New York: Uber is racking up bigger losses than perhaps any young technology company ever has before. But what if Uber is vulnerable because it actually takes too much money?
The notion is based on the cut of each fare that Uber takes. This percentage is larger than sales splits at eBay, Airbnb, Priceline, Grubhub and others that likewise match willing buyers — online shoppers, or riders in Uber’s case — with drivers, restaurants, people with a spare room or other willing sellers.
Uber’s outsize commission could allow rivals to undercut its business by offering drivers a larger share of fares. The risk is theoretical now, but nearly everything must go flawlessly for Uber to justify its $69 billion valuation.
To understand the point, here’s a basic primer on Uber’s business model: If you pay $20 for an Uber ride to dinner, the company tends to collect something like 20% to 30% of the fare, or $4 to $6. The driver gets the rest. Uber’s commission percentage is a secret, and it varies by city, competitive pressures and other factors. But that’s a roughly typical share Uber aims to collect in the US.
Here’s the thing, though. On average, eBay keeps 8%, or $1.60, if you spend $20 on a coffee maker from their online marketplace. Grubhub typically gets $3.20 from a $20 restaurant takeout. Airbnb collects 9% to 15% for each reservation , and Priceline’s Booking.com gets 11 cents of every dollar from a hotel booking, on average.
Those companies do different things than Uber, but they all are online marketplaces — they match buyers and sellers, and take a cut from each transaction. For its fee, Uber provides mapping software, helps with problems, processes credit-card payments, takes out insurance and performs other valuable chores.
Uber is a private company, and that makes it tough to know whether it provides enough value to charge roughly double the commission percentage collected by Airbnb and Amazon’s third-party marketplace.
In principle, though, Uber’s relatively high cut — also called a “take rate” or “rake,” in casino terminology — leaves the company potentially vulnerable to competitors who might opt for a smaller share of transaction fees. Don’t take my word for it. This is from Bill Gurley, an general partner with venture capital firm Benchmark and one of Uber’s biggest backers. Gurley wasn’t referring to Uber in his 2013 blog post, but it’s an intriguing read with Uber in mind:
“A high rake will allow you to achieve larger revenues faster, but it will eventually represent a strategic red flag — a pricing umbrella that can be exploited by others in the ecosystem, perhaps by someone with a more disruptive business model.”
There is worrying precedent for Uber. Gurley mentioned eBay’s expansion into China a decade ago, when the company ported over its US commissions. Local rival Alibaba charged nothing for people to sell stuff on its Taobao marketplace. Alibaba won, and eBay gave up in China. Groupon faded in popularity in part because businesses felt they were getting a bad deal — the company at times took a 35% cut from each daily deal.
Uber drivers sometimes complain or sue over how Uber treats them. This grumbling isn’t unusual. There are inevitable tensions between online marketplaces and merchants that rely on them. But some smaller Uber competitors, including Juno in New York City and Fasten in Boston, are trying to lure drivers by exploiting Uber’s commissions. Juno has said it would take just a 10% cut of fares, for example.
It may be, though, that Uber has staked out a unique position that lets it thrive even if keeps its commission structure as is. Drivers don’t seem to have the power that larger merchants have over eBay, for example, and may not be able to apply the same pressure on Uber to lower its commissions. The on-demand ride business is also wildly distorted by companies willing to subsidize rides. That makes it tough to assess a natural baseline for industry commissions.
For sure, if Uber did take a smaller cut of fares, its losses would be uglier. Uber’s net revenue — the total commissions it earns — was $2 billion-plus in the first half of this year, my colleague Eric Newcomer reported. If Uber’s share of fares were smaller, net revenue would be lower, and losses would be higher than the more than $1.27 billion reported for the first half of 2016.
Right now Uber’s hold on on-demand transportation looks unassailable, which means it doesn’t need to fear its commission rate Achilles heel. But it’s also true in the technology industry that sometimes sure things can take a turn, and quickly. Bloomberg