While these narratives are fun and all, Uber happens to operate (even if only for today) in a pretty well understood market with a great deal of data available. So let's try to tie some of these ideas to hard numbers, shall we?

Taxi & Limousine Industry Overview

Let's start by looking at the highlights of Uber's current industry. According to IBISWorld, the US Taxi & Limousine Services industry will pull down $9.7 billion in revenue in 2013 across five major segments: taxi fares (55%), leases to operators, black cars, limousines, and other, which includes in-cab advertising, party buses, and maintenance.


That's the good news. The bad news is that revenues stagnated a long time ago. Five-year growth is an anemic 0.8%, and the next five years don't look much better. Even worse, revenues are widely distributed amongst nearly 200,000 players, with no one firm capturing >1% of the market. In business-y terms, that's considered "extremely fragmented."

Business Model

So, what is Uber? Is it a town car company? A taxi company? A personal logistics service? A car replacement? Indeed, it could be a strip of options that subsumes all of these, or it could be something else entirely. Generally speaking though, its dominant dynamic is most likely one of the following:

• A taxi authority and call-center lessor
• A multi-sided platform enabling a two-sided market
• A brokerage

Now, fair warning: business models are inherently indistinct. At best, they're carefully conceptualized mappings of the relationships within a firm's market environment. At worst, they're seductive narratives that beguile us with their coherence and optimism while bearing only the shallowest relationship to reality. An accurate conception of a firm's business model provides the foundation for sound analysis. An inaccurate conception provides the opportunity for mental masturbation. With that in mind, let's examine these options in turn.

Authority and call-center lessor
Under the authority and call-center lessor model (a standard model within the T&LS industry), firms lease out to independent-contractor drivers the right to operate under a proprietary dispatch network. Drivers are responsible for owning and maintaining their vehicles and usually their insurance. Leases are generally offered at a fixed amount per shift, with the driver paying the lessor upfront and retaining all earnings made during the lease period. The main attractions of this model are: (i) low capital intensity, (ii) minimal liability, and (iii) minimal volatility in daily revenues.

At first blush, this model bears a striking similarity to Uber, but there is at least one important difference. Uber does not lease out the right to operate in its network; instead, drivers pay Uber a portion of each fare they collect while using Uber's dispatch network. Importantly, this arrangement exposes Uber to a great deal of demand-side volatility that would otherwise be spread amongst their drivers. The variance also creates a meaningful difference in incentives. Whereas the typical authority has little incentive to invest in dispatch technology, in-car payment systems, or advertising, Uber has a perfect incentive to undertake such investments, as every incremental fare increases Uber's take proportionately. For this reason alone, I'd say that Uber is not an authority and call-center lessor, and so will not analyze its business under that model.

Multi-sided platform (MSP)
Although there's no settled definition of what constitutes an MSP or two-sided market, the literature tends to focus on a common set of dynamics:[1]

1. direct interaction between heterodox groups of users
2. positive network effects
3. value lock-in (high barriers to competitive entry and/or high multihoming costs for users)

Much of the excitement around Uber derives from the idea that it's a two-sided marketplace for poorly utilized assets. If Uber is such a marketplace, and if it has the "winner-take-all" characteristics that such marketplaces often exhibit, than its comps include the sort of sharing economy/collaborative consumption companies that VC dreams are made of (e.g., Airbnb). So obviously this is an important issue to settle. With that in mind, let's examine each of these dynamics in turn.

• Direct interaction between heterodox groups of users. Uber clearly exhibits this dynamic. Passengers and drivers are distinct groups with distinct needs, communicating directly via Uber's app platform.

• Positive network effects. While some positive network effects do exist, I would argue that Uber's business is actually dominated by negative network effects. As anyone who's tried to order up an Uber during one of their land-grabs can attest, adding users to the platform quickly leads to a worse experience for everyone. Unlike information, a cab ride is an exclusive product -- if you're in a cab, then I can't call it, which means your usage degrades my experience. What's more, a cab ride is a commodity product, which means that every passenger (and driver) in an area is competing with their peers. Again, this implies that adding users subtracts value from existing users of the network.
• Value lock-in. Let's be clear: Uber does not have any. There are no real barriers to entry in the cab market, and that's doubly true for the asset-light dispatch services sub-market. The problem is the product. Not only are cab rides commodity products differentiated almost solely on the basis of availability, they're further perceived (at least to Millenials) as a universally inferior mode of transport.[2][3] You can talk all you want about what a great experience Uber is, but the fact remains that, on balance, when people need a cab, they care about getting from A to B far more than the "experience." If an Uber's not available, people have a plethora of perfect substitutes at their disposal. And thanks to a bunch of evil, innovation-crushing regulations, they can make their decision without regard to unsafe conditions or price gouging. Add it all up, and you can understand why the T&LS market remains so incredibly fragmented, and why Uber's chances of changing that dynamic are most likely nonexistent.
  

