29 October, 2015

Plane reading, Oct 29 2015

Expert takes worth reading on economics, technology, and other interesting topics from the last week.
Plus, recent news on Uber and on-demand/autonomous vehicles:

Economics and business in emerging markets

  1. Xinhuanet, on Chinese exams and licensing for TV hosts
  2. Tyler Cowen, on characterizing China's growth as Solow catch-up (capital accumulation)
  3. Dallas Fed, "Long view of China suggests economic slowdown"
  4. QZ, on the possibility that failed China metals exchange Fanya was a Ponzi scheme, possibly supported/protected by government
  5. Tim Taylor, on China's growth's contribution to reducing global inequality (from Hellebrandt/Mauro)
  6. NBER, on China's apparent massive understatement of real unemployment 1998-present

Economics and Inequality

  1. Tim Harford, "The real benefits of migration."  Interesting framing of impact of ignoring benefits to migrants themselves
  2. Middle Class Economist, on a study claiming 90% of state subsidies go to large businesses
  3. Tim Taylor, on more research showing inequality partly driven by handful of outperforming firms: inter-firm pay, not intra-firm pay
    • This doesn't appear to be widely understood, as VoxEU reports on the "surprising" negative correlation to unionization and top earners' shares of income.  Seems to me that this is expected since outperforming firms are unlikely to be unionized (due more to type of work(ers) at leading-edge firms than impact of unions on manageability)
  4. Atlantic, on Frankfurt's new book On Equality suggesting inequality is a strawman for unfairness: "The poor suffer because they don't have enough, not because others have more, and some have far too much."
  5. A new Vanderbilt study on the impact of universal pre-K is a bit of a Rorschach test:

Economics and environment, including global warming

  1. VoxEU, on Europe's anti-dumping protections against Chinese solar panels overcorrecting and tilting the playing field in favor of European production
  2. Nature, on generalizing the likely overall negative impact of global warming on economic productivity
  3. CNN, on breakeven oil prices for Middle Eastern economies (based on budget/expenses)

Economics and Politics (aka public policy)

  1. Noah Smith, on financialization depth's potential as a form of the "resource curse"
  2. Mark Thoma, on Brad deLong's "Central banks are not agricultural marketing boards"
  3. Tyler Cowen, on Clinton's and Sanders' plans for reduced/free college tuition
  4. Economist, on perverse impact of Romania's plan to reduce jail time in exchange for research
  5. Spontaneous Finance, on negative deposit rates in Swiss banks
  6. Paul Krugman (via Mark Thoma) on a new paper examining the 30-year decline of "natural interest rates" - the rate of interest at which the economy is neither depressed and deflating nor overheated and inflating

Economics and business

  1. Alphaville, on "commodity financing as deflationary feedback loop of hell."  Interesting sidebar on backwardating self-driving POV into rental markets
  2. Alphaville, on the accounting impacts of Moody's updated guidance for capitalizing operational leases
  3. Alphaville, on deal multiples of PE firms vs strategic buyers
  4. SSRN, on the positive impact (financial and governance) of professors on corporate boards
  5. NBER, research suggesting Spotify is revenue neutral (displaced album sales offset by reduced piracy)
  6. Chad Jones, on Paul Romer's concept of the economics of ideas as nonrival goods and increasing returns to scale

Bitcoin, blockchain, and more general FinTech

  1. Alphaville, on Digital Currency Group - a bitcoin trading platform nee Genesis Trading
  2. Bloomberg, on McKinsey's new report "Two routes to digital success in capital markets" predicting that FinTech can increase revenue, cost cuts, and boost profit by 30%
  3. Dealbreaker agrees: "FinTech thinks that's a cute little job you've got there"
  4. Lawrence Uebel, on opportunity to use tech for anti-money laundering / know your customer compliance to gain tech/cost advantage
  5. Alphaville, on a blog analysis of SPECTRE (Bond villain) as an investment vehicle

Big Data, Machine learning, AI, etc.

