Why Uber Is Losing Money Faster Than Any Tech Company Ever

Uber is losing money faster than any technology company ever, and it's largely because of an essential component to the company's operations: The drivers. Image: AP

Bloomberg reports Uber lost $US1.27 billion ($1.6 billion) in the first half of this year, which is unprecedented, even for a tech company. By comparison, Amazon reported losses of $US1.4 billion ($1.8 billion) in 2000 during its biggest loss ever. Amazon CEO Jeff Bezos fired 15 per cent of his workforce as a result.

Uber is clearly playing by the same "grow first, make money later" edict of Silicon Valley, so it should be no surprise the company's costs have increased as its operations expand into new cities. What is surprising, however, is that the biggest cost to the company is the fee it pays out to drivers. According to the Bloomberg report, driver subsidies account for a majority of losses in the first half of 2016.

That's the same fact shown in leaked documents published by The Information earlier this year. The leaked documents showed Uber paying out $US2.72 billion ($3.5 billion) to drivers in the first half of 2015. By comparison, Uber lost only $US72 million ($94.5 million) to promotions and price cuts during the same period.

Uber has been desperately (and quietly) trying to mitigate its losses to drivers. After lowering fares across North America to attract new customers, Uber began taking a greater percentage of driver's fares (up to 30 per cent now). Uber has instituted temporary hourly wage guarantees in some cities, but as Buzzfeed recently reported, Uber is still taking about one-third of their driver's meagre wages in cities across the US.

A recent Forbes report notes that gross bookings (fares charged to the app before drivers and customers get their cut) were way up in 2015. This fact is being touted as one of the biggest indicators that Uber's business is doing well. So how can Uber make money if its always losing so much to its drivers?

Eventually, Uber will get rid of the drivers and turn a huge profit. Earlier this month, Uber announced it would begin allowing customers in downtown Pittsburgh to summon self-driving cars from their phones, indicating at least part of the company's long-term business plan. Uber also acquired self-driving car company Otto for $US300 million ($393.8 million), showing its eagerness to advance its driverless car technology.

"It's the case of business 101," said Uber in a statement to Business Insider last year after its private finances were leaked. "You raise money, you invest money, you grow (hopefully), you make a profit and that generates a return for investors."

The critical part that Uber omits is how it will earn a profit if it continues to lose most of its money to drivers. The answer is seems pretty obvious to me: Just get rid of them.

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Comments

    Get rid of drivers??? That's funny as taxis have been profitable for generations in every country. So even with surge pricing, treating your employees as contractors (so you don't have to pay them any entitlements), and cutting the revenue that taxis had been getting, they still can't make a profit.

      So... Instead of replacing drivers with self-driving cars you want to employ them as contractors to waive all sick/holiday/superannuation entitlements and you think that's a better solution?

      Taxi drivers work 12 hour shifts - only the drivers who own their taxis make enough money to be comfortable, the others don't.

      Bring on the driver-less Uber I say - sure there will job losses - but maybe they can find a job in another area that will actually allow them to take holidays and spend time with their family.

      Well they are using an aggressive pricing strategy so they can destroy the taxi industry, take over the market and then replace all the drivers with robots.

      Its a long game the governments are letting them win. Uber will lead to one industry being destroyed and with the long term goal of not employing drivers at all. Economy wise Uber is bad with increase unemployment and monopilisatiin goals.

      Instead of stone walling them on thrir long term plans or questioning their unsustainable pricing structure... one by one the state and local govts are caving in.

      Its wierd to hear an Uber driver say Uber is great... if you were a union or public servant you would be irrate that your invone is at the whim of their unsustainable pricing model and tgat there long term plan is to fire the lot of you.

        "Economy wise Uber is bad with increase unemployment and monopilisatiin goals."
        I disagree, you see increased unemployment, I see a heap more workers who can work in other industries as we no longer need people behind the wheel.

        That's a win for productivity. The more we can automate, the more people we have for important tasks.

          This doesn't work. You can't push an entire workforce into high skill jobs, it creates a massive class divide between the skilled and unskilled workforces. This is the problem India is facing over the last few years since they effectively force-grew their IT industry and it's led to major social problems and extreme wealth disparity.