In conclusion, Uber is an MSP, but because users are free to use whichever dispatch service they'd like, and because there's no penalty for multihoming, Uber is not meaningfully shielded from competition by either network effects or multihoming costs. Therefore, it should not be analyzed in the context of a "winner-take-all" market dynamic. While the MSP model should certainly inform Uber's business strategy, it's less helpful in our quest to determine Uber's value as a business.

Brokerage
Brokers arrange transactions between buyers and sellers in exchange for a commission paid upon execution. They often facilitate these transactions by supplying information on market conditions, prices, and available products. They also offer their clients access to prospective customers with whom they've already formed relationships. Brokers tend to be judged by the quantity and quality of their customer relationships, as they speak to the broker's ability to consummate transactions.

In my opinion, Uber is best analyzed as a non-exclusive broker operating on behalf of drivers. Drivers use Uber's dispatch platform as a means of finding passengers, and by handling the payment infrastructure, Uber is ensured a commission from the driver on the transactions it effects. However, neither the driver nor passenger commits to Uber exclusively; indeed, should an Uber-driver and an Uber-passenger meet without the help of Uber's platform, they're under no obligation to pay Uber a dime.

Sizing the Market

Total Available Market (TAM)
TAM measures the theoretical revenue opportunity for a product or service. For Uber, I define TAM as fare revenue for taxis and black cars. According to the revenue segmentation below, that comes to about $6 billion.


Serviceable Available Market (SAM)
I've yet to find an authoritative definition of SAM, but I tend to think of it as the portion of the TAM a company can reasonably expect to reach given its business model. As an app-based platform, Uber is aimed at pre-arranged taxi services.[4] By some estimates, pre-arranged services account for more than 80% of overall demand nationwide.[2] So let's be generous and say that Uber's SAM (i.e., cabs not hailed on the street or at a cab stand) is 90% of its TAM, for an SAM of $5.4 billion.

Serviceable Obtainable Market (SOM)
There are many ways to derive this number, but let's go with the simplest: feasible market share. Personally, I would estimate that the best possible outcome for Uber would be to capture 3% of the market. My reasons are as follows:

• The taxi industry is extremely fragmented. The top four operators combined generated less than 3% of total industry revenues in 2013.
• Uber has no structural advantages (i.e., moats). Because their drivers are independent contractors, Uber has no real means of forcing exclusivity on the supply side. Passengers, meanwhile, are free to use any cab company they like, using whatever means of hailing they please.
• Uber's brand excludes over 50% of riders. Uber is quite clearly positioned as a corporate/up-market option for riders. Given that corporate ridership accounts for 60% of black car revenue and 24% of taxi revenue, that seems like a good decision. But taxicab ridership follows a bimodal distribution: those who use cabs the most are either very rich or very poor. In fact, households with <$50k in income (44% of the population) use taxis at about the same frequency (relative to overall trips) as households with >$125k in income (13% of the population).[2][5] Furthermore, households with zero or one cars -- i.e., low-income people and Manhattanites -- make 5-10x more trips by taxi (as a percentage of total trips) than households with two cars or more. Toting it all up, I'd estimate that mid- and up-market taxi riders account for less than 50% of all taxi riders.
• Local operators know how to compete with a national brand. 1-800-TAXICAB is a cooperative of independent operators who rely on a national endpoint brand to drive customers to local members. Coordination in response to the brand localization problem operates to blunt the effectiveness of Uber's national branding strategy.
• E-hail technology is fully commoditized. Don't believe me? Go ahead and search for "taxi" in iTunes or Google Play.
• Mobile payments don't make a (meaningful) difference in dispatch decisions. If you really want to argue with me on this point, you better come with data, and your sample better cover more than SF/SV.