  1. Chris House, on utility challenges of large datasets
    • Mark Thoma, on distinguishing between predictive and significant variables
  2. Alphaville, on the mainstreaming of technological abundance thinking

Education reform, MOOC, etc

  1. Alex Tabarrock, "Apple should buy a university"
  2. Slate, on textbook publishers getting into adaptive learning software
  3. New Yorker, "The rise and fall of for-profit colleges"

Business and Technology

  1. NYTimes, on Harvard's Law School Library's "Free the law" project - digitizing and making freely available case law (which is technically free, but expensively aggregated by Lexis/Nexis etc)
  2. Steve Randy Waldman, advice for Twitter
  3. Fred Wilson, "Software is the new oil" in terms of delayed operating leverage and cash flow
  4. NYTimes, on the economics and high automation of the used book market
  5. WashingtonPost, on Yelp's plan to integrate health & safety inspection data into restaurant listings
  6. Wired, on Apple Music's traction and likely eventual dominance
  7. BPS research digest, on research examining the link between personality traits and computer programming abilities (openness, not introversion or conscientiousness) 
  8. GigaOM, on AirBnB testing "Journeys" a full-service travel offering
  9. Digitopoly, a revised history of the quote "information wants to be free"
  10. Jason Lemkin, on Jet.com as "star-f*cking" not investing
  11. RT, on Grenoble's (France) literary short story vending machines
  12. Mother Jones, a longform piece on the failures of Electronic Medical Records
  13. Slate, on the origins of unpredictable behavior of Facebook recommendations
  14. Stratechery, on the NY Times / Amazon workplace scandal and response
  15. ManuKumar's take on Howard Mark's recent letter "It's not easy" and the value of second-level thinking


  1. AvWeb, on NASA's new x-plane distributed propulsion proof of concept
  2. NYTimes, on NASA probe Cassini diving through water vapor plumes on Saturn's moon Enceladus
  3. WSJ, on Germans' law-abiding nature intersecting bikes and pedestrian transit
  4. Futurity, on research showing that teeming ants function as both a liquid and a solid, not unlike ketchup
  5. Lifehacker, on an arduino/3d printer hack to open any combo master lock in under 30 seconds
  6. Charles Green, "Clients don't buy solutions they buy problem definitions"
  7. NYTimes, on Volkswagen's expanded inquiry into managers who knew about fraud but turned a blind eye
  8. Climateer, on Charlie Munger's positive view of expert generalists over specialists
  9. HBR, on research that suggests that empathy is harder if you've been in someone else's shoes
  10. Futurity, on connectivity/collaboration being good for data acquisition and bad for problem-solving and solution generation
  11. Gizmodo, on cold-weather-gear testing for US Navy Seals.  Great story, also interesting about ability of wicking microfiber layers to dry you from inside out
  12. DailyFinance, on startup alternatives to waiting on hold for customer service
  13. Corey Robin, attacking an op-ed that defends restaurant tipping customs
  14. Mark Mansen, on "Screw finding your passion"
  15. Tim Lawrence, on "Everything doesn't happen for a reason"
  16. Vanity Fair, on the divorce/sex scandal at Stanford's business school.  This hits close to home, not only on costly (and documented!) abuses of the legal system by people in power, but also on bystanders looking the other way in fear of losing their own jobs/livelihood.  This is a national problem.  "Marriage is an institution, divorce is big business."   Bystanders have a role in stopping bullying.

Uber, on-demand rides, ridesharing, hyperlocal logistics, parking, vehicle autonomy etc.

  1. Tyler Cowen, "Three counterintuitive scenarios for driverless vehicles."  This blog has been discussing #3 for several months now
  2. Cowen again, on peak consumer surplus for Uber riders
  3. Jason Lemkin, on Uber's IPO being 2Q2016 at earliest based on current capital raising implications
  4. DealBreaker, announcing reports Uber is looking to raise another $1 billion at a $60-70b valuation
  5. TechCrunch, on WalMart wanting in on drone delivery
  6. TechCrunch, Lyft beat Uber to Las Vegas airport
  7. CheapTalk, on last week's attempted (failed) Uber driver strike in Chicago
  8. NYTimes, on Uber's PR focus as alternative to drunk driving
  9. The Atlantic, on the true cost of roads (far more than drivers pay)
  10. Mike Shedlock, Amazon vs FedEx/UPS vs Uber
  11. WSJ, on Uber's systematic impact on taxi lenders (discussed by this blog several months ago)
  12. PointsGuy, on Uber partnering with airlines.  A broader version of this is among my upcoming recommendations for Uber
  13. TheVerge, on Domino's new bespoke pizza delivery cars
  14. TechInsider, on Oslo banning cars from city center by 2019
  15. WashingtonPost, on Navigant research framing of which auto companies are leading autonomy
  16. Dealbreaker, on Uber "entering the Balkans uninvited because that's never backfired on anyone before"
  17. DailyFinance, on Amazon Fresh subscription increase to $299/year (includes Prime)
  18. TechCrunch, on Amazon one-hour delivery launching in San Francisco
  19. Business Insider reports Uber accused (by rivals) of "using tax avoidance on massive scale" in Europe by issuing receipts from Netherlands to avoid VAT in most cities