          I'm all for technological advancements in all industries, but you can't decimate job availability for unskilled workers without having a dangerous cascade effect on the entire economy and social system.

            Also any industrial city / town has the same issue and effects wider community. Detroit is a prime example of an industry reduction brings economic ruin. The same issue or the mining industry collapse had on Western Australia effecting wide spread with government cost cutting and rate increases.

            Uber also using their business model to avoid taxes, so economically, Uber wont be paying for schools, hospitals, or roads in your city/state.

          That's right, and it's the way industry has always been right back (possibly) to when they invented the wheel and could 'cart' things around rather than 'hire' people to carry things on their back. Many industries now use machines rather than people to build, transport, and create instead of humans.

          I think taxi services will eventually become a boutique industry and will be sold as a transport industry with the human touch. Usually industries don't die, they just adapt to the way things have changed.

    So I used to drive a Taxi many years ago. I didn't own it, just rented it for 12 hours at a time 5 days a week.

    How much did I rent it for? 50%. I got to keep 50% of whatever fares I made, and the owner took the rest. That was a good deal.

    So Uber only taking 30%? that's freaking awesome.

      And sticking the drivers with the all overheads of car maintenance, licensing, insurance, liability and fuel. They are taking 30% for access to the application.

        I dare say this driver would have had to foot the bill for fuel. But I wonder if 20% of the takings for a day is enough to pay for a car and maintenance costs. I suppose a $500 day in fares for him as a taxi driver would have resulted in $250 for him minus fuel costs.

        In the Uber situation it would result in $350, minus fuel costs for the driver, if he could buy and service a car for less than $100 per day, then he is ahead.

        I forgot about insurance however, so perhaps that's a big cost... however overall it seems about the same deal. Up to the drivers to pick who they want to work for I suppose.

    to be fair Taxi complaining not about uber but about high cost of government license that make them not competitive against uber who dont need to spend 100k a year licensing drivers.

    so maybe there is something that government should be doing to put uber out of business?

    Given UBER has described itself as an internet speak-easy where people with cars can offer a ride to those who want a ride to avoid the obligations of employers to its employees...I would suggest criminal charges are inevitable.

    On the automated driver route, Tesla has that as one of their goals as outlined in their Master Plan Part 2: https://www.tesla.com/en_AU/blog/master-plan-part-deux

    On talking about self-driving cars:
    "When true self-driving is approved by regulators, it will mean that you will be able to summon your Tesla from pretty much anywhere. Once it picks you up, you will be able to sleep, read or do anything else enroute to your destination.

    You will also be able to add your car to the Tesla shared fleet just by tapping a button on the Tesla phone app and have it generate income for you while you're at work or on vacation, significantly offsetting and at times potentially exceeding the monthly loan or lease cost. This dramatically lowers the true cost of ownership to the point where almost anyone could own a Tesla. Since most cars are only in use by their owner for 5% to 10% of the day, the fundamental economic utility of a true self-driving car is likely to be several times that of a car which is not.

    In cities where demand exceeds the supply of customer-owned cars, Tesla will operate its own fleet, ensuring you can always hail a ride from us no matter where you are."

    Something doesn't ring true. Ubers costs are strictly limited to management of the application itself and the insurance they offer. They don't have any of the other costs of running a fleet of vehicles, because the drivers manage that out of their cut.

    Saying that they are "losing money" to the drivers is a bit of a weird way to look at it. The drivers are providing the actual service, uber is simply the enabler, the co-ordinator.

    Uber is reaping a 30% cut from the drivers for providing a booking and payment service. That's how it actually is.

      I thought this as well. Something isn't being disclosed here. I think the issue is someone doesn't know the difference between net profit and gross profit.

    Robots are coming. Once again, the only possible solution is a guaranteed, unconditional and universal basic income.
    https://en.m.wikipedia.org/wiki/Basic_income#Technological_unemployment

    What is not mentioned here are Uber's high overheads. Paying "cash for comment" Uber-friendly articles in certain newspapers, where they do not have a foothold, is enormous. Woe betide any reporter who is agin them.
    You'd also be surprised at the number of people paid to post positive online comments whenever the occasion arises.

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