That's why they call it Gawker

While it is de rigueur among observers of Silicon Valley’s Game of Thrones to dismiss questions of profitability as short-sighted hand-wringing, the detailed documents obtained by Gawker demonstrate conclusively for the first time that Uber has been financing its astronomic growth by taking staggering losses.
 

This unaudited revenue and expense breakdown for 2013 and 2014 shows that, though Uber’s net revenue has grown substantially, the company lost more than $56 million in 2013. By the first half of 2014 alone, that number had leapt to more than $160 million. 
 

Another document, laying out quarterly profits and losses in 2012 and part of 2013, shows the same dynamic: healthy growth in revenue coupled with steadily deepening losses. In 2012, Uber’s losses totaled $20.4 million; from the first quarter of 2012 until mid-2013, quarterly losses more than doubled from $3.5 million to $8.1 million.
 

Juicy get by Gawker on Uber's financials, but the financial analysis is about the quality you'd expect. The original version of the article included this line:

“Net revenue” typically refers to the money you have left after the cost of doing business—profit.
 

Yikes. I give lots of tech journalists grief for not knowing the subjects they're covering, but I'd venture to say most anyone with the a basic finance or econ course under their belts knows the difference between net revenue and profit. This hilariously defiant correction was later added:

Correction: Although net revenue is sometimes used as a synonym for profit, in accounting terms it means simply gross revenue minus the cost of sales. Two sentences that confused this meaning have been removed.
 

If I were an investor, I think I'd be ecstatic to see these internal financials. In a commodity market where the last company standing will be incredibly valuable, Uber is subsidizing a price war that favors the company with the scale advantage (i.e., Uber). Try calling an Uber Pool and compare it to calling a Lyft Line and you'll get a sense of how much thicker the Uber market is, on both the driver and rider side.

The subsidized pricing in a variety of cities are a worthwhile customer acquisition cost for what might be a lifetime rider. The last time I was in Los Angeles, riding Uber all over town was so cheap it fell into the category of no-brainer, and I contemplated not renting a car next time in town. I was in New York City recently and whereas a year ago a lot of Manhattanites still took cabs most of the time, now most of them are Uber converts. Once the introductory rates and subsidies go away, I suspect most of them will still be customers. That's when the profits come.

And yes, someday one of Uber's chief costs, the drivers, may be replaced by driverless cars, adding to their gross margins, and also their profits.

No moral judgments here, just some impressed gawking at Uber's flawless execution. That wouldn't have made for a Gawker-worthy story, but that should've been the headline.

Wife bonuses

And then there were the wife bonuses.
 

I was thunderstruck when I heard mention of a “bonus” over coffee. Later I overheard someone who didn’t work say she would buy a table at an event once her bonus was set. A woman with a business degree but no job mentioned waiting for her “year-end” to shop for clothing. Further probing revealed that the annual wife bonus was not an uncommon practice in this tribe.
 

A wife bonus, I was told, might be hammered out in a pre-nup or post-nup, and distributed on the basis of not only how well her husband’s fund had done but her own performance — how well she managed the home budget, whether the kids got into a “good” school — the same way their husbands were rewarded at investment banks. In turn these bonuses were a ticket to a modicum of financial independence and participation in a social sphere where you don’t just go to lunch, you buy a $10,000 table at the benefit luncheon a friend is hosting.
 

Women who didn’t get them joked about possible sexual performance metrics. Women who received them usually retreated, demurring when pressed to discuss it further, proof to an anthropologist that a topic is taboo, culturally loaded and dense with meaning.
 

Finally got around to reading this piece in the NYTimes on Upper East Side moms. Is this real?

The author wrote the piece to promote her new memoir titled, no joke, Primates of Park Avenue.

An Upper East Side wife penned this response with about as virally-optimized a title as even the greatest minds in the Buzzfeed labs could concoct: I get a wife bonus and I deserve it, so STFU. 2015 is shaping up to be the year every one tried to break the internet.

Al came out in favor of the idea of the wife bonus almost as soon as we moved to Australia. He’s got a very politically incorrect sense of humor and joked it was to reward me for being a “good little wife,” which made me laugh out loud. Seriously, though, we settled on the exact terms: When he received his bonus every year at the end of April, we’d each take a fifth after tax and bank the rest.
 

I’m exceptionally lucky to have a husband who values how important a job it is to stay home and take care of a child, as well as understanding how difficult it is to leave friends, family and career prospects behind to further his career. He was actually pleased to have a tangible way to recognize the contribution that I also make to the success of our lives.
 

The wife bonus gives me not only financial freedom, but freedom from guilt too. We have a joint account, and before we started the system, I was reluctant to spend our money on myself, even though my husband insisted he was happy for me to. Now that I have a quantifiable amount to treat myself with, I don’t feel guilty doing so.
 

The five-figure amount has pretty much stayed the same despite the economy. Last year, I bought a Prada handbag and Burberry raincoat for about $1,500 each. I tend to wait until I’m back home in London to spend my bonus because I can leave Lala with a member of the family and go on a week-long splurge to upscale stores like Selfridges. My favorite labels include Bottega Veneta, Chanel, Prada, Smythson, Erdem and Stella McCartney.
 

I will leave aside any personal judgment here and just observe that the furor reflects the evolving conception of marriage. Whereas once they were largely seen as economic arrangements, now we expect more from marriage, from our spouses. They must fulfill us in every way. I can't tell what the model of hedonic marriage has to say about wife bonuses, perhaps an economist out there has an analysis.

If the couples observed here just had shared bank accounts and the money flowed the same way otherwise, we wouldn't have any such furor. The framing is everything here.

