Media consolidation story of the day

Libby Watson writing for Gizmodo:

The Wall Street Journal reports today that Verizon is exploring a merger with Charter Communications, less than a year after Charter successfully merged with Time Warner Cable.

The talks are still reportedly in the early stages. According to The Journal, there is “no guarantee” a deal will arise, and it’s “unclear whether Charter executives, including Chief Executive Tom Rutledge, would be open to a transaction.” But there has reportedly been speculation recently about such a merger since Verizon CEO Lowell McAdam said it would make “industrial sense.”
Charter is the second-largest cable provider in the US after Comcast. Last year, it merged with Time Warner Cable, giving it control of 34 percent of the US cable-broadband market, according to Business Insider. Time Warner Cable company was previously owned by Time Warner before being spun off in 2009; Time Warner itself is currently exploring a merger with AT&T, Verizon’s main rival in the wireless market. The Washington Post noted that a Verizon-Charter merger would make it competitive in size with Comcast:

Verizon serves 114 million cellphone subscribers, 4.6 million TV customers and 7 million Internet subscribers; Charter has 17 million TV customers and 21 million Internet subscribers. Together, the two companies’ high-speed Internet businesses would add up to more than Comcast’s 25 million broadband customers; at 21.6 million, their combined base of TV customers would be roughly on par with Comcast’s.

Many Americans still don’t have much choice of cable company or internet service provider, particularly at 25mbps speeds which is the Federal Communications Commission’s (FCC) definition of “broadband” (i.e., enough speed to stream video or use multiple devices). The latest FCC data shows 29 percent of developed census blocks (areas of the US that people actually live in) don’t have access to any provider that provides 25 mbps, and a further 47 percent only have access to one provider with that speed.

"Where the rules are made up and the points don't matter"

There is a popular comedy improv game where the performers are required to ad lib a conversation made up entirely of questions. These do not have to be particularly sensible and they can and often do veer off in radically different directions, but they need to be on topic just enough to qualify as a response.  This is harder than it looks, particularly when the performers are deliberately trying to stump each other. It is challenging enough that the game is often played with tag teams, where a new player steps in when someone can't come up with an appropriate query.

As I believe we have mentioned before, the public policy discourse has evolved into something very much like this. When asked to defend a position, one is required to give some kind of answer which is vaguely on topic, but that is pretty much the only requirement. The statement can be silly, illogical, factually inaccurate, and, by every standard, worse than no answer at all, but as long as you responded, you get to keep playing the game.

As with all things involving Donald Trump, this convention has recently been pushed to its absurd extreme.

From Deadspin:

Betsy DeVos, a galactically rich and galactically evil anti-public school, anti-gay rights donor appointed by Donald Trump to be our country’s next Education Secretary, is going through confirmation hearings tonight (sports angle: her shitty father owns the Orlando Magic). She was asked about guns in schools. She said it was worth exploring. Her reasoning? “Grizzly bears.”

Robot Origami

Sometimes, when I'm feeling pessimistic, knowing that people are out there coming up with things like this makes me feel better.

"Cult of the Savvy " – this is one you need to read

I have been meaning to write something on Jay Rosen's thesis for a while now, but I have a piece I'm working on about Straussian communication matrices that makes this particularly relevant so I decided to get on the stick.

At the risk of giving away the point of my upcoming post, one thing to keep in mind while reading the following is that the people who are easiest to fool are generally the people who think of themselves as being the most difficult.

From "Behold how badly our political journalists have lost the freakin’ plot"

This is what led to the cult of the savvy, my term for the ideology and political style that journalists like Chris Cillizza and Mark Halperin spread through their work. The savvy severs any lingering solidarity between journalists as the providers of information, and voters as decision-makers in need of it. The savvy sets up — so it can speak to and cultivate — a third group between these two: close followers of the game. The most common term for them is “political junkies.” The site that Cillizza runs was created by that term. It’s called The Fix because that’s what political junkies need: their fix of inside-the-game news.

Junkies are not normal, but they accept their deformed status because it comes with compensations. They get to feel superior to ordinary voters, who are the objects of technique and of the savvy analyst’s smart read on what is likely to work in the next election. For while the junkies can hope to understand the game and how it operates, the voters are merely operated on. Not only does the savvy sever any solidarity between political journalists and the public they were once supposed to inform, it also draws a portion of the attentive public into emotional alliance with the ad makers, poll takers, claim fakers and buck rakers within the political class— the people who, as Max Weber put it in his famous essay “Politics as a Vocation,” live off politics.