21 October, 2015

Plane reading, Oct 21 2015

Expert takes worth reading on economics, technology, and other interesting topics from the last week.
Plus, recent news on Uber and on-demand/autonomous vehicles:

Economics and business in emerging markets

  1. Tyler Cowen, "The rise and fall of the Chinese economy" at MRUniversity
  2. Alphaville, on unsustainable debt growth inside "India's House of Debt" increasing financial stress, particularly as is tied to commodity exposure (and recent price drops)
  3. Barry Ritholz, with an excellent infographic from Visual Capitalist comparing the demographics and economies of China with the United States
  4. Christopher Balding, on the Chinese service sector's growth capacity to counterbalance the shrinking of China's manufacturing and construction
  5. TechCrunch, on Xiomi's new segway-scooter and 4k TV.  I just started reading "Little Rice: Smartphones, Xiomi and the Chinese dream"
  6. TechCrunch, on GrabHouse (India) being the latest attempt to eliminate brokers from real estate brokering.  It's not clear GrabHouse has insight into the dynamics of why something simple like Craigslist has stood up under almost all challengers (including Pittsburgh favorite RentJungle).
  7. David Warsh, on (mostly) unheralded Chinese economist Du Runsheng
  8. AlphaVille, on BofA monthly fund manager survey showing perception of decreased risk from China recession since last month

14 October, 2015

Plane reading, Oct 14 2015

Expert takes worth reading on economics, technology, and other interesting topics from the last week.  Plus recent news on Uber and on-demand/autonomous vehicles:

Economics and business in emerging markets

  1. Alphaville, on the topic of SOE "reform" in China under reduced need for infrastructure
  2. TheVerge, on a Pepsi-branded android phone in China
  3. Alphaville, on the prevalence of petrodollars in Sovereign Wealth Funds, the impact on emerging market capital inflows, and the impact of lower oil prices on both.  Also causes dumping of US-denominated assets.  Which isn't really the problem some people fear.  Somewhere I've seen a breakdown of OPEC country budgets, many were based on oil prices at/above $75/bb hence liquidation of SWF
  4. VOX, on ISIS business model being unsustainable (revenue is 50% extortion, 25% taxes, 25% oil/gas)
  5. Noah Smith, on why free trade is no longer seen as no-brainer by economists

09 October, 2015

Blog roll: John Hempton

Periodically I'll highlight some of the blogs I read on a regular basis - and share with you why I find them valuable.

Today, that's John Hempton of Bronte Capital in Sydney, Australia.  First some background, then I'll narrate a specific recent post and highlight what makes it a "good" example of strategic analysis of a business.


Hempton invests in long/short equity positions for non-retail clients and often shares thoughts about positions he holds or is considering - particularly potential frauds.

His posts are thoughtful, incisive, and full of wit.  Usually, he's sharing a contrarian position on something that has been hiding in plain sight that "public" investors aren't spending the requisite amount of intelligence on when analyzing.

Sometimes, Hempton is contrarian to the contrarians - like his long-running series opposite Bill Ackman's take that Herbalife is a ponzi scheme.  If you aren't familiar, the best single post on Herbalife to start with is probably here.

08 October, 2015

Uber (Part 6) - Transit network cross-subsidies make it easier to cherry-pick profitable routes

Summary: At a high level it appears at least plausible that in Pittsburgh today, the entire bus system could be profitably discontinued if the Port Authority operated an Uber-like service instead.

It's common for a business to offer a portfolio of products, some of which are more profitable than others.  This can either strengthen the business, or open it up to devastating competition, depending on the situation.

A product might even be sold at a loss (negative profit) as part of a marketing strategy.  Industries from banking to specialty chemicals, however, have slowly learned this can be a devastating strategy:  it invites new competition to cherry-pick profitable product volume, leaving a company saddled with both loss-making products and legacy overhead costs that are challenging to adjust in the short-term.

This is similarly true with customers who are cheap/expensive to serve/sell to due to idiosyncrasies in their structure or behavior.  Often times, these cross-subsidies aren't intentional - they evolve from organizations' cost structures bloating into the available revenue.