Negative interest rates

It’s not unusual for interest rates to be negative in the sense of being lower than the rate of inflation. If the Federal Reserve pushes interest rates below inflation to stimulate growth, it becomes cheaper to borrow and buy something now than to wait to make the purchase. If you wait, inflation could make prices go up by more than what you owe on the loan. You can also think of it as inflation reducing the effective amount you owe.
 

What is rarer is for interest rates to go negative on a nominal basis—i.e., even before accounting for inflation. The theory was always that if you tried to impose a negative nominal rate, people would just take their money from the bank and store cash in a private vault or under a mattress to escape the penalty of paying interest on their own money. When the Federal Reserve slashed the federal funds rate in 2008 to combat the worst financial crisis since the Great Depression, it stopped cutting at zero to 0.25 percent, which it assumed to be the absolute floor, the zero lower bound. It turned to buying bonds (“quantitative easing”) to lower long-term rates and give the economy more juice.
 

...
 

Now comes the interesting part. There are signs of an innovation war over negative interest rates. There’s a surge of creativity around ways to drive interest rates deeper into negative territory, possibly by abolishing cash or making it depreciable. And there’s a countersurge around how to prevent rates from going more deeply negative, by making cash even more central and useful than it is now. As this new world takes shape, cash becomes pivotal.

 

Fascinating. It's understandable why banks would want to move to a cashless society, but it might not be a bad idea. The mindset shift required might take a generation or two to overcome, cultural inertia being such a powerful force. What usually wipes the slate clean, as morbid as it may be, is simply the dying off of the previous generation.

Heist movies would be a lot less fun minus Brinks armored trucks and giant vaults filled with cash. I'm fine with a cashless society, but I may be more trusting of government than the average citizen. Those less trusting in government might be more inclined to have a virtual currency like Bitcoin replace cash, but virtual currencies come with technological opacity for the average person that carries its own trust issues.

Like chemotherapy, negative interest rates are a harsh medicine. It’s disorienting when people are paid to borrow and charged to save. “Over time, market disequilibria are dangerous,” G+ Economics Chief Economist Lena Komileva wrote to clients on April 21. Which side of the debate you fall on probably comes down to how much you trust government. On one side, there’s an argument to be made that cash has become what John Maynard Keynes once called gold: a barbarous relic. It thwarts monetary policy and makes life easy for criminals and tax evaders: Seventy-eight percent of the value of American currency is in $100 bills. On the other side, if you’re afraid that central banks are in a war against savers, or that the government will try to control your financial affairs, cash is your best defense. Taking it away “is a prescription for revolution,” Cecchetti says. The longer rates break on through to the other side, the more pressing these questions become.

The rise of the intangible corporation

The modern corporation is made up of fewer atoms than companies of old.

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Justin Fox quotes Oxford business professor Colin Mayer riffing off of the seven age of man from Shakespeare's As You Like It.

At first the merchant trading company established by royal charter to undertake voyages of discovery and promote commerce around the world. 
 

Then the public corporation created by Acts of Parliament to engage in major public works and the building of canals and railways. 
 

Then with the freedom of incorporation in the 19th century, the private corporation -- the seedbed of the industrial revolution and the manufacturing corporation.
 

Next comes the service firm and the rise of the financial institution.
 

The fifth age is the transnational corporation putting a girdle around the world and running rings around national governments.
 

Last scene of all that ends this strange eventful history is the mindful corporation -- sans machines, sans man, sans money, sans everything.
 

Mayer uses WhatsApp as his canonical example of a company with no assets and very few employees and yet a huge market cap (given its $22 billion purchase by Facebook), but just a short while before that Silicon Valley was all abuzz about Instagram for the same reason, albeit a lower price in relative terms.

Just wait until VR goes mainstream. The most valued bricks and mortar and real estate of today are digital. It's a lot cheaper than the real thing, and a whole lot less regulated, too. Tech companies do love their degrees of freedom.

Universal banks losing out to specialists?

Although it dislikes the term, JPMorgan is a prime example of a universal bank. Others – Citigroup, Bank of America Merrill Lynch, Barclays, Deutsche Bank – also combine retail and investment banking but JPMorgan is the most prominent. 
 

And universal banks have been, to put it politely, a disappointment. JPMorgan produced a return on equity of 9.4 per cent last year. That is barely adequate but it is the best of a bad bunch. None of the others made it past 5 per cent. And last year was not out of the ordinary. Those five universal banks together have managed an average return on equity of 5 per cent over the past five years. There is always an excuse – fines, new rules, restructuring charges, tough conditions in one market or another – but these are all part and parcel of universal banking. 
 

Compare that with the specialists. Look at Wells Fargo, which is predominantly in the retail sector, with a 12 per cent five-year average ROE. Or even Goldman, a pure investment bank, with 11 per cent. 
 

The universal banking model is broken, a fact some banks have realised. UBS and RBS have moved. Others – Deutsche and Barclays, for example – have been less radical so far and need to go further. The US universal banks are the most wedded to the model, promising better returns in the future. But shares in almost all of them trade at a discount to specialists. The message from investors is clear.
 

Paywalled piece from The Financial Times, via The Browser (which, if you're into more than just technology news, is a great, short, curated daily list of links to interesting reading online; another artisanal service I happily subscribe to).

How does that legendary Jim Barksdale quote go? “There are only two ways to make money in business: One is to bundle; the other is unbundle.”

Certainly feels like times are ripe for an internet only financial services play. Our arcane financial system has held up longer in its current form than I expected. I know there have been a few, though I have not tried any of them, but this article is more evidence that a horizontal (or specialized) attack might be fruitful. I'd probably start by trying to actually own the customer's money/wealth/assets, then branch out into figuring out ways to sell them financial products for those (e.g. insurance, credit cards). Customer acquisition is such a bear, though, that it might be easier for a trusted and well-known company like an Amazon to tackle.