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Summary:

The recent takedown of Uber and questions about its future by a famous finance professor reminded me that predicting the future is a risky business. As someone who has been wrong often, I can say one thing for sure: hindsight reminds you of your follies every day.

In my life as a professional prognosticator, I have been wrong more often than not.

There was a time when I thought Qwest was going to be the 800 pound gorilla of telecom because they had bet big on IP. Oops! They were a scam wrapped in a scandal. There was that time when I thought Hulu was a clown company. Yup, in the end I was the clown. And not to mention that time when I thought Facebook should sell to Yahoo for $1 billion. Mark Zuckerberg doesn’t have to smirk at me every time I visit his sprawling campus for me to know that I was wrong — the Facebook stock price does a good job of hitting my hubris in the plexus on a daily basis.

Photo from Flickr/Paz.ca

Photo from Flickr/Paz.ca

And the worst misreading of the future just might have been my initial take on Amazon, which has gone from being a book seller to the Frankengodzilla of technology, retail and consumerism. It once just sold books, and last night it turned its storefront into an app on a phone.

The point I am trying to make is that making predictions about the future is a risky business and we are as likely to be right as we are to be wrong. And the reason for that is because we don’t know how human behavior will change or morph in the future. This is especially true when it comes to technologies, and how we use them. Ten years ago who would have thought that the i (for internet) would be more important than the phone in an iPhone?

This line of thinking was brought on by an article by Professor Aswath Damodaran, one of the smartest academics and great minds of finance who teaches at New York University. He argued this week that Uber isn’t worth $17 billion. (It’s actually $18.4 billion!) As a long time reader of his blog, I knew this would be a logical, well crafted and mathematically sound argument. He didn’t disappoint, making a compelling case about why Uber is too richly valued at $17 billion. It is hard to argue with his logical arguments, but he was less than optimistic about Facebook as well.

Ten years ago, Prof. Damodaran was also pessimistic (but equally logical) about Google, and telling Money magazine it was worth less than $15 billion. At that time, he estimated that Google would generate a total of nearly $48 billion in cash over its lifetime. As of March 31, 2014, Google had about $59.38 billion in cash, cash equivalents, and marketable securities.

In the case of these three companies, I do believe that the learned professor’s magical and astute formulas need room for something that can be hard to quantify. Back in the day when I was a pup of a reporter, I talked to him a couple of times. Later, like many others who covered companies for a financial newswire, I picked up his book, Damodaran on Valuation. It is a great book, but it doesn’t account for the recent changes in our world.

Today we live with new realities and new technology companies, which end up with opportunities and growth curves that can’t be predicted (in either direction.) A lot of traditional metrics of business don’t account for the changed metabolism and velocity of business due to presence of the network and, more lately, the concept of anywhere computing.

Google, Facebook and Uber are good examples. They are three companies that are essentially internet verbs. Many companies that become verbs actually end up modifying our behaviors and companies that modify behaviors end up becoming behemoths. In the industrial economy, behavior modification of society came from being able to make physical goods at scale in an efficient and cheap manner. (Xerox used to be that company, a combination of the digital and the physical that became a verb but in the end petered out, so there is that.)

In the digital realm, companies are free from the friction of producing physical goods and as a result we see companies like Google go from zero dollars in revenues to billions at a much faster rate. The increase in the number of network endpoints — computers, phones, tablets, televisions, cars, drones, whatever — only increases the speed with which companies can find scale (if they can modify behaviors.)

GooglePlex

Google did a good job of transforming itself from being a nice-and-clean search engine to essentially augmenting the brain, prompting Nicholas Carr to ask the question is Google making us stupid? Facebook has gone from a nice-and-boring social network to becoming an identity layer of the web. It is where nearly a billion people are depositing the artifacts of civilization in the 21st century — photos, videos and birthday wishes. Uber, too, is doing something similar — it has become a verb and is becoming a replacement for our idea of transportation.

Google benefitted from the emergence of broadband networks that allowed us to search more often and more easily. It also in the process changed the idea of online advertising from banners to more effective (and lucrative) textual advertising. Facebook benefitted from the emergence of even faster always-on networks, both wireless and wired. It allowed us to instantly become stars of our own reality shows. It too figured out a new kind of advertising potion (native advertising) and has surprised everyone.

And Uber is also benefitting from society’s shift to anywhere computing. Google became a giant because it had the most amount of data about the web and what people wanted. It used that data and created a flywheel made of the data equivalent of flypaper. Facebook, did the same, except it mapped our relationships. Both Google and Facebook didn’t start out as data-driven, but over the time have become (or tried to become) more predictive about their user’s needs.