But we’re not done. The savvy sets up a fifth group. (The first four: savvy journalists, political junkies, masters of the game, and an abstraction, The Voters.) These are the people who, as Weber put it, live for politics. They are involved as determined participants, not just occasional voters. Whereas the junkies can hope for admission to the secrets of the game (by taking cues from Chris Cillizza and Mark Halperin and the guys at Politico) the activists are hopelessly deluded, always placing their own ideology before the cold hard facts.

...

So this is what the savvy in the press do. Cultivate the political junkies. Dismiss and ridicule the activists, the “partisans.” Assess the tactics by which the masters of the game struggle to win. Turn the voters into an object, the behavior of which is subject to a kind of law that savvy journalists feel entitled to write. Here’s Cillizza, writing one:

    Remember that most voters — people who don’t follow this stuff as closely as me, you or, likely, most people we know — make their decisions based on 30-second TV ads.”

I’ll remember, Chris. Your assignment: Inhale that sentence, click this link and behold how badly our political journalists have lost the plot.

You should also check out Paul Krugman's follow-up post.

Beyond the hyperbole barrier

Occasionally you come across an idea so absurd that it is literally impossible to top. It defies mockery by exaggeration because you simply can't come up with a more extreme example than what is actually happening. (If I tried really hard, I could probably connect this to some event in the news, but let's save that for another day.)

You see this a lot when a previously winning formula starts getting mined out. For example, producers have had considerable luck over the past few years taking series with good name recognition that had been considered light-weight kiddie properties and reimagining them as dark and sexy adult shows.

The trouble is that the pool of potential titles is limited, and if the trend goes on long enough, inevitably something will get green-lit that is so ridiculous that any sentence beginning with "they might as well adapt ..." is doomed to anti-climax.

We've talked about this before, right?

By now, we've done literally thousands of posts, and, to be perfectly honest, it has gotten to the point where I tend to lose track, but surely we've covered the whole upsell strategy. You know, come out with some super-economy version to lure people in, then make it so godawful that customers are eager to start climbing the upgrade ladder.

I'm almost certain we talked about the practice with cable-television, where the bottom tier is often worse than what you get for free with an antenna. I think we've used airlines as an example too, but just in case here's Sidney Fussell writing for Gizmodo:

On Wednesday, American Airlines announced that it will soon offer a cheap-as-hell “basic economy” package for its flights. The catch—because there’s always a catch when it comes to flying—is that these passengers won’t be able to use the overhead bins while flying.

Outside of checked baggage, which will still incur a regular fee, “basic economy” fliers—let’s call them “basics” for short—will only be allowed to bring one personal item on board with them, and it’ll have to fit under the seat. “No overhead bin luggage may be brought on board,” the airline’s press release notes pointedly. If your bag doesn’t fit, you’re looking at a $25 checked bag fee plus another $25 for checking it at the gate. Presumably, even if there’s space for your bags, you won’t get the privilege of putting them overhead.

Pauline Kael on Hollywood Leftism

The initial impetus for digging up this passage from Kael's essay came from a recent Matt Novak post, but as soon as I started rereading the original I realized that it was far more relevant then I remembered.

For a long time, the virulence of the response to “Raising Kane” seemed rather strange, particularly the focus on "defending" Orson Welles. Not only was the essay rather affectionate (albeit irreverent) toward the director, Kael was a long time champion of the Welles' works, often more so than the people who were supposedly offended by her treatment of him. It wasn't until years later that I realized just how many sacred cows she had gone after over her career and, not coincidentally, how valued those cows were by many of her attackers. Case in point, the martyrs of McCarthyism. Like Orwell in 48, Kael in 1971 was (as you can see below) willing to say out loud things that good liberals kept to themselves, particularly when the martyrs and and the liberals in question were Hollywood-based.

If you would have asked me a couple of years ago, I would have told you that, while the American Left had much to answer for in regards to its handling of the Soviet Union (a point many others have made), that was a thing of the past. At least with Stalin, you could do cling to the belief that the eventual goal was compatible with left-wing values. It is difficult to imagine anything that either liberal or leftist can admire about the Russia of Vladimir Putin. Nonetheless, recent events have shown us that accusing politicians and journalists of being inappropriately influenced by Russia will still prompt counter-accusations of “McCarthyism.”