For example, the US postal service has a dual government mandate to provide both universal service and to break-even financially.  But years of having FedEx and UPS cherry-pick the most profitable routes, combined with an internet-driven shift away from "baseload" mailings, have left the postal service struggling to service its legacy costs.  In 2012, even the US government spent only $337m of its $4.8b in mailings with the USPS (7%).  The situation at USPS is going from bad to worse.

This concept of cross-subsidies is both an opportunity and a threat for Uber:

  1. Transit network subsidies are large, particularly in bus networks
  2. Profitable transit routes may fall to Uber-like competition, especially once autonomy is available, sending public transit systems into an accounting death spiral
  3. Meanwhile, Uber should be careful that its adoption of a legacy ride pricing structure doesn't leave it vulnerable to a similar disruption

07 October, 2015

Plane reading, Oct 7 2015

Expert takes worth reading on economics, technology, and other interesting topics from the last week.  Plus recent news on Uber and on-demand/autonomous vehicles:

Economics and business in emerging markets

  1. Chris Dillow, on the global trade slowdown
  2. TechCrunch, on Hoffman-backed Segovia - enterprise software for aid programs and NGOs.

Economics and Inequality

  1. Gale, Kearney, and Orzag at Brookings, on the Gini coefficient limits of a 50% tax rate's ability to alter income inequality particularly among the bottom quintile.  And John Quiggan with a partial rebuttal
  2. Mark Thoma, arguing that welfare states help (not hinder) economic growth.  Tim Taylor with more detail, including mythbusting about perceptions that the US has low and lagging transfer payments relative to global peers

01 October, 2015

Leadership: Do you get what you inspect or expect?


The capstone ROTC class is titled, simply, "Leadership."  Mine was taught in 1998 by CAPT J.A. Fischbeck, a nuclear-trained former skipper of the USS La Jolla (SSN 701) and later the director of the Navy's Arctic Submarine Laboratory.

Our final exam was to write an essay on the topic "Do you get what you inspect, or expect?"  I chose the latter, and wrote an essay on the power of setting clear, high expectations and demanding people be accountable to them.

It was too easy, I argued, for mere inspection to devolve into a checklist mentality.  I had been on board a submarine - I think it was the USS Oklahoma City (SSN 723) - as a midshipman when its computer emergency scrammed the nuclear reactor quite unexpectedly.  Someone had gotten complacent filling out a routine inspection form, and hadn't noticed an unsafe condition develop*.

It was an... interesting... experience.  Subs are usually trimmed for slight negative buoyancy and controlled with diving planes; without propulsion an already submerged submarine will slide backward into the depths while the operators scramble to bring the emergency electric propulsion online.  The backup to the backup is an emergency blow, which we did not have to perform that day.

30 September, 2015

Plane reading, Sept 30 2015

Expert takes worth reading on economics, technology, and other interesting topics from the last week.  Plus recent news on Uber and on-demand/autonomous vehicles:

Economics and business in emerging markets

  1. Alphaville, on China SOE "privatization" of a salt company is really just ownership by different SOEs
  2. Alphaville, on bad debt in Indian banks - mostly in the highest areas of loan growth
  3. Brad DeLong, narrating the Krugman/Hamilton debate on the likely impact of China slowdown on United States
  4. NYTimes, on "India is the new China" for tech company investment/expansion due to mixture of untapped potential and openness to partnership

Economics and inequality

  1. Brookings, on research showing that externally focused misbehavior in schools raises lifetime earnings even after accounting for negative impact on learning... but only for non-poverty students
  2. Chris Blattman, on the astonishingly positive results from a Nigerian business plan competition that handed out about $60m worth of $50,000 prizes

28 September, 2015

Uber (Part 5) - Unit economics of food delivery

Relative to Uber's other challenges, food delivery seems like an expensive distraction unless their experiments in food delivery convince them to buy/partner with GrubHub.