So, assuming that Uber can capture 5% of its SAM (a generous assumption for all the reasons above), that leads us to an SAM of $162 million.

Revenue model
It's easy to look at that $162 million number and get excited, but remember that we're talking about $162 million in fare revenue. As a broker, Uber will only ever see a small portion of that amount. According to Xconomy, Uber takes 10% of the base fare plus a $1 per ride surcharge from cab drivers, and 20% of the base fare for black cars.[6] Again, let's be generous and assume that Uber can get its average cut up to 18%. This implies a best-case total US revenue opportunity of $29 million per year.

What if...

Obviously, this number can be made bigger in any number of ways. International expansion is an easy assumption to make, but before assuming too much there, I'd recommend reading up on the cultural dynamics surrounding taxicab usage in other countries. The decision of whether to take a cab -- and the subsequent decision of which type of cab to take -- depends very much on the availability or lack of substitute forms of transportation. You can't just say things like "London is a reasonably dense metro, so that's a big opportunity!" and leave the rest to the imagination. Narratives are fun, but they have to match with the underlying infrastructural, cultural, socioeconomic, and psychological realities.

Similarly, we could grow this market by assuming that increasing efficiency will increase demand, but there's no evidence to suggest that increasing supply-side efficiency will lead to increased travel demand. Nor is their evidence that society is waiting for a shared "replacement" for personal autos. I've heard it argued that Uber frees people to travel by car more often because it's more convenient. While that may be true in the parking desert that is SF, research suggests that owning a car causes people to increase their travel frequency by more than 2.5x. So far as I can tell, there is no evidence that people actually want to replace their cars, regardless of how great Uber's UX may be.

Finally, we could assume that Uber will become the switchboard for all things transit, a "Cisco for the physical world" as Michael Wolfe puts it. While I applaud the imagination, the evidence is lacking. And by evidence, I don't mean a smoking gun, I mean signals and indicators. What is it in our psychology that will draw us toward such a future? Do the fundamental economics of the physical world lend themselves to such an enterprise? What about our regulatory or liability regimes? These questions are rhetorical, but my point remains: our world is complex and chaotic, and certainly not subject to facile narratives drawn from shallow analogies.

Conclusion

So how big of a deal is Uber? Well, to seed and angel investors who sold shares in the last round, I'm sure it's a very big deal indeed. It's also a big (if temporary) deal to passengers in land-grab cities like DC and SF who get to take highly subsidized cab rides for as long as Uber's war chest lasts. Of course, as soon as those subsidies run out, it will be just another transport option, but so it goes. There's nothing wrong with a business that tops out at under $100 million in net revenue with fat margins -- that's pretty amazing, in fact,. Probably not $3.5-billion-plus-a-reasonable-return amazing, but still pretty great. Ultimately, the question depends on you. If five years ago you spent your weekends gently sobbing while cab after cab failed to show up, and now you don't, then Uber's a very big deal indeed. If you live in Manhattan and make around $100k, then it probably doesn't register at all.

One Last Note

I've made a boatload of assumptions during this exercise and you are free to disagree with any or all of them. But remember that we're not talking about a seed-stage company anymore. It's a real company with established business lines and actual revenue, and that requires more than a facile narrative to value.

---

1. Note that these elements do not constitute a dispositive test; rather, they form a useful framework for evaluation. Our understanding of network effects, especially those that connect the internet with the physical world, is still very much a work in progress.
2. The Taxi - Friend or Foe, page 15
3. Millenials & Mobility: Understanding the Millenial Mindset
4. Taxi service comes in two flavors: on-demand and pre-arranged. On-demand service includes street hails and taxi-stand pickups. Pre-arranged service encompasses rides arranged in advance of pickup. Operators can and do provide both types of service.
5. Income, Poverty and Health Insurance in the United States: 2012
6. Uber's Fare Numbers in Boston Revealed, Barely Dent Cab Market

Back in the 19th century, if you wanted electricity, you had to make your own provisions. Each individual was responsible for acquiring and maintaining their own electrical supply. And then the electrical grid and electricity was available on tap. It turned from a product to a service.

Both electricity and transportation share the same property in that it's never directly desired, it's only desired as instrumental to a larger goal. We don't care that we have power, just that our tvs turn on and our showers are hot. The same applies to transportation.