I don't want to get into this debate at the moment or go into the impact it may have had on the election, but this does seem like a good time for some historical perspective.

From “Raising Kane” by Pauline Kael published in The New Yorker, February 20, 1971 and February 27, 1971

        It’s common to blame the McCarthyism of the fifties and the removal of blacklisted writers for the terrible, flat writing in American movies of recent years, but the writers might have recovered from McCarthyism (they might even have stood up to it) if they hadn’t been destroyed as writers long before. The writing that had given American talkies their special flavor died in the war, killed not in battle but in the politics of Stalinist “anti-Fascism.” For the writers, Hollywood was just one big crackup, and for most of them it took a political turn. The lost-in-Hollywood generation of writers, trying to clean themselves of guilt for their wasted years and their irresponsibility as writers, became political in the worst way—became a special breed of anti-Fascists. The talented writers, the major ones as well as the lightweight yet entertaining ones, went down the same drain as the clods—drawn into it, often, by bored wives, less successful brothers. They became naïvely, hysterically pro-Soviet; they ignored Stalin’s actual policies, because they so badly needed to believe in something. They had been so smart, so gifted, and yet they hadn’t been able to beat Hollywood’s contempt for the writer. (Walter Wagner had put twenty-seven of them to work in groups in succession on the script of Vincent Sheean’s Personal History.) They lived in the city where Irving Thalberg was enshrined; Thalberg, the saint of M-G-M, had rationalized Mayer’s system of putting teams of writers to work simultaneously and in relays on the same project. It had been lunatic before, but Thalberg made it seem mature and responsible to fit writers into an assembly-line method that totally alienated them and took away their last shreds of pride. And most of the Algonquin group had been in Hollywood so long they weren’t even famous anymore.
        Talented people have rarely had the self-control to flourish in the Hollywood atmosphere of big money and conflicting pressures. The talented—especially those who weren’t using their talents to full capacity—have become desperate, impatient, unreliable, self-destructive, and also destructive, and so there has always been some validity in the businessman’s argument that he couldn’t afford to take chances on “geniuses.” Thalberg didn’t play around with a man like Mankiewicz; after throwing him off A Night at the Opera, he didn’t use him again.
        The writers who had become accustomed to being assembly-line workers were ready to believe it when, in the forties, they were told that, like factory workers, they were “part of the team on the assembly line” and needed “that strengthening of the spirit which comes from identity with the labor of others.” Like the producers, the Screen Writers Guild respected discipline and responsibility, but though the businessmen had never been able to organize people of talent—producers like Thalberg just kept discarding them—the union ideologues knew how. The talented rarely become bureaucrats, but the mediocre had put down roots in Hollywood—it doesn’t take long in Los Angeles, the only great city that is purely modern, that hasn’t even an architectural past in the nineteenth century. In the forties, the talented merged with the untalented and became almost indistinguishable from them, and the mediocre have been writing movies ever since. When the good writers tried to regain their self-respect by becoming political activists in the Stalinist style, it was calamitous to talent; the Algonquin group’s own style was lost as their voice blended into the preachy, self-righteous chorus.
        The comedy writers who had laughed at cant now learned to write it and were rehabilitated as useful citizens of the community of mediocrity. It was just what the newly political congratulated themselves on—their constructive, uplifting approach—that killed comedy. When they had written frivolously, knowing that they had no control over how their writing would be used, or buried, or rewritten, they may have failed their own gifts and the dreams of their youth, but the work they turned out had human dimensions; they were working at less than full capacity, but they were still honest entertainers. Their humor was the humor of those trapped by human weakness as well as by “the system,” and this was basic comedy—like the jokes and camaraderie of Army men. But when they became political in that mortally superior way of people who are doing something for themselves but pretending it’s for others, their self-righteousness was insufferable. They may have told lies in the themes and plots of the thirties comedies, but they didn’t take their own lies seriously, they didn’t believe their own lies, the way they did in the forties. In the forties, the Screen Writers Guild and the Hollywood Writers Mobilization (for wartime morale-building) held conferences at which “responsible” writers brought the irresponsibles into line. The irresponsibles were told they were part of an army and must “dedicate their creative abilities to the winning of the war.” And, in case they failed to understand the necessity for didactic, “positive” humor, there were panels and seminars that analyzed jokes and pointed out which ones might do harm. It was explained to the writers that “catch-as-catch-can,” “no-holds-barred” comedy was a thing of the past. “A very funny line may make black-market dealings seem innocent and attractive,” they were told, and “Respect for officers must be maintained at all times, in any scene, in any situation.”
