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