Why Uber 2018 is unlike Amazon 2002


Last week, Uber chief executive officer Dara Khosrowshahi compared these initial years of his company’s ride-hailing business with those of Amazon. The poster child of e-commerce went from selling books to becoming ‘the everything store’. Uber wants to go from enabling consumers to hail cabs to providing every service that involves going from, in Khosrowshahi words, “point A to point B”: food delivery, freight, autonomous vehicles, buses, bikes. Uber will sacrifice profits for growth, he added, as Amazon has consistently done.

Through the prism of business expanse, the analogy sits fair: from one business line to many. But the contrast is stark in the way Amazon went about it and how Uber—now in its eighth year of operations—is going about it. In its eighth year, in 2002, Amazon generated $174 million cash from operations, which could be reinvested in its business. It has generated cash from operations every year since, and that figure has grown consistently, to $18.4 billion in 2017.

Such internal surpluses helped Amazon curb its reliance on external capital, even as it expanded at a brisk pace: since 2002, its annual revenue growth has always exceeded 20%, and was $178 billion in 2017. But Amazon generated only $3 billion in net profit. That was Khosrowshahi’s point: Amazon was prepared to sacrifice current profits for future growth, as is Uber.

Chief executive officer of Amazon Jeff Bezos. Photo: Hemant Mishra/Mint

Chief executive officer of Amazon Jeff Bezos. Photo: Hemant Mishra/Mint

Except, Uber’s operations are not generating any internal surplus, and its expansion is entirely fuelled by external capital—it has ploughed through $8 billion of capital. In 2017, it lost $4.5 billion on revenues of $7.5 billion—a net margin of -60%. Amazon lost that kind of money only in 1999 and 2000 (net margin of -44% and -51%). But never since, as it engineered a state of balance where its operations could fuel its expansion.

Uber isn’t at that place yet. It continues to rely on capital to expand its business range. It’s not short on capital, with $19 billion in reserve and a generous investor in SoftBank. But at some point, Uber’s needle will have to move from external capital to internal cash, as Amazon’s did with elan. If it does manage that, Khosrowshahi’s analogy will sit better.livemint