Is Uber a joke? Okay, Uber is definitely not a joke in the sense that it is a large company that has rattled the taxi industry in the United States and around the world. It has also raised many important regulatory issues, as it has sought to evade longstanding regulation of the taxi industry.
Many of these regulations were clearly protectionist in nature, with the purpose of securing the position of an entrenched cartel. However other regulations, like background checks of drivers and insurance requirements for passengers, serve important public purposes. While Uber has preferred the route of simple evasion of regulations, it is likely that we will see a much needed modernization of regulations in this area.
While Uber’s impact on the taxi industry is clearly not a joke, the market valuation of the company may well be. Uber is not yet publicly traded, but its market value has been estimated as being as high as $70 billion. That compares to a market value of just $51 billion for auto giant GM and $44.6 billion for Ford.
These are longstanding companies that both make close to $10 billion in annual profits. By contrast, Uber is losing billions of dollars a year.
Investors are not ordinarily prepared to pay large amounts of money for the stock of companies that lose money. The stock certificates might be pretty, but presumably at the end of the day investors will want to see profits.
There are two stories whereby Uber turns itself around and becomes a hugely profitable company. The first is that it will soon drive out enough of its competition so that it will enjoy near-monopoly status in many markets. This will allow it to raise its prices enough so that it can then turn large profits.
There are two problems with this story, one technical and the other legal. The technical problem is that it is not clear whether the technology of the taxi industry lends itself to monopolies. It’s not that hard to have an app for calling cabs, nor is it hard to hire drivers. If Uber were to up its prices by 20-30 percent, it would likely find many new competitors in the market.
The other problem is the legal one. Predatory pricing to gain a monopoly is textbook anti-competitive behavior. This should lead to anti-trust action by the government and lawsuits by competitors. This is undoubtedly a major reason that Uber has staffed itself with former top Obama administration officials. Of course, Donald Trump has probably never heard of anti-trust laws.
The other turnaround story for Uber is that it was never really about taxis, but rather self-driving vehicles. Uber is going to be the behemoth of the self-driving vehicle industry and dominate this market the way IBM once dominated computers and Microsoft dominated software.
The problem with this story is that Uber would have to beat out a large number of major competitors, including the existing auto companies, Apple, Google and undoubtedly many smaller tech companies. That seems like a long shot.
So let’s try alternative number three — Uber’s stock is nearly worthless, but for now people are willing to pay lots of money for it. This shouldn’t sound far-fetched if you have heard of AOL, Priceline or more recently Groupon. In each case, stock valuations soared into the tens of billions or even hundreds of billions before plunging to a small fraction of this amount.
In such cases we see a massive redistribution of wealth, often from pension funds and other institutional investors to the “visionaries” who were able to sucker them. Folks like Steve Case, the former CEO of AOL, are incredibly rich today because of their talents in this area. Perhaps Uber CEO Travis Kalanick is following in his footsteps.
But there is another aspect to the ephemeral value of high-flying companies that eventually come down to earth. Uber actually is spending lots of money on research. The same applies to many other low or no profit companies or their major shareholders, such as Tesla and Amazon. Tesla CEO Elon Musk and Amazon CEO Jeff Bezos, have both committed large amounts of their companies’ and/or their own money to research in areas like solar power, electric cars and reusable space crafts.
It’s not clear at this point whether this is money that is especially well-spent. We only get the information that they choose to make public.
However one clear outgrowth of these huge stock valuations, whether or not they subsequently prove to be justified by future profits, is the funding of large amounts of research in new technologies. In many cases, this is research that we might have envisioned the government financing in prior decades, just as it did for the development of the internet.
Whether or not the research proves very useful remains to be seen. In any case we have effectively outsourced government financed research to these newly rich marketers, who are in turn relying on funding from institutional investors, some of whom are also in the public sector.
It’s certainly better to have these folks financing research rather than just buying more islands and yachts, but fulfilling the childhood dreams of the newly rich hardly seems like the most efficient mechanism for supporting research. Unfortunately, in Donald Trump’s United States it may be the only one available.