What is Driving the Future of Uber?
Every day thousands of a people use Uber for the convenience it provides for private transportation. All it takes is one click on a cellular device to have a driver pick you up. Although Uber has found a way to break-in and dominate the transportation industry through a reinvented taxi business, it is evident that this will not be how the future of their business looks. In reality, Uber is not a transportation company, but rather it is a technology company. Travis Kalanick, the CEO of Uber, has noted, “It’s a technology platform that connects riders and drivers.” Despite Kalanick’s indication that the company’s function is solely for the app, Uber has demonstrated many attempts to shift the focus of their business to autonomous vehicles.
Before focusing on Uber’s future it is important to understand the company and the business model as it is now. According to recent statistics, there are 1 million Uber rides taken every day around the world. Uber’s business model is no different than a traditional cab company in that its only source of revenue is from rides; however, Uber allows essentially anyone with a car to become a driver and takes a twenty percent cut from the driver’s revenues. Uber is the “middle man” between an individual and a cab and for that service it charges a slight fee to the driver.
Uber has been successful not only because they have revolutionized the taxi industry, but also because they have been able to segment their services in order to appeal to various demographics. For example, commuters on a tighter budget might elect to use Uber Pool, which is basically a carpool version of the service. Although an Uber Pool ride may take slightly longer, it allows riders to pay a cheaper fare by splitting the ride. Alternatively, Uber also offers Black Car services which appeal to users seeking a more luxurious mode of transportation, for a higher price of course.
Uber’s revenue growth over the past few years is truly remarkable. In the first half of 2015, the company’s gross revenue was $3.63 billion, which is around $1 billion more in gross revenue than the entire 2014. Despite tremendous success in the past, we must value Uber based on how we believe they will perform in the future, not how they have performed in the past. This is based on the concept that the value of a business is the present value of all of the company’s future cash flows. The market that Uber currently operates in has become extremely saturated in major cities with the entrance of competitors like Lyft, Gett, and most recently Juno. The shift to self-driving cars will be key for Uber for a number of reasons. I think that most consumers will use the taxi app that results in the cheapest fare, and with new competitors in the market, prices naturally will get driven down.This affects a company like Uber’s profit margins and revenue expectations. Furthermore, Uber currently pays out eighty percent of each ride to the driver, and if they are able to own and operate fleets of self-driving cars, this will transform their “middle man” status into the supplier of the service. As with many early-stage technology companies, Uber has fast-growing revenue with a negative bottom-line. Uber’s investment in driverless cars may be their only opportunity to change that.
The self-driving car industry is going to be huge. There are expectations for it to be a $77 billion market by 2035. Uber has already tested a fleet of 43 autonomous cars in Pittsburgh that drove around 18,000 miles per week. Through this test run, Uber was able to complete 930 rides, demonstrating tremendous progress in the field. Not only will autonomous cars boost Uber’s revenue due to the zero dollar payout to drivers, but studies show that it will allow Uber to complete more rides per day. Right now, Uber drivers complete 1 to 2 rides per hour; however, researchers believe autonomous vehicles will be able to complete roughly 4 rides per hour. In this situation, it seems that although automizing cars, in the beginning, will be costly, it will ultimately allow Uber to grow tremendously.
Although autonomous vehicles seem like an industry that Uber will be successful in, there are a number of risks associated with this business endeavor. Firstly, there is the risk of competition. Companies such as Google, Tesla, and automakers such as Ford have been extremely active in this space and it seems that it will be a race to implement the technology successfully. Furthermore, Uber will have to take much more responsibility for any accidents involving their fleets. Just a couple of weeks ago an Uber autonomous vehicle was involved in a collision in Arizona which may result in a lawsuit filed against Uber. Lastly, I think it is important to address whether society is ready for the shift to autonomous vehicles. Although it seems that people are comfortable with the current driving system, Uber’s history shows that they can be successful at disrupting the marketplace. They’ve done it once, so what’s stopping them from doing it again. Despite the tremendous opportunity in autonomous vehicles, I think Uber still has a lot of ground to cover, and until Uber can assure society of the unquestionable safety of self-driving transportation they will continue to be a high revenue, negative profit business. It takes years of unprofitability for companies such as Uber to change the way we live and it remains to be seen how innovation will impact our methods of transportation.