Uber lost at least (at least!) $1.2 billion in the first six months of 2016, according to Bloomberg News. The majority of this loss was due to driver subsidies. When startups lose money on purpose it’s called an investment. But an investment in what, exactly?
This question came up in email correspondence between Justin Fox of Bloomberg and Melissa Schilling of NYU’s Stern School of Business. Prof Schilling asserted that “[t]here are two main reasons for tech companies to lose money early to make money later, and neither of them apply to Uber.”
The first is “[u]pfront investments in fixed costs that are going to pay off with scale.” But, Schilling says, Uber’s fixed costs are low. Most of its losses are due to subsidizing drivers, a variable cost that won’t go down as Uber gains more drivers.
The second is “[s]ubsidizing a large installed base to “win” the market.” But the switching costs for both riders and drivers to use another service are low. In fact, many Uber drivers in the US already also drive for direct competitor Lyft.
But there is a long-term asset Uber gets each time a driver ferries a rider from point A to point B — the data.
Uber is like a card-counter at a blackjack table. It gains information to improve its future bets from every hand it plays. But unlike blackjack where every player sees the other players’ cards, in the ride share game whoever gets the fare first shuts everyone else out of the hand. Only that firm gets the data from that ride, building a unique stock of data capital.
So, imagine for a moment that Uber is buying data to improve its future ability to compete. What does that data cost? And is it worth it?
Uber is a private company, so information about its financials and ridership is a little thin on the ground. But we can use rough numbers from Bloomberg’s reporting and a few heroic assumptions to make some educated guesses.
We know that Uber lost at least $1.2 billion in the first six months of 2016. We also know that it provided one billion rides in roughly the same time frame (It was actually between Dec 24, 2015, when it delivered its billionth ride, and June 18, 2016, when it delivered its 2 billionth). That’s $1.20 per ride record.
Considering that personal transportation is a 10 trillion dollar market worldwide, a billion dollars for a billion unique detailed records is probably a pretty good deal.