As a result, it's become increasingly clear that transportation is about to make this exact same transition. Our current system by which each individual is responsible for maintaining their own means of transport and diligently becoming an expert on both the operation and maintenance is, I predict, going to seem like one of the most anachronistic parts of society when viewed from 50 years in the future.

Instead, the future of transportation is that it will be on tap. When we need to be somewhere, it will simply happen and the job of maintaining the mechanics for making that happen will be abstracted from the user.

Nobody is quite sure how the competitive landscape of this future will turn out. Will freight and human cargo be under one system or separate systems? Will different modalities (car, train, air) be run by different providers or be vertically integrated? Will a monopoly form or a profusion of small, competitive corporations?

Regardless, the reason why Uber is so important and Google invested money in them is because they are an early player in what we know to be a titanic shift in how society is run. The reason why Uber is important is because they have the potential to be the GE or Westinghouse of the 21st century.

Direct hit to the the taxi licensing racket, one of the most corrupt aspects of urban government.

Google invested $250 million into Uber.

Google has pretty much perfected driver-less tech.

Hmmmm.

What could Google see in what appears to be a taxi dispatch company?

A revolution.

Imagine what driver-less taxis would do to every aspect of our world?

We wouldn't need to own cars. We could just have one sent to us by using an app on our phone.

We wouldn't have traffic jams. Cars would "talk" to each other while driving in perfect succession.

We wouldn't have car accidents or drunk drivers.

We wouldn't even need car insurance. No accidents. Nothing to insure. Want to steal the car? Bring up the "find my car" app.

We would also be doing the enviroment a huge favor. Your car is not being driven 100% of the time. At most it is being used  10% to 20% per day. By having a smaller amount of cars in use 100% of the time, we can drastically reduce our carbon footprint. Think of it as "smart car pooling".

I am most excited about how we can change the actual landscape of our cities. I am sick of looking at houses with big ugly driveways that accomodate 6-7 cars. We could build homes with no driveways.

We could narrow our streets, instead of every year adding one more lane.

We could increase the size of our sidewalks and bike lanes. A driver-less car is not going to hit you and then give you the finger.

Heck, we can re-imagine what a "car" is supposed to look like if a human is no longer in the driver's seat. We may not even have a driver's seat!

That in a very big nutshell is the big deal with Uber.

P.S. Now imagine Google acquires Tesla?

Big enough to cause a Thursday taxi driver strike in Milan and taxi-driver strike in Paris in January. Uber is changing the rules of the taxi and ride-sharing game, one city at a time


Milan taxi drivers march against Silicon Valley ride-app Uber

The big deal:

In <5 years Google will release driverless cars
In <2 years after that Google will start by creating taxi fleets

Uber is good at predicting where the next pickup/s will happen. With this investment, Google can have majority of its cars waiting at the high demand area (after a baseball/football game) or some unknown event. You open app, set your ride, get into a google car. Tell the car where you want to go.

Once the car knows where you want to go, Waze (bought by google) will direct the car using the shortest/quickest route.

This BIG DEAL solves a lot of inefficiencies:
1) Booking a car (current Uber or regular taxi) after that football game, ties it to that passenger. 10 cars will be looking to pickup 10 people who booked it through the app. Instead, with automatic cars, efficiency comes closer to that of a street hailed cab.

2) Cost: No driver means more than half the cost to run a cab, is reduced

3) Death to existing fleets: No need for existing fleets, they wont be able to match the efficiency of Google+uBer+wAze (GooBerAze).

4) Prescient data: Your Gmail + Calendar, gives google enough heads up to have a car outside to pick you up well before you decide to book a ride.

Arriving at an airport? Your GooBerAze ride will be waiting outside to drive you to your hotel (because the confirmation email was sent to your GMail or Google Apps account).

RSVP'd for a party? walk out of your current location (work/office etc), GooBerAze car is waiting outside to drive you to the party in time.

Doctor's appointment? Going to a conference?........you get the concept.

The Biggest Deal:
Once this model becomes tried and tested, it'll be a lot more cheaper for you to use GooBerAze than owning a car to travel to work, shuttle kids to school. It also solves the Last Mile connectivity problem with public transport.

