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On Demand Businesses 101

With $2.2bn in Annual Losses, Why is Uber still Worshipped by Investors and Enterprises?

“You know what’s better than a million dollars,” Sean Parker asked Mark Zuckerberg in their first meeting over a few drinks. Clueless, Zuckerberg was left in awe when Parker casually commented about the global prospects of an emerging social networking site. “A Billion Dollars, that is what’s cool,” Parker finished, leaving Zuckerberg with a new beginning for ‘TheFacebook.Com’. A decade later, Uber finds itself in a similar position. Eager to capitalize on the disruption it has created in the transportation markets around the globe, Uber doesn’t want anything less than global dominance. The emergence of Facebook killed every social networking site of the early 2000s. The remaining few were mercilessly crushed. After 2005, if anyone tried to compete for an online presence, it was simply taken over (Read Instagram). For Facebook, the money was not a problem, but the idea of an existing competitive enterprise was one.

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Uber is not Facebook, and has a long way to go before it attains a stature as formidable as that of the latter, and yet, it finds itself on the pedestal where enterprises see it as invincible and unsinkable. Being the biggest private company in terms of valuation, Uber harbors the power to turn every tide of investment in its favor. Fortunately for the brand, the investors are not shying away from pumping in the money, pushing its valuation to a staggering $69bn. However, in the glory of its valuation, one cannot miss out on the grief of its losses. Since its inception in 2009, Uber has registered unprecedented negative growth annually. Last year, in 2016, Uber put estimates to shame when it lost $1.2bn dollars in the first 6 months itself, which was 20% more of what it was estimated to lose already. By the end of 2016, Uber had lost a total of $2.2bn. The valuation, however, continues to increase as unexplained investor faith helps the brand to lead the bandwagon for other enterprises to worship and follow. The question is why everyone wants Uber to lead this procession?

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The answer lies in the disruption Uber has caused amongst the transport service providers across the globe. Starting from partially displacing the Yellow Taxi Drivers in the US, it has now extended its services to developing economies in Asia. India, with its potential market of at least half a billion people gives Uber the opportunity to carry out ruthless expansion at the cost of the existing transport service providers in the informal sector. Much of this expansion can be attributed to the advances on the technology front with cost-effective peripheral hardware solutions. Uber’s disruption in the existing markets did not come from the service that was being offered, but from the manner in which the same service was being offered. They merely did what the folks at Facebook had done years ago, with the exception that their disruption wasn’t confined to the internet alone. Enterprises today seek valuable lessons from the disruption and are employing technology to revamp the market of utility services, examples of which are visible in the meal delivery, healthcare, home services, and transportation sector.

What makes Uber work amongst the consumers is the fact that they are required to pay only 41% of the costs they would have paid had they hired a conventional taxi service. For every 10 dollars you spend on a Yellow Taxi service, Uber charges only 4 to 5 dollars (varying according to region). While the remaining 5 dollars are paid for by the hefty investments that are made each year, Uber is now looking towards a sustained revenue model that doesn’t lose $2.2bn against the $1.43bn it earns. This would come from the profits on the invested capital, offering service at lower costs and enhanced quality to inspire user consumption, and allowing users to gain from the sustainable competitive advantages adopted by the brand. Enterprises must follow a similar model as it is essential for the emerging ones to ensure profits on the invested capital for sustained monetary input from the eager stakeholders. Alongside, the idea of paying less for enhanced services is what made Uber favorable amongst people, and their faith is what guides the brand towards continuous expansion. From the perspective of small enterprises, Uber is gaining more users than the money it is losing. However, is there more than what meets the eye?

 

Uber today has a negative profit margin of 143%. Facebook, at the same point in its timeline was registering a growth of 25% while Amazon was struggling with a negative growth rate of 50%. However, unlike Facebook, Uber has to worry about what it pays to its drivers, about the inflation in fuel prices, and unpredictable user consumption hindered by geographical and political factors. While Amazon was able to reduce its expenditure through calculated investments in their warehouses, delivery practices, and other infrastructure, Uber would require both, the fuel and the faces, to run the show. Surge pricing has not helped Uber achieve the numbers it wanted to, and therefore, they are looking at the next big disruption; car without drivers.

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Uber is not worshipped for its numbers, positive or negative, but for the disruption it brings to a market constrained by outdated practices and stagnated growth. The idea of driverless cars (they intend to have a personnel to monitor it) has landed Uber in a lot of trouble with the lawmakers, with some citing the flaws in existing technology as the reason to cease this pursuit. While Uber traverses through this legal turmoil, one wonders what would be the fate of these driverless cars in markets as densely populated as India and South America or places with adverse weather conditions. Clearly, Uber is looking to repeat its own history, and unlike the last time, it has the backing of every single enterprise that draws inspiration from its business model for their functioning.

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So, what works in the favor of Uber, given the recurring and mounting losses? If the leaders at Uber are to be believed, Uber is still in its developing phase. Expanding one city at a time, it plans to have a complex Algebra in place that would compile the revenues from each city and be an integral part of the revenue model that finally helps investors with some returns on their lofty investments. To accomplish this, they plan on global dominance. Every feasible country, every feasible route, and Uber wants to get there. While some might confuse their ‘developing phase’ remark with a $69bn valuation for a display of shallow modesty, Uber has its eyes set on a global presence that is unparalleled and kills every other competitor in the business, virtually and literally.

Uber’s godfather like presence in the ‘On-Demand’ segment is not without its reasons. With Smartphone devices in play, users are now ordering services with greater ease and reduced waiting times. Alongside, as Uber keeps adding more cars to its fleet, it is helping more users in less time and drivers with more trips. Turns out, with more additions to its fleet, a driver can go for 3 trips in one hour and earn a decent profit after exhausting all the statics costs including fuel and maintenance. Making a calculated move, it bowed out of the market in China and was taken over by its rival, ‘Didi’. While one may confuse this with the defeat of Uber in a critical economy, it turned out to be a profitable move, given the investments and resources that were warranted.

Today, Uber is the buzzword for every entrepreneur and enterprise looking to create a space for themselves in the market. The losses for Uber are here to stay for another few years, along with the opportunities to convert those losses into gigantic profits. Eventually, it is all going to come down to how well Uber can cause the next big disruption in automation and driverless cars. The investors would be hoping for Uber to crack the formula before Google does, or else, the brand might just lose out on both, money and time.

For Uber, the drive through the fault lines of a shaky industry driven by user consumption is not going to be easy. Fortunately, it has its magnanimous share of admirers and enterprise for motivation.

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