        Show-business people are both giddy and desperately, sincerely intense. When Stalinism was fashionable, movie people became Stalinists, the way they later became witches and warlocks. Apparently, many of the Hollywood Stalinists didn’t realize they were taking any risks; they performed propaganda services for the various shifts in Russia’s foreign policy and, as long as the needs of American and Russian policy coincided, this took the form of super-patriotism. When the war was over and the Cold War began, history left them stranded, and McCarthy moved in on them. The shame of McCarthyism was not only “the shame of America” but the shame of a bunch of newly rich people who were eager to advise the world on moral and political matters and who, faced with a test, informed on their friends—and, as Orson Welles put it, not even to save their lives but to save their swimming pools. One might think that whatever they had gained emotionally from their activity they would have lost when they informed on each other, but it doesn’t seem to have always worked that way. They didn’t change their ideas when they recanted before the House Un-American Activities Committee; they merely gave in and then were restored to themselves. And they often seem to regard it not as their weakness but as their martyrdom. Show-business-Stalinism is basically not political but psychological; it’s a fashionable form of hysteria and guilt that is by now not so much pro-Soviet as just abusively anti-American. America is their image of Hell (once again, because of Vietnam, they’re in a popular position), and they go on being “political” in the same way, holding the same faith, and for the same reasons, as in the late thirties and the forties. The restoration there is fairly general. In Hollywood recently, a man who used to be “involved” told me he wanted to become more active again, and added, “But, you know, I’m scared. The people who are urging me to do more are the same ones who ratted on me last time.”
        Mankiewicz was too well informed politically to become a Communist Partyliner. Because he didn’t support this line, he was—and only in part jokingly—considered a “reactionary” by the activists of the Screen Writers Guild. Yet he went on to write the movie they point to with pride in Hollywood, the movie they all seem to feel demonstrates what can be done and what movies should be doing, and it’s their all-time favorite because they understand it—and correctly—as a leftist film. Its leftism is, however, the leftism of the twenties and early thirties, before the left became moralistic. There were other expressions of the tough spirit of the thirties that came after the thirties were over. There may be a little of it in the newspaper film of the fifties Sweet Smell of Success, but the ambivalence there is harsher, grimmer, more artistically “serious” than it was in the thirties; there’s some in the happy mocker of Hollywood in Singin’ in the Rain, which takes off from Kaufman and Hart’s Once in a Lifetime, and in the films of Preston Sturges, who alone somehow managed to stay funny and tart. The only writer of this whole group who became a director with an individual style, Sturges kept American comedy alive singlehanded through the mawkish forties. Maybe he was able to because he was a cynic and so politically baroque that he wasn’t torn by doubts and guilts. The political show in Hollywood in the forties was just one more crazy scene to him; he’d grown up rich and eccentric in Europe, the son of that expatriate lady (called Mary in The Loves of Isadora) who gave Isadora Duncan the fatal scarf.
        But Mankiewicz climaxed an era in Kane. He wrote a big movie that is untarnished by sentimentality, and it may be the only big biographical movie ever made in this country of which that can be said. Kane is unsanctimonious; it is without scenes of piety, masochism, or remorse, without “truths”—in that period when the screenwriters were becoming so politically “responsible” that they were using all the primitive devices to sell their messages, and movies once again became full of blind beggars, and omens of doom, and accidental death as punishment for moral and sexual infractions, and, of course, Maria Ouspenskaya seeing into people’s hearts—the crone as guru.