A Sidecar blog post recently quoted Fred Smith, the CEO of FedEx:
“I think there’s just an urban mythology out there that an [on-demand delivery app] somehow changes the basic cost input of the logistics business or changes the patterns or the underlying business situation and that’s just not–that’s just incorrect. So great company, great concept [in reference to Uber], but I don’t think it’s…likely to be a major player in the logistics business”

The informative post then detailed the numbers behind Sidecar's multi-modal delivery system and posited that their system, when fully loaded, could deliver a package anywhere in the city for about $6.90 using San Francisco labor economics, less than half the cost of a FedEx $16 2-hour delivery:

  • Cars can make 6 dropoffs/hour if they don't have to park and get out; drivers need to make about $22/hr 
  • Bikers can make 4 dropoffs/hour and riders need to make about $19/hr
  • Walkers need to make about $16/hr

UberEats appears to be pricing food delivery well below run-rate cost

23 September, 2015

Plane reading, Sept 23 2015

Expert takes worth reading on economics, technology, and other interesting topics from the last week.  Plus recent news on Uber and on-demand/autonomous vehicles:

Economics and business in emerging markets

  1. Christopher Balding, on "official" China growth data being multiples higher than any individual component - suggesting manipulation and falsification
  2. Forbes, covering the growing concerns around Alibaba's fantastic numbers possibly being falsified (and governance structure)
  3. Barry Ritholz, on McKinsey Global Institute (via HBS) data showing shifting center of gravity of corporate revenue towards emerging markets 

20 September, 2015

Leadership: You get what you're willing to follow

TED talks give me the willies.  Snarked Martin Robbins (back in 2012):
TED Talks are designed to make people feel good about themselves; to flatter them and make them feel clever and knowledgeable... People join for much the same reason they join societies like Mensa: it gives them a chance to label themselves part of an intellectual elite... TED’s slogan shouldn’t be ‘Ideas worth spreading’, it should be: ‘Ego worth paying for’.
One reason TED talks are so popular is that they activate people's tendencies to, as Jonathan Haidt says, "Follow the sacral"
People who worship the same idol can trust one another, work as a team and prevail over less cohesive groups. So if you want to understand politics, and especially our divisive culture wars, you must follow the sacredness.
Perhaps my response to inspiring speeches is unconsciously a bayesian inference similar to when women see a middle-aged guy driving a Porsche: he may a car buff, but all else equal it may be more likely to assume he's overcompensating.  (an unscientific UK polls suggests about 40% actually are overcompensating.  Possibly because it's sometimes an effective tactic)

(Note: I'm not a car guy, but driving a friend's 458 convertible on the Merritt parkway a few years ago helped me understand why he is.  His Porsche is for track use only)

If everything were really that awesome, the speaker shouldn't need to work so hard to convince me.

17 September, 2015

Uber (Part 4c) - The asymptotic limits of shared vehicle costs

This is a 6,700-word post, perhaps I should have drawn a half dozen pictures with captions instead.

Among the arguments for Uber's current valuation is its option potential as the global platform for dispatching fleet-owned replacements for personally owned vehicles (POVs).  In this vision of the future, these fleet vehicles may or may not be owned by Uber.

This view is inconsistent with my understanding of operating economics.  Conventional wisdom makes several errors that artificially inflate the breakeven mileage of POV retention:

  • Mis-classifying variable expenses as fixed, particularly insurance and depreciation
  • Not penalizing fleet vehicles for higher variable costs
  • Comparing apples/oranges car types (size, amenities, autonomy, and/or regulatory environment)

As a result, the limits of shared cost savings for Honda Civic-type fleet vehicles are much smaller than widely assumed - the POV breakeven today is less than 100 miles/month with minimally paid drivers, and about 500 miles/month with autonomous vehicles.  Even if autonomy eliminates insurance requirements, the breakeven for an autonomous Civic is about 1,000 miles/month - less if Uber retains any platform margin.

Near-term POV replacement by driven fleet vehicles is likely to be caused by external one-time variable cost avoidance such as parking fees and hassle factors rather than increased capital utilization of the vehicles.  This distinction makes a difference - for Uber, for car owners, for city planners.

16 September, 2015

Plane reading, Sept 16 2015

Expert takes worth reading on economics, technology, and other interesting topics from the last week.  Plus recent news on Uber and on-demand/autonomous vehicles:

Economics of politics

  1. Princeton's Woodrow Wilson School, on the "natural" mechanisms by which income inequality is increased economies develop.  Related, evidence shows that the so-called "wage gap" rise 1978-present is "virtually all" driven by top company out-performance inter-firm rather than intra-firm social issues such as CEO pay.  The implication is that many existing programs to counter inequality are ineffective at best, and counterproductive at worst.
  2. Brad DeLong, on how the above is misunderstood (or ignored) by politicians including Hillary Clinton
  3. Mark Thoma, on research showing how the topic of inequality may be increasing political polarization by moving Democrats to left, replacing moderate Democrats with Republicans.  Result is more liberal Democratic party but more conservative legislature overall
  4. Scott Alexander, a book review of "Manufacturing Consent" by Noam Chomsky and Edward Herman exploring how and why both the left and right believe the media is biased against them

10 September, 2015

Executable strategy: Sweat more in peace, bleed less in war

Tolstoy famously opens "Anna Karenina" by stating that
"Happy families are all alike; every unhappy family is unhappy in its own way."

