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Uber Hints at Detour With Volvo Deal

The company muddies up its middleman expertise by actually owning something.
Photographer: Michael Fein/Bloomberg

For all its technical complexity, Uber is a relatively easy-to-understand business. The company doesn't own physical assets or employ drivers. Instead, its software connects people who want rides with people willing to drive them, and Uber takes a cut of the fares.

The mechanics and financials of this type of middleman business -- or a "two-sided marketplace," if you want to make small talk at Silicon Valley holiday parties -- is familiar thanks to eBay, Priceline, Apple's mobile app store and many other companies with similar foundations. But now Uber Technologies Inc. appears to be wading into owning physical assets, which calls into question what its ultimate business model will be.

Yes, Uber is the world's most valuable private technology company, but it still doesn't know what it wants to be when it grows up. 

Skid Marks

Uber is the world's most valuable private technology company, but it is clouded by scandals and questions about its business model

Source: CB Insights

Uber agreed on Monday to buy 24,000 Volvo SUVs that will become part of Uber's future network of self-driving taxis. Several news reports have said Uber is on the hook to pay $1 billion or more for the cars, which will be delivered between 2019 and 2021. Far from being "asset light," Uber's purchase suggests the company in a few years may own a rapidly depreciating fleet of cars. 1

Many of the technology companies working on autonomous driving software have tried mightily to avoid owning and operating cars. They don't want to deal with the capital depreciation or the annoying, profit-killing duties of rotating tires and vacuuming floor mats. Uber is also trying that approach in a partnership with Daimler AG, which has disclosed plans to put the automaker's self-driving vehicles in Uber's future driverless car network. 

But Uber is now steering into the skid of asset ownership by ordering tens of thousands of cars years in advance of potential demand. The company's decision is a helpful reminder that even as a small number of investors have valued Uber at roughly $68 billion, 2  they and the public still don't know whether a future Uber will make money by continuing to be a middleman for drivers and riders and for other categories including restaurant orders.

If the company owns a fleet of cars and collects fees from rides, that looks more like Hertz than like a traditional two-sided marketplace consisting of matching supply and demand. It's stunning to think that Uber is so valuable despite not knowing what kind of company it will ultimately be, and whether it can do so profitably.

Red Ink

Uber's revenue has been growing fast but its reported losses remain high

Source: Bloomberg News and other news reports

Note: Uber selectively reports its financial results. These losses likely don't reflect the company's bottom-line financial results.

The questions about Uber's business model aren't the only cloud hanging over the company. It's also trying to rebuild its workplace culture under new CEO Dara Khosrowshahi, make peace in a civil war of Uber investors, fight off rivals in nearly every country in which it operates and win over suspicious regulators.

Yes, if Uber shifts its business model to embrace self-driving cars -- and there are big questions about when autonomous cars will be technically feasible or permitted at large scale -- then it solves one of its business conundrums by making its network of drivers obsolete. As the Volvo announcement makes clear, however, autonomous cars raise whole new questions about the company's strategic and financial prospects. 

This is important because Uber's valuation implies the company's future path is certain. It most assuredly is not. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. It's possible Uber has plans to hand off ownership or maintenance of this Volvo vehicle fleet. 

  2. Uber is negotiating a complex stock sale at a significant discount to its headline valuation. This is a reminder that "valuations" of private technology companies are semifictional numbers.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net

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