It's going to be a long weekend

Some soothing music might be a good idea. I'd recommend starting with Debussy.

Kevin Drum on a pox on both houses style journalism

This is Joseph.

Mark Evanier points us to this quote from Kevin Drum:

So what is Donald Trump going to do about that? Unfortunately, the answer is pretty obvious: he's going to propose a replacement plan that does hardly anything for anyone and then he's going to lie about it—loudly and relentlessly. Congressional Republicans will all join in, and the press will then report that the effect of the replacement plan is "controversial." Because, really, who can say what it does? All those numbers are pretty confusing, after all.

This really is the underlying hack for journalism that seeks to be centrist by always saying both sides are incorrect.  If one side lies (it could be either) then reporting becomes "we can't figure out if this is a lie or not because it would be partisan to make a decision".  The next step is a pretty dark place for investigative journalism, where nobody tells the truth because that concedes an advantage to liars. 

For the "a pox on both their houses" style centrism to work, other journalists have to be willing to call out lies.  If we make centrism high status, then it becomes a bit parasitical, by allowing those who practice it a chance to free ride off of the truth telling of colleagues. 

When these colleagues figure this out, then it isn't pretty because everyone becomes a centrist. 

Framing the policy

This is Joseph.

From Chris Dillow:

A wage ceiling allows lackeys of the rich to whine that Labour hates the well-off. We should reframe the policy. Rather than say nobody should earn (say) 20 times more than the lowest earner we should say that nobody should earn less than one-twentieth of the top earner. We should call the wage cap a wage floor.

Obviously one can argue about the ratio.  And there may be cases where this sort of blunt policy would be problematic. But as a cap, it is much better to frame it as raising low incomes than capping high incomes. 

If the ratio wasn't a cap, but a test for a "3% excess earnings tax" (or something else) then the top level makes more sense.  A modest tax on high ratio earnings would raise revenue but would be unlikely to create inefficiencies as saving a few percent isn't going to make dramatic tax avoidance strategies all that effective.  Then the framing rather needs to be on the cap and not the floor, although it would create a management pay-out for making sure the lowest paid workers aren't under-paid. 

The most troubling part of a troubling story

In case you haven't heard, Fiat Chrysler has just been caught engaging in practices that look disturbingly like what we saw from Volkswagen.

From David Tracy and Ryan Felton writing for Jalopnik:

 In a conference call with reporters Thursday morning, the U.S. Environmental Protection Agency says an investigation has revealed that diesel V6 Jeep and Ram vehicles made between 2014 and 2016 have “at least eight auxiliary emission control devices” that were not disclosed to the agency—an allegation of cheating that not only seems similar to what Volkswagen did but may have been caught because of the German automaker.

The software, according to the EPA, yields different tailpipe emissions (NOx, to be specific) when in real world usage versus in laboratory testing, and depends highly upon operating conditions. For example, the EPA says the systems “[reduce] the effectiveness of emissions controls when driving at high speeds.”

For those who have been following Volkswagen’s Dieselgate, that is very similar to what the Germans are accused of doing: implementing a system that would pass lab certification tests but put out more emissions in the real world for greater fuel economy and performance.

There is a lot to be worried about here, particularly given the parallels to the earlier case, but I find this the really scary part [emphasis added]:

In a statement, FCA US said it was “disappointed” that the EPA issued a notice of violation, and that it’s aiming to work with the incoming administration of Donald Trump to address the situation.

“FCA US intends to work with the incoming administration to present its case and resolve this matter fairly and equitably and to assure the EPA and FCA US customers that the company’s diesel-powered vehicles meet all applicable regulatory requirements,” the statement said.

As we've been saying for a very long time...

The other day I was checking the TV listings had added a new subchannel, one that turned out to be an interesting development in the over-the-air television thread: to cut to the chase, arguably the most successful and powerful producer in the industry today just started his own terrestrial superstation.

For those of you just tuning in, there has been a major debate over the future of broadcast television over the past decade or so, one we have written about extensively here at the blog. To grossly oversimplify, one side has argued that terrestrial television is an all but dead medium that should be chopped up and sold for parts immediately. The other side argues that it is both vital and growing sector and that it serves valuable social and economic purposes. The first argument has been the darling of the press. It has gotten a ton of coverage and has spread some embarrassingly inaccuracies.

As you might've guessed by now, I took the other side of the debate. One of the arguments I used was that the people with the best data (which is, in this case, all proprietary) have consistently been taking digital broadcast television seriously. It is highly significant that most of the major studios have jumped into this market, usually either in partnership with or imitation of the company that pioneered the model Weigel Broadcasting.

Now, in addition to companies like NBC Universal, CBS, and Fox, to name a few, we also have mega producer Mark Burnett (Survivor, the Apprentice, the Voice, Shark Tank and many others) staking out a claim.

From Wikipedia:

Light TV is an American digital broadcast television network owned by MGM Television that launched on December 22, 2016. The network features family-friendly and faith-based entertainment programming. Light TV is headed by the husband-and-wife team of Mark Burnett and Roma Downey; Burnett is the CEO of MGM TV, while Downey is best known as an actress and star of Touched by an Angel. Both Burnett and Downey consider themselves deeply religious, and have teamed in the past on producing several religious- or family-oriented projects (most notably the 2013 History miniseries The Bible) through the MGM subsidiary Downey leads, Lightworkers Media.

