Ride-sharing giant Uber is not the moneymaker you might think it is. Leaked numbers from the company’s third-quarter financials published Thursday on tech website The Information claim Uber lost more than $800 million in the third quarter of this year. The Information forecasts that based on Uber’s less-than-stellar financial performance this year, the company is set to lose a grand total of $2.8 billion in 2016, significantly more than the $2 billion it lost in 2015.
Surprised? You’re not alone. Since it was founded in March 2009 by UCLA grad Travis Kalanick and Calgarian Garrett Camp, the company has revolutionized the cab scene globally, expanding its operations to over 60 countries and spawning hundreds of copycat ride-share startups. There are constant rumours that the company plans to go public in the near future, meaning that you’ll be able to purchase Uber shares when it gets listed on a major stock exchange. Most recently, Uber was pegged to be valued at $68 billion, a remarkable number for a company that has only been around for seven odd years. So why is it burning cash?
Tech analyst and investor Michael Dempsey, who has closely followed Uber’s growth over the last half-decade, told VICE Money that the company has felt the need to aggressively expand into global markets, a endeavor that is proving very costly. “So many different players are popping up in overseas markets… Asia especially… and Uber feels that they have to go in there to compete. It’s not cheap to do that.”
Indeed, it hasn’t paid off. In August this year, Uber abandoned its operations in China. After three years of battling Chinese regulators and attempting to swat off local ride-share competitors, Uber lost the fight and sold its $8 billion business to Didi Chuxing, a Chinese ride-share company that now holds an iron grip on 80 percent of the domestic market.
“I don’t think Uber quite realized that China was a difficult market to capture,” says Dempsey. “The social, cultural, legislative dynamics are so different in Asian countries that it’s very hard for an American company to win.”
Case-in-point, eBay, the very successful American e-commerce giant. It tried to break into the Chinese market in 2002, but got completely annihilated by local competitor Taobao. Tech In Asia editor Charles Custer pinned that loss on eBay’s failure to understand that in China, shopping is a social and personal experience. “People were used to talking and even haggling with people they bought things from. Taobao created a chat feature which let you do that,” wrote Custer.
Short-term pain for long-term gain?
Jan Dawson, an analyst at San Francisco-based technology research and advisory firm Jackdaw takes a more optimistic stance on Uber’s balance sheets. He told VICE Money out that it is not unusual for a startup this young to spend more than it earns while it’s still expanding.
“I think about Netflix as a parallel,” says Dawson. “Domestically, they make money. Internationally they actually don’t make much money. They’re a mish-mash of profitable and unprofitable businesses within one big umbrella. The key though, is to move those unprofitable markets into profit territory, eventually.”
Netflix’s latest earnings state that it has 34 million paying international subscribers, among the 80 million in total subscribers. London-based analytics firm IHS Markit predicts Netflix will have 75 million international subscribers by 2020, pulling in $7 billion in international revenue.
“Uber is a big startup, but that startup is still new. The high growth phase that we’re seeing right now is generating losses because Uber is still subsidizing their services in many markets to try and claim a monopoly of market share,” says Dawson.
Self-driving technology is expensive
Since it’s inception, Uber has been secretly developing autonomous vehicle technology. That’s an expensive venture which runs the risk of failure, depending on how consumers respond to self-driving technology. Uber spent $680 million in August this year to acquire Otto, a company started by a bunch of ex-Googlers that builds proprietary hardware and computer software used in autonomous vehicles. It also slapped down $500 million to develop the right kind of maps for self-driving vehicles, and more importantly, to reduce its dependence on Google (who are also deep into the self-driving vehicle game).
“It’s hard to really gauge how much capital Uber is pumping into self-driving technology, but I think the question here is… is it important to own self-driving technology when you’re a ride-sharing company?” says Dawson.
On a sheer cost-basis, there’s some truth to that. Purchasing a fleet of self-driving cars is much less expensive than trying to dominate the entire self-driving tech space by owning both the technology and the cars.
But it might pay off, says Michael Dempsey. “They want to own both the demand and the supply, like they do now with drivers.”
According to Dempsey, Uber’s current advantage over other ride-share companies is that they employ the most drivers. The company’s inevitable shift to self-driving cars means that they will lose that advantage of dominating the employment space when it comes to ride-share drivers. In order to remain competitive, Dempsey believes Uber needs to distinguish themselves from other ride-share companies by owning the technology that they will use in their cars.
Uber founded Travis Kalanick didn’t mince his words in an interview with Bloomberg recently. “The minute it was clear to us that our friends in Mountain View [Google] were going to be getting in the ride-sharing space, we needed to make sure there was an alternative [self-driving car]. Developing an autonomous vehicle is basically existential for us.”
Vanmala is VICE Canada’s Money & Economics Editor. Follow her on Twitter.