If you are guaranteed a ride from home-train/metro-work (and return) at or below the cost of using your own car, would you drive your car to work? Your car investment (that always depreciates) makes less sense. You dont have to go in circles to park the car in a world blessed with GooBerAze!!!

Heck, Google can start pooling cars (all cars driving from DC to Boston or part of that route), tailgate and drive in the slipstream, making it more efficient!

With GMail, Calendar, and Google Now, Google+Uber+Waze is a data marriage made in heaven. This is why google plunked a quarter billion into Uber and a billion in purchasing Waze.

Uber by itself is not a big deal

GooBerAze (or what ever the combined solution will be called) is.

--Update (May 07, 2014)
Google Maps On Mobile Gets Uber Integration And More | TechCrunch

A step closer to Gooberaze, I'd guess Google/Uber already are integrating with Waze data to predict arrival/driving time.

The only missing pieces in the puzzle, are:
1) Integrate with Google Now
2) Integrate with the Autonomous Vehicle.

(Its only been 6 months since I wrote this post. I'm still sticking to the original estimates).

Google can be a master of Public Transport!

-- Update (July 10, 2014)
a16z post about the effect of Uber, Lyft + autonomous vehicles on transportation Auto-Autonomy: Cars Are Racing Toward Disruption

Uber is a big deal not because of its price tag (relatively modest, by tech startup standards) or because of the amount of business it's doing currently, but because it's fundamentally disruptive to an established industry. It's a real threat to the system of taxis in US cities, which are already under pressure because continued economic stagnation and environmental concerns are driving people toward multi-user public transport. It fundamentally breaks the main support of the taxi industry, which is the artificially scarce (and as a result expensive and overpriced) taxi license or medallion. You can tell it's disruptive by how many lawsuits are levied against it by established taxi operators. Whether or not it will really take hold is an open question, but there's no doubt it's a big deal in the sense that it's going to seriously challenge the taxi industry.

Justin’s analysis is first rate; it’s very lucid. But let me add a twist to show how to expand Uber’s profits.
 
Positive network effects are more salient than described. Contractual incentives for lock-in are feasible.
 
Two-sided markets have foursets of network effects.[1]For Uber these are rider-->rider, driver-->driver, rider-->driver, and driver-->rider.  Focusing on just the same-side rider-->rider congestion understates the potential cross-sidenetwork effects.   If Uber can sufficiently motivate driver and rider participation, it could achieve the effect of riders attracting more drivers, and more drivers attracting more riders.

The original analysis is correct that, without lock-in, the prospect of a winner-take-all market is low.  Cab rides are commodities and multi-homing costs of drivers using competing platforms are low.  But here’s where it gets interesting.
 
Uber could use incentive contracts to raise driver multi-homing costs, which can increase the winner-take-all effect. Suppose Uber offers drivers the following deal:
 

I’ll offer you an x% discount on our commission fee to go exclusive with Uber and I’ll use tracking software (like that of say oDesk) to check whether you’re honoring the deal.

Now, if Uber can get a large block of riders in the initial land grab, it can set rider prices and driver commission discounts such that drivers make more on average with Uber’s bigger pool of riders than they’d make with a competitor.  Drivers are in a bind.  They might like to add a competitor, but they give up their discounts in order to take a chance on a much smaller pool of riders.
 
The exact pricing and discount structure will need to be the subject of serious data analytics, yet this is an advantage that a firm with an existing client base has over other firms.  From these analytics, personal logistics, delivery, and other value added services become possible. Entry by competitors becomes more difficult.
 
So, I’m just sayin’, even within the taxi market, here’s how it could be done.

[1]See “Strategies for Two-Sided Markets” Harvard Business Review, Eisenmann, Parker & Van Alstyne. Page on Bit

Uber is a massive deal because urban logistics and infrastructure optimisation are extremely important to a sustainable and prosperous future. Have you every thought about the cost of taxi's stopping on city streets whilst the transaction occurs.  I live in Sydney and this causes huge congestion and frustration.  Removing this inefficiency, which Uber does, would make the entire road network better optimised.  That means less cost for governments and therefore citizens. There are so many more examples of how Uber will help make the world a better place....