Obviously, Mark Burnett's time is incredibly valuable – the opportunity cost for missing one of these projects can easily run into the hundreds of millions of dollars – but there is another aspect of this story that is possibly just as important but is likely to slide past those who have not been following things closely.

Remember what I said about proprietary data? MGM was one of the earliest and biggest players in this industry. They already had ownership of or partnership positions in at least three terrestrial superstations, including the granddaddy of them all, ThisTV. With the probable exception of Weigel , which virtually invented the industry and is so influential that both Fox and CBS sought it out as a partner, no one has better data than MGM. Burnett knows everything about the horse he's betting on.

"So the last will be first, and the first will be last."

This comment by Kaleberg reminded me of just how unlikely the triumphant return of the Cracked brand would have seemed forty or so years ago.

Though the magazine ran forever, it was always clearly the cheapest and the least respected.

In later years, the magazine was a useful training ground for such future independent comic book creators as Rick Altergott, Dan Clowes, and Peter Bagge. Clowes would later discuss his childhood ambivalence for the magazine with an interviewer: "No one was ever a fan of Cracked. We would buy Mad every month, but about two weeks later we would get anxious for new material. We would tell ourselves, 'OK, we are not going to buy Cracked. Never again!' And we'd hold out for a while, but then as the month dragged on it just became, 'OK, I guess I'll buy Cracked.' Then you'd bring it home, and immediately you'd remember, 'Oh yeah, I hate Cracked!'"

With the reboot, the lameness of the original actually became part of the joke

An article on Cracked.com, the website which adopted Cracked's name after the magazine perished, joked that the magazine was "created as a knock-off of Mad magazine just over 50 years ago", and it "spent nearly half a century with a fan base primarily comprised of people who got to the store after Mad sold out."

The law of unintended consequences

This is Joseph

One of the reasons that social norms are important is situations like this one:

Needless to say, this is why Democratic senators were stunned yesterday when they asked Comey if the FBI was investigating Trump over his Russia ties, and Comey replied, "I would never comment on investigations — whether we have one or not — in an open forum like this, so I really can't answer one way or another."

This is less than 3 months after he sent a letter to congress saying that they were investigating Emails that were linked to Hilary Clinton.  Two weeks before the election.  Now I know that wasn't a comment in an open forum but still . . . 

The reason for not making comments on ongoing investigations is that it removes all questions of motive and timing in disclosing information.  The letter to a political opponent of a presidential candidate looks like you are trying to evade the norm.  Plus, once you do it once, you are stuck explaining why different rules apply when these questions arise in other contexts.  And it's hard to justify deciding when to comment or not on ongoing investigations when there is a partisan element. 

I can recognize that there is a key difference of kind here (letter to congress versus open comment) but these are awfully fine distinctions.  Would he provide a letter if Democrats senators asked for one?  These perceptions are now putting pressure on what is a very important social norm of a key investigative body.  I hope that they can figure out a way forward that brings back the old norms, which had some really good reasons to exist.   

They lose money on every ride but they make it up in volume

On one level, ride sharing is a good idea -- using smartphones to connect passengers with underutilized drivers has potential to provide significant benefits on both sides of the transaction -- but, as mentioned before (see here and here for a couple of recent examples), the bullshit narratives and mystical thinking of both investors and journalists have taken something that could have been an innovative business model and turned it into something damned close to a Ponzi scheme

As you would expect from a Gawker remnant, Jalopnik has been the go-to site for Uber coverage, both firsthand and through useful links to and summaries of essential reporting and analysis elsewhere.

Here, Ryan Felton directs us to an important piece of analysis by Hubert Horan,

Uber is currently the most highly valued private company in the world. Its primarily Silicon Valley-based investors have a achieved a venture capital valuation of $69 billion based on direct investment of over $13 billion. Uber hopes to earn billions in returns for those investors out of an urban car service industry that historically had razor-thin margins producing a commodity product. Although the industry has been competitively fragmented and structurally stable for over a century, Uber has been aggressively pursuing global industry dominance, in the belief that the industry has been radically transformed into a “winner-take-all” market.

...

