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So where does Uber’s value come from anyway?

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At an estimated $62.5bn, Uber has the dubious distinction of being the world’s most highly valued private technology business, as well as its most heavily lossmaking. That last word seems like an oxymoron: when did a ‘loss’ become something you ‘make’? Perhaps it’s a euphemism investors console themselves with as they hand over piles of money they may never see again. Last year the company recorded losses of $2.8bn, based on net revenues of $6.5bn and is burning through cash faster than Johnny Depp in a pet shop.

So where does the value come from? Uber is notoriously “asset light” so there can’t be much tangible value in the company. While most companies are happy to present their employees as their “most valuable asset”, this would be an unlikely claim from a business that just ditched its founder as CEO and is noted for an infamously toxic (sexist) working culture and patently unsustainable labour-supply cost structures. It’s possible that much of this value resides in Uber’s technology, although a recent study by CNBC and MCAM International suggests that Uber’s approach to patent protection is “nearsighted” in comparison to Lyft: “Lyft's patents are more focused, specifically on the development of an improved rider experience. Uber's portfolio is more vast but less likely to bring the company a specific advantage.”

Even if the two companies’ technological prowess is equal, Lyft’s relatively puny valuation – a mere $7.5bn – suggests that the value of Uber’s technology must only be a tiny proportion of its overall value, particularly given that Uber is battling an injunction from Waymo in the crucial area of driverless technology. So if the majority of Uber’s value doesn’t reside in its tangible assets, its human capital, or intellectual property, what’s left? Its brand?

Is Uber’s brand worth tens of billions of dollars?

Brand Finance seems to think so. Its 2017 Global 500 list ranks Uber as the 89th most valuable brand in the world, with a value of $14.6bn (above Zara, BNP Paribas, and Costco) and an AA- brand risk rating (which suggests the brand is as strong and stable as Hyundai Group and J.P.Morgan). Larger - and potentially more conservative – brand valuation specialists seem more circumspect; both Interbrand and Milward Brown have omitted Uber from their lists of the world’s most valuable brands.

In the interests of transparency, I should clarify that I used to run the London brand valuation practice at Interbrand. Perhaps that means I’m biased, but it also means I’ve seen this sort of thing before. I worked at Interbrand during the dotcom boom. At its height, we were approached by a couple of gentlemen who had acquired a domain that they believed would be the go-to site for anybody looking for information on the Internet (no - it wasn’t google.com). They weren’t trading on the site. There was no business to speak of. Just a very nice domain name. The gentlemen claimed to have received an offer of $500m for the domain – an entirely credible claim to anybody who remembers the hysteria surrounding the Internet at the time - but they firmly believed they were sitting on a billion-dollar brand.

So they asked us to assess their brand and furnish them with a seven figure valuation. Bear in mind there was no brand to speak of. No business. No customers. No top line. No bottom line. Nothing. We explained that for an asset to have a value, there must be a clear and confident expectation of future profit. In response, we were told we didn’t understand how value worked in the dotcom world. We were dinosaurs. But, as it turns out, we were correct dinosaurs. The dotcom bubble burst soon after. The gentlemen never realised their billion dollar dream. I doubt that they achieved a fraction of the sale price they had hoped for.

They weren’t alone in their optimistic concept of value. Boo.com swallowed over £80m of funding before its swift demise – peak turnover was £200,000. And Webvan reportedly spent $1bn in its two year journey from startup to bankrupt.

What makes Uber different? Unlike Boo.com and Webvan, it has at least achieved a significant top line. But stunning revenue growth doesn’t make a business valuable. Where’s the clear and confident expectation of future profit? People ride with Uber because it’s cheap and available. Uber is cheap because it heavily subsidises its trips. And Uber is available because there are enough people still willing to drive on the app.

To believe that Uber has any value – brand value or otherwise – we’d have to believe that both of these situations will improve over time: that Uber will find a way to deliver cheap rides without subsidies so it can attract a profitable client base; and that Uber can continue to increase its fleet of cars to grow its availability. Raising prices doesn’t seem a possibility – one of the problems with undercutting incumbents is that you attract the least loyal, most price-sensitive people in the market. And if you don’t maintain your price advantage – these price-sensitive customers simply defect to a cheaper competitor. Uber isn’t building a brand loyal customer base. It’s training people to care more about price. It’s difficult to see Uber as a strong brand. Disloyalty is baked into its business model. It’s culturally toxic. Governments and regulators seem to hate it. The public tolerates rather than embraces it. Few people outside the investment community would mourn its demise.

Nor does Uber seem likely to reach a point where economies of scale kick-in and allow it to deliver cut-price rides at a profit. Driver costs are predicted to go up rather than down as regulation catches up and driver exploitation is stamped out. The only hope for Uber’s continued existence seems to be driverless technology: driverless cars don’t sleep, strike, unionise, complain about exploitation, or allege sexual harassment. For Uber’s brand value to be positive, this technology will need to be both cheap and rapid to develop and roll out – the weaker the brand, the more heavily future profit is discounted. It’s hard to imagine that by the time Uber has burned through its remaining cash pile (three years according to some estimates) it will have successfully implemented cheap, driverless cars. We don’t even have cheap, driverless trains.

So is Uber’s brand really worth billions? Brands create value in all sorts of ways – many of which are not captured by current valuation techniques: they stimulate demand and inspire loyalty; they create permission for a business to operate in a community or society; they help to attract, organise and retain talented staff; they stimulate and direct innovation; they excite investors. In all respects but one, Uber seems the epitome of a valueless brand: it erodes loyalty; it alienates communities; it is regularly in dispute with its staff; and for all the talk of disruptive innovation it has yet to demonstrate a convincing roadmap to sustainable, profitable growth. But in one respect the brand seems to have excelled: investor optimism seems undented by the miles of column inches devoted to intellectual property infringement, cultural toxicity, absent leadership, driver unrest and regulatory animosity. Despite their oxymoronic leaning, Uber’s investors clearly know more than the rest of us. I genuinely look forward to finding out what that is.

At the moment, it’s difficult to get past the idea that a business that loses billions of dollars a year – and looks like it will continue to do so in the foreseeable future – could possibly be worth tens of billions of dollars. The brand’s utter absence of integrity and purpose seems only to exacerbate the issue. If brand value rests entirely on the optimism of a handful of sophisticated investors (whose exit plan may simply involve reaping back their billions through a vastly inflated IPO) – then another oxymoron may provide a more apt description of the type of value we’re now talking about: beggarly riches.

Nick Liddell is director of strategy at The Clearing

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