Uber’s fairytale of rational competition | FT Alphaville https://ftalphaville.ft.com/2020/02/11/1581430964000/Uber-s-fairytale-o...

Uber’s salt-and-pepper bearded chief executive Dara Khosrowshahi sent shockwaves

around the tech world last week when, in a press release (https://investor.uber.com/
news-events/news/press-release-details/2020/Uber-Announces-Results-for-Fourth-
Quarter-and-Full-Year-2019/default.aspx) delivered alongside the transport
company’s full-year results, he declared:

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We recognise that the era of growth at all costs is over. In a world where investors
increasingly demand not just growth, but profitable growth, we are well-
positioned to win through continuous innovation, excellent execution, and the
unrivalled scale of our global platform.

(Whether he thought this before or after the WeWork saga is another matter.)

Concurrently, Khosrowshahi heartened Wall Street analysts (https://www.ft.com/co

ntent/7c491ccc-4921-11ea-aeb3-955839e06441) with the news Uber will be profitable
on an adjusted ebitda basis by the fourth quarter of 2020, ahead of the 2021 target.
The stock has shot up 7.8 per cent since, despite the fact that a positive adjusted
ebitda for Uber would likely still spell negative free cash flow. (Although whether
“adjusted” ebitda constitutes profitability is debatable - do see Hubert Horan’s latest
(https://www.nakedcapitalism.com/2020/02/hubert-horan-can-uber-ever-deliver-p
art-twenty-two-profits-and-cash-flow-keep-deteriorating-as-ubers-gaap-losses-hit-8-
5-billion.html) for the argument against.)

But we’re not here to nitpick on Uber’s financial reporting, as creative as it is, but
rather draw your attention to a new term that seems to have mysteriously entered the
Uber vernacular this year: rational.

As students of philosophy will know, it’s a word that means many things to many
people but the generally agreed definition is “based on clear thought and reason”.

So how are Uber using the term? Here’s Khosrowshahi on the quarterly conference
call to explain (via Sentieo):

Yes. I'd say, as far as the competitive environment in the US, from a long-term
standpoint, the competitive environment has been constructive, has rationalised.

Ah, so the competition is rationalising. Or, to put it in blunter terms: not offering
ludicrously cheap fares to customers, or offers to drivers, to win market share or
undercut incumbents at any cost.

It’s a drum Khosrowshahi has been banging since December, when he presented at a
Barclay’s conference and used a variant of “rational” on six separate occasions. Here’s
a flavour:

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But the rationalisation, we're certainly seeing signs in the financing markets that
the capital allocators are going to be more demanding on their ROIs. That should
translate into how people spend, and we'll be watching the markets pretty so
closely. But from our viewpoint, we believe we've got a business model
advantage. We've got the best brand out there. So in a world where capital
is rationalising, we think we'll be one of the winners.

And . . .

We're a public company, so our capital availability is advantage over some of the
other players, although profit you could argue on that as far as private versus
public. So in a rationalising world, we like where we stand.

Analysts have been grooving to the rational beat. In UBS’ recent initiation on the
company (BUY: price target $56), analyst Eric J. Sheridan used the
term “rational”, “rationalising” or “rationalisation” 25 times.

It’s almost as if, dare we say it, an Uber-funded neuro-linguistic programming

specialist was let loose on the entire Uber-covering investor and media community
with the task of bodysnatching their vocabulary and replacing it with something more
Dara “look me in the eyes, not around the eyes, but firmly in the eyes (https://www.y
outube.com/watch?v=_aZ2bdnG97A&feature=youtu.be)” compatible.

There is a case to be made for the competition becoming less aggressive. Following
WeWork, the appetite for large private investments in high-growth tech-enabled
companies operating in mundane sectors like real estate and transport has waned.
Exhibit 2819 being SoftBank-backed Oyo’s recent climbdown (https://www.ft.com/c
ontent/2d23233c-442a-11ea-a43a-c4b328d9061c) on its global ambitions to
dominate the hotel industry.

Well capitalised companies, such as Uber with its $10.9bn of cash and cash
equivalents at 2019’s end, are therefore in a better position to ride it out, curb costs
and perhaps, and dare we suggest it, raise prices when weaker rivals bite the bullet. If
this scenario plays out, profits shouldn’t theoretically be far off.

The problem is, this doesn’t quite seem to be the case at the moment — at least
outside the US. From the FT’s tech guru Tim Bradshaw (https://www.ft.com/content

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/dd7adec4-490b-11ea-aeb3-955839e06441) Friday:

Ola believes it can unseat Uber as London’s top car-booking service within a year,
an executive at the Indian company has said, as the two SoftBank-backed
companies prepare for battle in one of the world’s toughest transport markets.
Bengaluru-based Ola will make its long-awaited debut in London on Monday, six
months after obtaining a permit from Transport for London. It is hoping that a
focus on safety, rather than aggressive discounting, will allow it to leapfrog
existing competitors such as Kapten, Gett and Bolt.

In a market which is almost perfectly price elastic, and which has low barriers to
entry and is therefore likely to become commodified as a service — it’s hard to see
where the slowdown in the ambitions of Uber’s rivals is going to come from, bar a
systemic liquidity shock that closes access to capital for several months.

Even looking at Uber’s results the current lack of pricing power is clear, its gross
booking revenue per trip in 2019’s fourth quarter, which includes all of its business
lines including UberEats, RideSharing and its other transport solutions such as
Freight, was $9.51. In the same period for 2018, it was $9.49.

Although an improvement from the third quarter, it is still a dozen cents below the
first and second quarter of 2018:

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One explanation might be that Uber’s maturing services, like UberX, are covering the
lower booking revenue from its newer offerings, such as e-Scooters.

However this doesn’t seem to be the case. Uber disclosed in the fourth quarter results
that gross bookings for Rides grew 20 per cent in constant currency terms, while
Rides trips grew 23 per cent:

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Not a sign of rationalising competition.

Still, it’s hard not to be impressed by the cut of Khosrowshahi’s jib, and FT Alphaville
is willing to give him some time to turn around the ailing Uber tanker after his
excellent work at Expedia.

Then again, operational excellence can only get you so far. For, as Warren Buffett
said:

When a management with a reputation for brilliance tackles a business with

a reputation for bad economics, it is the reputation of the business that remains
intact.

Related Links:
Why Uber won’t own its autonomous cars (https://ftalphaville.ft.com/2020/02/04/1
580812662000/Why-Uber-won-t-own-its-autonomous-cars/) — FT Alphaville
The questionable economics of autonomous taxi fleets (https://ftalphaville.ft.com/20
19/04/29/1556557142000/Scoop--the-questionable-economics-of-autonomous-taxi-
fleets/) - FT Alphaville
Do the economics of self-driving taxis actually make sense? (https://www.ft.com/con
tent/08a73c68-cb40-30eb-9e2b-39ecfd03e2e4) — FT Alphaville
SD cars and productivity (https://www.ft.com/content/49181616-f944-3c02-9221-9a
fe32335c78) — FT Alphaville
Uber's conflicting self-driving fleet vision (https://www.ft.com/content/93c554fd-bd
f8-330f-aa38-9aee9e2d1330) — FT Alphaville

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