For Uber (or any other radical industry restructuring) to be welfare enhancing, it would have to clearly demonstrate:

    The ability to earn sustainable profits in competitive markets large enough to provide attractive returns on its invested capital

    The ability to provide service at significantly lower cost, or the ability to produce much higher quality service at similar costs

    That it has created new sources of sustainable competitive advantages through major product redesigns and technology/process innovations that incumbent producers could not readily match, and

    Evidence that the newly-dominant company will have strong incentive to pass on a significant share of those efficiency gains to consumers.

Unlike most startups, Uber did not enter the industry in pursuit of a significant market share, but was explicitly working to drive incumbents out of business and achieve global industry dominance. Uber’s huge valuation was always predicated on the dramatic growth towards global dominance. Thus if Uber’s valuation and industry dominance were to be welfare enhancing, Uber’s efficiency and competitive advantages would need to be overwhelming, and there would need to be clear evidence of Uber’s ability to generate large profits and consumer welfare benefits out of these advantages.

...

As shown in Exhibit 2, for the year ending September 2015, Uber had GAAP losses of $2 billion on revenue of $1.4 billion, a negative 143% profit margin. Thus Uber’s current operations depend on $2 billion in subsidies, funded out of the $13 billion in cash its investors have provided.

Uber passengers were paying only 41% of the actual cost of their trips; Uber was using these massive subsidies to undercut the fares and provide more capacity than the competitors who had to cover 100% of their costs out of passenger fares.

Many other tech startups lost money as they pursued growth and market share, but losses of this magnitude are unprecedented; in its worst-ever four quarters, in 2000, Amazon had a negative 50% margin, losing $1.4 billion on $2.8 billion in revenue, and the company responded by firing more than 15 percent of its workforce.[4] 2015 was Uber’s fifth year of operations; at that point in its history Facebook was achieving 25% profit margins.[5]

...

There is no evidence that Uber’s rapid growth is driving the rapid margin improvements achieved by other prominent tech startups as they “grew into profitability.”

Assuming that the unusual spike in EBITAR margin in the first half of 2014 (157%) was due to one-time events or accounting anomalies, Uber has been steadily producing EBITAR margins worse than negative 100% since 2012, and the absolute magnitude of losses has been increasing.

Uber corporate revenue for the year ending June 2015 was over 500% higher than the year ending June 2014, but the EBITAR margin barely changed, moving from negative 115% to negative 108%. Uber had a negative $1.2 billion EBITAR contribution in the first half of 2016, suggesting full year GAAP losses approaching $3 billion. Uber’s EBITAR contribution margin improved from negative 108% in the first half of 2015 to negative 62% in the first half of 2016, but this margin improvement is entirely explained by Uber imposed cuts in driver compensation. As shown in Exhibit 3, Uber only allowed drivers to retain 77% of each passenger dollar in 2016, down from 83% in 2014-15[6]. If drivers had retained 83% of 2016 passenger payments, Uber’s EBITAR contribution would have been negative $1.8 billion, and its EBITAR margin would have fallen to negative 122%. Uber’s EBITAR margin did not improve because its productive efficiency or market performance was improving; capital was simply claiming a higher share of each revenue dollar and giving less to labor.

If rapid growth could not drive major margin improvements between 2012 and 2016, there is no reason to believe that Uber will suddenly find billions in scale economies going forward. Fundamentally digital companies like Amazon, EBay, Google and Facebook had massive operating scale economies because the marginal cost of expanded operations was close to zero. Aggressive pricing fueled the growth that drove major margin improvements and also created major consumer welfare benefits.

By contrast, in the hundred years since the first motorized taxi, there has been no evidence of significant scale economies in the urban car service industry. That explains why successful operators never expanded to other cities and why there was no natural tendency towards concentration in individual markets. Drivers, vehicles and fuel account for 85% of urban car service costs. None of these costs decline significantly as companies grow. As the P&L data above demonstrates, Uber has not discovered a magical new way to drive down unit costs.
...

Uber’s refusal to consider an IPO may best be explained by the recognition that publishing detailed, audited financial data confirming these massive losses and the complete lack of progress towards profitability could undermine public confidence about its inevitable march to industry dominance.

There have been hundreds of articles claiming that Uber has produced wonderful benefits, but none of these benefits increase consumer welfare because they depended on billions in subsidies. Uber is currently a staggeringly unprofitable company. Aside from the imposition of unilateral cuts in driver compensation, there is no evidence of any progress towards breakeven, and no one can provide a credible explanation of how Uber could achieve the billions in P&L improvements needed to achieve sustainable profits and investor returns.