Peter Thiel ended on this theme in his September 2014 WSJ article "Competition is for losers"
Business is the opposite.  All happy companies are different: Each one earns a monopoly by solving a unique problem.  All failed companies are the same: They failed to escape competition.
Go read Peter's thoughtful essay.  Then come back and I'll build on what Peter said by turning it back on itself:

  • Happy companies are all alike: they solve problems for their customers in a way that leaves enough leftover for themselves
  • Unhappy companies are all unhappy in their own way: They are solving customer problems in ways that fail to ensure value accrues to the company in a sustainable way - sometimes by taking too little, other times by taking so much it provokes a reaction that leaves it with net less

This post is in three parts at a general level, and finishes with a coda looking at the financialization of taxi medallions that seems relevant and timely - and a bit fun given our Uber conversation.

Like many of my other posts, it could probably have been broken into several pieces if I had the time to make it shorter.

09 September, 2015

Plane reading, Sept 9 2015

Expert takes worth reading on economics, technology, and other human interest topics from the last week.  Plus recent news on Uber/on-demand/autonomy:

  1. BloombergBusiness, on China shutting down its (world largest) stock futures market to stop what is currently a $5 trillion market drop
  2. Tim Taylor, on Economic Theory vs Policy Advice: "The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists."
  3. EquitableGrowth, on sins of comission vs omission in U.S. financial system "functioning as designed"
  4. David Colander, reflecting on Gordon Tullock (in memorium) and the value of out-of-sync temperaments and viewpoints

05 September, 2015

Uber (Part 2a) - Intuition building for "multi-sided markets" with "network effects"

If you're new to our Uber conversation, it begins here.  This post is out of order.

On Sept 3rd, Wired covered NYC's launch of a "Technical Advisory Group" tasked with developing recommendations on how regulations should evolve to consider on-demand ride services.  Uber reportedly has a seat at that table, as does Venture Capitalist Fred Wilson and academics from NYU and Columbia, among others.

The TAG's recommendations will serve as input to new regulations in NYC, which are likely to cascade influence to other global cities facing the same situation.

Below, I offer a framework from a 2006 Harvard Business Review article to explore why I believe Uber is as much a "regulatory arbitrage" story as it is a "sharing economy" story.  Among my half-dozen recommendations made (so far) has been that Uber should consider pushing to close the regulatory loophole behind them while they're big and competitors aren't.

This is because I believe Uber is in a market that may be fundamentally unwinnable, at least in the manner/value in which Uber appears to be trying to win it today.  In brief, the on-demand ride market has significant network effects on both sides of the transaction, but it isn't really a multi-sided market.

To help readers understand my broader framework for Uber's strategic imperatives (now re-labeled as Part 2b), I'll attempt to make my intuition more explicit.  Sometimes intuition is helpful - if the problem is framed correctly.  Other times, the right answer is counter-intuitive.

One benefit from being this explicit (pedantic?) is because it's not clear that I know enough about the topic to see what I'm missing.  Perhaps it's me, not the (private) market valuing Uber, that's mistaken.  My background in economic analysis and algorithms is stronger than many people's, but I'm not an expert in any particular area.*

Here's Uber investor and board member Bill Gurley explaining Uber's pricing mechanism and business model in early 2014, if you want a quick primer on how Uber works.  My conversation below focuses entirely on the peer-to-peer model of UberX.

03 September, 2015

Uber (Part 4b) - The limits of cost savings from electric vehicles

In Uber (Part 4a), we discussed the expert consensus that the on-demand ride industry is headed towards marginal cost pricing, with or without autonomy.

Autonomy could help Uber in the long-term, by enabling it to capture the revenue currently allocated to the drivers.  In next week's Part 4c, we'll look at the overall vehicle cost curves and discuss how the run-rate economics of Uber will likely impact individually owned cars in the medium- and long-term.

