Network effect as business model

Uber reported a $2.2 billion loss in the last nine months. Since it was founded in 2009, it's lost money every year. How can they keep going?

This article in Vox points out that Uber seems to be following Amazon's model.

Amazon’s unprofitability during the 1990s was an illusion created by Amazon’s aggressive investment in growth. Amazon was spending a lot of money on things like warehouses and new software that were going to take a few years to pay off. The company could have turned a profit earlier by spending less on these things, but Bezos convinced Wall Street that it was worth prioritizing growth over profits (indeed, when investors briefly soured on tech companies after the 2000 stock market crash, Amazon simply shifted to a lower gear and began showing modest profits).

Tim Lee figures this is part of the plan:

The other possibility — one that seems more likely to me — is that Uber really has figured out ways to make the taxicab market more efficient. I see three big ways that Uber’s model is superior to conventional taxicabs.

The most obvious one is that smartphone hailing is inherently more customer-friendly than having to call an old-fashioned taxi dispatcher. The Uber app gives customers a realistic estimate of how long it will take for a car to pick them up. And once a customer hails a cab, it allows him to track a car’s progress.

That’s much nicer than the traditional taxicab model where you’d call for a cab and then have to wait an unknown period of time for it to arrive — with no way to track the car’s progress. Before Uber came along, calling a cab was so inconvenient and confusing that many people didn’t even bother.

And Uber’s pickup times have gotten even shorter as the company’s fleet has grown. The more drivers a ride-hailing company has on the road, the closer the nearest car will be to any given customer — and hence the less time customers have to wait to get picked up. This creates a virtuous circle: More drivers improve the customer experience, which attracts more customers. And more customers attract still more drivers. In short, Uber is expanding the market for taxi services. It’s not just taking business away from traditional taxicabs.

A similar virtuous circle operates on the driver’s side of the market. As Uber gets more customers, it reduces the average distance a driver must drive to reach a customer — and hence the amount of time they waste driving without getting paid. A larger market also helps to smooth out demand, reducing the average time a driver spends waiting for the next customer call. The result: As Uber grows, its drivers are able to complete more fares per hour of work.

Here is one potential positive outcome:

If Uber’s dominance is cemented by lower costs made possible by network effects, that would imply that Uber could become profitable without ever raising fares to pre-Uber levels. An Uber-dominated market might be a lot more efficient than a competitive one, leaving room for lower fares, higher driver compensation, and healthy profits for Uber shareholders.

Here is the link to the full article:  Vox: Why Uber lost $2.2 billion in 9 months