, and eventually make so much total profit that it compensates for all the money burned along the way (currently losing $5B/quarter btw).
One way this could happen is if Uber is able to keep their prices the same but replace their human-driven cars with self-driving cars. This scenario is possible but I’d give it less than 50% chance. But we don’t need to try to predict the exact win scenario, we can just assign some probability that there will be some kind of win scenario.
Facebook IPO’d in 2012 at a $104B market cap before anyone knew by what mechanism they’d generate profits. They only hit the jackpot figuring out a highly profitable advertising engine around 2014.
I personally don’t think Uber is an appealing investment, but I’m not confident about that assessment, because they’re in a unique position where they’re embedded deeply in the lives of many millions of customers, and they might also hit some kind of unforeseen jackpot to become the next Facebook.
Not invested either, but I thought its view of the future where, in general, people moved from owning transportation capital (cars) to one of an on demand use of transportation service seems to have some sense to it. Coupled with the move toward rental of personal assets while not used, like the AirBnB model it looks a bit better too (perhaps as a transition state...?)
That does seem to depend on more than merely the technical and financial aspect. I suspect there is also the whole cultural and social (and probably the legal liability and insurance aspects for the autonomous car) part that will need to shift to support that type of market shift.
Not sure if this is a move in the similar direction but one of the big car rental companies just launched (or will) a new service for longer term rental. Basically you can pay a monthly fee and drive most of the cars they offer. The market here seemed to be those that might want a difference car every few weeks (BMW this month, Audi next, any maybe Lexus a bit later...). In the back of my mind I cannot help be see some time of signaling motivation here and wonder just how long that lasts if everyone can do it—all the different cars you are seen driving no long signals any really type of status. Still, there are clearly some functional aspects that make it appealing over having to own multiple vehicles.
I don’t quite understand, if even the contribution margin of an individual driver is negative (before fixed costs), then I don’t see how this model can become viable in the future.
My understanding is that contribution margins are obviously positive (Uber gets at least a half of the trip fare on average), but there is also a cost of investment in engineering and in low fares (which buy market share), that have not yet been covered.
The viability of the business model, thus, comes from the fact that future (quite positive) income from the provided services will continue to cover investments in non-monetary gains, such as brand, market share, assets and IP.
The hope is that they’ll hit on something big like self-driving car technology that fundamentally improves Uber’s marginal profit.
I run a service busines with a financial model kind of similar to Uber’s, and I can tell you there’s not much qualitative difference between reporting −20% vs +20% “contribution margin”, because it depends on how much you decide to amortize all kinds of gray-area costs like marketing, new-driver incentives, non-driver employees, etc, into the calculation of what goes into “one ride”.
I use the ambiguous term “marginal profit” to mean “contribution margin with more overhead amortized in”, and I’m pretty sure Uber’s is quite negative right now, maybe in the ballpark of −20%.
Or the old fashioned thing where you kill off competition and then raise prices.