A sticker with the Uber logo is displayed in the window of a car on June 12, 2014 in San Francisco, California. (Photo by Justin Sullivan/Getty Images)

A sticker with the Uber logo is displayed in the window of a car on June 12 in San Francisco. (Photo by Justin Sullivan/Getty Images)

Uber, which today is essentially using gonzo-marketing tactics and arbitraging the inefficiencies to corner the market, is also starting to accumulate data about behaviors of Uber users to eventually predict supply and demand, and one day could become so personalized that it becomes a replacement for owning a car. When getting a car to go somewhere becomes as simple as pushing a button your screen and getting someone to drive you somewhere in less time it takes to go to the parking lot, you know the very idea of transportation is going to be challenged.

Of course, it could all go horribly wrong. Legislation, radical new technologies or simply shifts in economic conditions could puncture Uber’s dreams. Drivers could decide that Uber isn’t for then and opt for another option. The quality of its ad-hoc work force (the drivers) is another big challenge for the company that upset the apple cart. Or that the senior management gets so carried away with its current playbook and doesn’t embrace the data religion.

No one knows — including me — what the future holds for Uber. As someone who has been wrong often, I can tell you one thing for sure: hindsight reminds you of your follies every day.

The good professor, in response to my tweets from last night, tweeted this:

I will remember that for my future prognostications.

And if you’re keeping score, here are my previous articles on Uber and how it is evolving:

  1. Robotech_Master Thursday, June 19, 2014

    Practically every other day, I see investment site articles, such as this one—

    http://seekingalpha.com/article/2274323-should-amazon-be-trading-at-such-a-high-valuation

    —proclaiming that Amazon is doomed, DOOOOOMED, because it has an infinitessimal profits to earnings ratio. (In fact, another Amazon article from Seeking Alpha, entitled “The Hail Mary Phone,” just hit my inbox as I was typing this.) They’ve been saying that for YEARS now. I guess they think that if they keep on predicting Amazon’s downfall, sooner or later they’ll get to say, “HA! I told you so!”

    Funny, isn’t it, that Amazon doesn’t KNOW it’s doomed?

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  2. Rags Srinivasan Friday, June 20, 2014

    Despite my belief I can understand 10k, the hidden footnotes and business models I am steadfastly stuck with no-fee index funds and don’t dabble in individual stocks.
    What Damodaran had done in the past and now with Uber is Well reasoned analysis based on known factors and accounting for uncertainties. It is not that he did not account for technology shifts as you say but likely did not assign more precise likelihoods for those scenarios.

    One shouldn’t be faulted for being wrong on predictions but only for making wrong assumptions ( committing bias induced errors) and failure to account for all possible scenarios with their likelihood.

    Taking the Uber argument to extreme, it is possible to argue every startup is worth $100B. If we looked at his portfolio, as he points out, it evens out.

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    1. Rags

      I think that is the point. When making predictions and assumptions, we get too rigid in adopting models that we deem fit and don’t leave room for readjustment on both the up and the down side due to bigger changes. The model doesn’t account for precisely the things I was pointing out – networks and technology often change the arrangement of the business reality. Sometimes for good, sometime for bad. But whatever it is, it is really fast and unpredictable. So one has to leave room — and not have biases, as the professor himself says. I think not allowing for room for technological shifts is a bias in itself. Also, I am not saying that Uber is worth a 100 billion or whatever. I am saying is that you can’t assume, that the future is going to be precisely as one deems it to be.

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  3. BUT FORESIGHT IS IN A SIMILAR WAY TRULY UNPREDICTABLE AND TO A GREATER EXTEENT UNCERTAIN IN THE CUT-THROAT COMPETITION IN THE CORPORATE BUSINESS WORLD…

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  4. Om – excellent discussion and I agree w/ your observations. While there are no guarantees, the following appear to distinguish highly successful, disruptive businesses:
    1. As James Slavet of Greylock points out, the majority of “unicorns” (billion-dollar plus internet companies) are “digital transaction” businesses.
    2. These companies have also (a) succeeded in eliminating significant “frictions” (time, cost, risk, annoyances, etc.) in consumers’ lives; (b) aimed to become “indispensable” to customers; (c) excelled at key disciplines of innovation (esp. design-build-learn); and (d) maintained a passion and drive for disruption ordinarily associated w/ startups.

    These themes are touched on in http://bit.ly/1kAxPRZ, http://buff.ly/1nsX4FP and http://buff.ly/1iwapjk.
    Dr. Phil Hendrix, immr and Gigaom Research analyst (@phil_hendrix)

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  5. Digital Retail Apps Sunday, June 22, 2014

    Companies as verbs – a very interesting idea and it makes perfect sense. In each of the highlighted cases Google, Facebook and Uber the foundational company purpose was to transform the end user experience – for Google: as a means of search – for Facebook as a way to connect – for Uber as a way to get there. These are everyday things we consumers do: search, connect and go. These companies started in the right place – understanding consumer paths: to knowledge to relationships to just getting places. This ability to re-think a way to solve these core needs in a way completely in sync with consumers end goals, well I think this is what separates these three companies from the pack. This philosophy of starting with the customer and their needs would serve the mobile payments industry well where the majority focus on payment when all a shopper wants to do is shop. They’re trying to solve the wrong problem.

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