Uber finally delivers

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Ethan Wu (0:36)

Thank Pushkin.

Big news from ride-sharing land, Uber, which I'm sure you've taken before, they've made a profit. No accounting gimmicks, no BS, just a real, genuine operating profit. $326 million in the second quarter, up a billion dollars year over year. It's the first time they've done this, and it's a big change for a company that's been bleeding money, really since it came onto the scene. Today on the show, we discuss, what took it so damn long?

This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu, joined today in the New York studio by Uber snob, Rob Armstrong, who will not take a lift on principle.

Rob Armstrong (1:20)

I'm a one-ride-sharing company man.

Ethan Wu (1:24)

You helped them with that $326 million profit.

Rob Armstrong (1:26)

I'm doing my part.

Ethan Wu (1:27)

Yeah, very nice.

So Uber's been one of these really exceptional growth stories at Silicon Valley. It scales across the country, transforms the way we get around, disrupts the taxi industry. But the weird thing's always been, Rob, that they've never made any damn money. But you could imagine, and I think this was the initial pitch from Uber, how they could, which is that they're this perfectly platonic tech layer between an independent contractor driver and a customer just wanting to get around town. They take a little slice for pairing up the two, and beautiful. They get the network effects, they scale up.

It's a wonderful, lovely business. All is well, they make money. What's wrong with that?

Rob Armstrong (2:10)

That really did not happen.

That really did not happen. I mean, all of the excitement about this profitable quarter at Uber, and it is definitely better to be profitable than it is to be not profitable. Yes, this is true. It has been a turning point for Uber. The fact is, on their balance sheet, here's what they have.

They have an accumulated deficit on their balance sheet, which is roughly speaking, all the losses they've made over their history of $33 billion. So $33 billion has sunk into this business, has been disappeared by this business, and paid in capital is $42 billion. So a huge amount of money has been put in, and the majority of it has been set on fire so far to make $300 million in one quarter. That's kind of the history of this business as we have it. So why did that happen if this was a frictionless technology business that just took a little clip of money as the money went rushing by? It was like, why isn't this, I'm just repeating your question back to you, but why isn't this the kind of Microsoft of transportation? Why isn't it the MasterCard of transportation where two people do a transaction, they get a fraction of it, and they just walk away with free money, no capital costs, whatever.

Ethan Wu (3:26)

And I think to anyone that's taken Uber, it may be clear why that it's not so frictionless. I mean, there's just a lot of stuff involved. The first thing is you're driving a hunk of metal hurtling down the road at 60 miles an hour, and there will be crashes. People will get injured.

Rob Armstrong (3:40)

And the tires will have to be replaced, and the oil will have to be changed, and all of that. So you could put it like this.

In the very best tech businesses, in the very best network businesses, the marginal cost of providing the service is zero. Like once Microsoft has written the software, once MasterCard has built the payment network, selling another unit of the software, selling another transaction over that network costs nothing.

Ethan Wu (4:08)

Yes.

Rob Armstrong (4:09)

And Uber, for all its history and for all of its future, will have high marginal costs, because a person who is made of meat has to be moved around in a huge metal thing.

Ethan Wu (4:22)

Yes.

Rob Armstrong (4:22)

And that costs a lot every time you do it.

Ethan Wu (4:24)

Yeah.

Rob Armstrong (4:24)

So that's one difference between those businesses and Uber.

Ethan Wu (4:27)

Yeah, and you've written about this nicely just on the cost side, that insurance is a really significant expense for Uber.