Today, I want to consider only marginal cost pricing in the short term, from the driver's perspective.  Since drivers can still make money in a marginal pricing environment if their costs are cheaper than the marginal cost supplier, they should be using low-cost cars, probably electric powered.  If/when drivers are replaced by Uber-owned vehicles (driven or autonomous), these should also be electric.

The fuel cost savings of electric vehicles are real, however the environmental benefits are much less than I used to believe.  Electric vehicles will also have savings from reduced maintenance costs, and a potentially longer life-cycle would also impact mileage-based vehicle depreciation.

At the end of today's post we'll examine the economics of a recent Uber ride I took: outside of surge pricing, it does not appear to pay to be an Uber driver in Pittsburgh unless Uber is still offering extra driver incentives.

Switching to a cheap electric vehicle instead of an E-class Mercedes would help my driver, but doesn't seem like enough to keep me driving (if I were him).  On the other hand, if my trip were representative of the average Uber passenger, and I made it ~3-4 times each month, Uber's $50b valuation begins to look aggressively achievable.

Plane reading - Sept 3, 2015

Expert takes on interesting topics of the last week, an innumerate baker's dozen:
  1. Paul Krugman, discussing Baker's piece on clay tablets illustrating trade "law of gravity" held even thousands of years ago (click through to read Baker)
  2. Christopher Balding, debunking the China GDP debunker debunkers
  3. Tyler Cowen, offering a simple primer for understanding China's downturn
  4. Fred Wilson, stating that a clear strategic plan, communicated well, is more effective at people retention than compensation

31 August, 2015

Uber (Part 4a) - Consensus view of on-demand ride economics and the implications

Part of my beliefs on Uber is that marginal cost pricing will drive the end-state economics of both drivers and platforms (4.b and 4.g in the framework).  Because of this, I'll (later) share specifics of how I believe vehicle cost curves are relevant to Uber's strategic imperatives.

My original plan to bring readers up to speed with the "consensus view" of expert analysis in this corner of the business world was to post my own narrative over the weekend - including some wonky discussion of a recent NBER working paper titled "Peer-to-peer markets," authored by Stanford's Jon Levin et al.

Then I read Alex Rubalcava's piece "A roadmap for a world without drivers," published last Wednesday on Medium.  Alex is a VC in a "family office" firm with several investments in the automotive space.

Rather than reinvent the wheel, I offer you Alex's good-enough summary consensus (slightly reordered, in bold, with my beliefs indented below).

TL;DR All you really need to know is that experts agree this industry is headed towards marginal cost pricing, with or without autonomy.  Autonomy could help Uber in the medium-term, if it can survive that long

Alex's autonomous vehicle discussion is essentially the same economic structure as our Uber discussion, except with driver costs approaching zero.  For further detail, read his piece and in particular follow his links to expert published views on various aspects of the discussion.

22 August, 2015

Simon Says: A wealth of information creates a poverty of attention

A post by Tim Taylor earlier this week caught my attention.

It focused on Herb Simon's 1971 article "Designing Organizations for an Information-Rich World" (hand-edited draft here), an essay which seems as relevant today as ever - including in the emerging study of "attention economies" such as YouTube.

Perhaps the idea is also somewhat related to this famous (and humorous) selective attention test.

In that (now) 45-year-old article, Simon wrote:
A large share of the costs of an information-rich environment are carried by information users, not information providers... [and] humans may be poorly adapted to disregard information enough...

21 August, 2015

Uber (Part 3b) - Does fundraising through foreign subsidiaries raise a Yahoo/Alibaba question?

This is a speculative post, prompted by this morning's news that Uber plans an IPO in 12-18 months and has been actively fundraising through foreign subsidiaries since at least late 2014.

I'd like to briefly discuss the latter point, which for the purposes of our ongoing conversation is a bit of a buried lede.

Among the challenges I outlined for Uber is the degree to which they'll need to raise dilutive external funds to expand operations, particularly in high-potential markets such as India and China.  The negotiation on allocating upside/downside that goes along with that fundraising (points 3.e through 3.h in my discussion framework) is a concern because Uber's $50b valuation already prices in a substantial global win.

Fundraising through a foreign subsidiary is one such dilutive source.

15 August, 2015

Uber (Part 3a) - A primer on valuation

One of the fundamental questions of strategy: "Is the prize worth the chase?" 

The purpose of this third post is to provide a short primer on business valuation, so readers better understand the link between Uber's recently established private-market-based valuation of $50b and the strategic imperatives implied for the managers tasked with earning into it.