Only speaking from my use and those of my circle,  Uber is a big deal.  It has replaced my use of taxi's in my home area (Minneapolis/St Paul) and we now use only uber for airport transportation.  My son and his friends use uber cars for a night out on the town.  Also, when traveling, we have used uber cars where available.   I love how uber has disrupted the taxi business model, which really needed room for improvement.  As an aside, I think Google is interested in Uber as a way to work into their driverless car platform.

If these predictions about Uber or similar systems come true, then also this:
Somebody will have a record of your every move.

I'm keeping my motorcycle.

IMO, this deal has much more for Google than it is for Uber. Everyone knows Google is working on driver-less car technology and Uber could be the perfect partner for them. Once they are ready to launch, I am sure Uber will be the first company to offer driver-less cars to its users. It would be hard for Google to launch their driver-less technology without this kind of partnership. Google-Automobile alliance could happen in future but its going to be very tricky for all the parties, to safe-guard their interest and promote new technology. Also, negotiating with Uber would be much more easier than to negotiate with Ford, Toyota etc.

I have a feeling the on-road price of driverless cars is going be much higher (2x/3x) than conventional autos and the first large scale deployment of these vehicles is likely to be in taxi fleets like Uber and also in novel auto-ownership sharing and ride/sharing arrangements that may be created within social groups.
 
To add to the great points above, I believe Uber's value to Google is likely to derive from the huge amount of data on discretionary trips by Uber customers that can really help Google/Uber understand transportation needs to optimize the number of driverless vehicles needed by taxi fleets and car/ride-sharing groups.

Uber is a great example of the new economy, it's pretty much the best example of the current world of valuations.

The good.

- It's a very nice idea, nothing out of this world crazy amazing, but a very solid idea.
- The implementation of it is superb, it's simply the best user experience you can imagine.
- The growth figures in user base are spectacular.
- The ambition for growth is vast, and it should be relatively easy to roll out to new countries but also adapt the core premise to cover other businesses to disrupt.
- Significant funding an support behind.

The bad.

- They don't really have any assets, there is nothing tangible they own.
- They don't really have any virtual assets, there is no IP that others can't easily replicate.
- They don't have any unique value against a myriad of competitors, other than they got their first.
- They are making decent revenue but no profit of note.

Personally.
I see the landscape of fickle consumers, of no IP and of a thousand new entrants and I while I respect Uber enormously, I don't see the value in the company. I don't see why in 4 years time Uber will still dominate a market and I'm just not that sure they can. We have a lot of companies like Airbnb, Sidecar, TaskRabbit doing a marvelous job of providing a service layer between people. The truth is if there is a lot of money to be made, then hundreds of people will join the party. And for many areas there is just not that much money to be made. Task Rabbit is a great idea, but I just can't see it ever making much profit.

However.

If Uber can remove itself from the single area of providing Point 2 Point car travel, and can morph into something along the lines of the " Modern Car Replacement:" and move into an areas like Car Clubs and do one way rentals, then if it starts owning assets and building a position where new entrants can't compete, then we have something BIG.

Zipcar / Hertz 24/7  etc are doing an incredible job of transforming  city transport for those without cars, but generally the technology that was once remarkable seems old.

1) I want to be able to see where my actual car is.

2) I want a company that has a decent back end, at the moment both companies have "lost" bookings, or had cars double booked, or in one amazing car, have shown a car that never existed in a location.

3) I want a club with a sense of "belonging" to make people more responsible , what makes Hertz particularly bad is they have never tried to generate a sense of being part of a club, people bring the cars back filthy, late, and don't care.

4) I want customer service. At the moment phoning Hertz when my car simply won't unlock is a typical 45 mins wait - this is something that kills me.

This is PERFECT territory for Uber, they nail these aspects better than anyone.

I feel a bit shy about this, but there is more on my Quora blog here
Remember when we owned cars? by Tom Goodwin on The Future of Advertising , Tomorrow's thoughts.

I think Uber is a great company but the more interesting point is that somebody should look at all these deals and see vicious cycle of VCs that seat on the Boards of all major tech companies and coincidentally buyout all the startups they invested in at astronomical valuation. Those deals also serve the basis for ever higher IPO valuations where VCs also make a killing. They way I see if you have something really huge pump it up till IPO, if not you can always tell your corporate Board about the latest hot startup trend and they will cash you out.

This Uber thing with Google is proof that "New World Order" is still active.