In this series' first post I laid out my conclusion that Uber's "prize is likely not worth the chase."  In the second post I laid out an analysis & discussion framework in support of that view.  Section 3 of that framework proposed a quick revenue-multiple valuation which was used in section 4 to develop a view of those strategic imperatives - essentially, what you'd have to believe about Uber in order to invest.

This primer is centered around supporting my choice of a ~5x revenue multiple valuation for a "mature" Uber as reasonably conservative, then asks what else we might consider since a revenue multiple clearly doesn't highlight enough value.

Prizes and chases contain both financial and other considerations (such as wait time, political capital, happiness, etc).  Though it makes many people uncomfortable to do so, almost any consideration can be reduced to its financial equivalent through highlighting the implicit trade-offs being made.  Often, people are surprised to see how much (little) they implicitly "value" a non-financial consideration.

"Unknowable" financials can usually be reduced to scenario descriptions of "what you'd have to believe."

This post has four sections:
  1. The "intrinsic value" of a business is based on replacement of its free cash flows (essentially revenue minus costs), the so-called "Discounted Cash Flow" (DCF) analysis
  2. Revenue multiples are often used to compare companies' valuations because it's a quick and easy shortcut to a full DCF. 
  3. Revenue multiple is close enough for our purposes, and it's more transparent than a full DCF
  4. Other valuation techniques could help us ballpark the value of access to Uber's user network.  Valuing Uber's network at $100/user shows one way to narrow the valuation gap

Disclaimers/disclosures: This author is not an investment banker and holds no professional licenses upon which a reader can rely.  These posts are not investment advice.  This author does have professional experience in M&A which enables him to identify and build off expert valuation assessments for use in the context of a strategic discussion.  Any errors here are solely my own and not those of the links I included.  See end of post for more detail

08 August, 2015

Uber (Part 2b) - A framework for analysis & discussion

A long-form "Uber" framework for analysis & discussion:

Below I offer a 5-point discussion framework in support of my view on Uber, developed while teaching a recent class on business strategy.  Hopefully it offers sufficient footholds for readers to challenge my facts, offer contrasting views on important points, and introduce ideas I haven't considered.  I'll continue to expand on several sub-bullet points in a series of follow-on posts over the upcoming weeks.

  1. Uber is large and growing quickly...
  2. ... and needs money to fund continued growth into "new" cities
  3. External fundraising will prove increasingly difficult because Uber's current valuation already prices in a "win" of much more than the existing global taxi market
  4. Internal funding by "mature" cities is likely difficult due to low current cash flow and possible margin erosion; the high capital costs of responding to any erosion increase the challenge further.  Counterintuitively, embracing drivers as employees may help
  5. Uber risks ending up more like Groupon than Amazon.  Uber may experience a value collapse if not outright failure; but in the process will fundamentally reshape local transit around the world

29 July, 2015

Uber (Part 1) - The prize is likely not worth the chase, but the future is coming anyway


This is the first of several posts regarding my somewhat idiosyncratic views on the strategic issues facing Uber circa July, 2015*.

It springs from a discussion I had with several students towards the end of the "Strategic Analysis of Business" class I taught at Sunstone** this summer.  The original question was whether Uber's generic strategy was better classified as "regulatory disruption/arbitrage" or "the sharing economy" or both.

Our discussion quickly evolved into a broader examination of the competitive issues facing Uber including the growth imperatives implied by a bond offering term sheet described in a recent Bloomberg article.  This is an especially interesting topic given increasing rumors of Uber's impending IPO.

While I'm not an expert on any particular aspect of Uber's business, our class discussion identified a handful of strategic elements that will be critical to its success (or failure) over the next few years.  I decided to use that discussion as a launch point for this blog.

Uber's prize may not be worth the chase

My own view is that Uber's prize is not worth the chase - it is overvalued in a way that any win will be a pyrrhic victory for most who are involved.  But the future will happen anyway.

Uber's current valuation of $50 billion implies some combination of unlikely events:
  • Uber will win an unlikely share of the global on-demand transportation market, including the huge "latent demand" growth enabled by providing safe rides priced below taxis
  • Uber will successfully defend against the likely substantial further erosion of its 20% driver/passenger matching platform cut (or even reverse the erosion)
  • Uber's urgent external cash flow needs must shift from dilutive sources rapidly enough to reduce the increasing pressure on their already sky-high valuation