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Why Uber could be worth $70 billion

Pablo Blazquez Dominguez/Getty Images

In June 2014, Uber made headlines by raising an eye-popping $1.2 billion, in a deal that valued the company at $17 billion. Now, a bit more than a year later, the company has had seven more rounds of fundraising, raising $6.7 billion in additional venture capital. And now the New York Times is reporting that the company is trying to raise yet another billion dollar round — and that the company now believes itself to be worth $60 to $70 billion.

When last years's $17 billion valuation was announced, it generated howls of skepticism. Aswath Damodaran, for example, estimated that the global taxi industry is worth $100 billion and Uber might get 10 percent of it, which would value the company at around $6 billion. Another estimate used a much smaller figure for the global taxi industry — $22 billion — but a much higher Uber market share — 50 percent — to arrive at a valuation just under $17 billion.

Now, investors seem to think the company is worth three to four times as much. Has the world gone mad? Not really. There are a couple of factors that could actually justify Uber's skyrocketing valuation.

The coming Uber monopoly

One is if this turns out to be a winner-take-all market. There are some industries — like search engines and social media — where the biggest firm winds up dwarfing all the others.

The smartphone-powered taxi market has the right characteristics for this: passengers are going to prefer the network with the most drivers, because that keeps down the average wait time. Drivers will want to drive for the network with the most passengers for the same reason. This factor gives the market leader a systematic advantage that will be hard for Lyft — to say nothing of smaller rivals or not-yet-founded startups — to overcome.

Chris Mims of the Wall Street Journal has predicted that Uber's profit margins would be destroyed by competition. But if Uber emerges as the undisputed king of the ride-sharing market, that won't happen. Uber will have the lion's share of passengers, and so drivers will have little choice but to give Uber its 20 percent cut.

A big question here is whether this market will have a global leader — like Facebook or Google — or whether each country will have its own dominant ride-sharing firm. Uber is facing growing competition from home-grown ride-sharing companies in China, India, and other countries. A big reason Uber is raising money so aggressively is that it hopes to expand quickly into these other countries, eventually achieving a dominant market share around the world — not just in the United States.

Uber could expand its market

The convenience of Uber — and innovations like its UberPOOL carpooling service — could dramatically expand the size of the market. A lot of people take fewer taxi rides than they'd like to because of high costs or limited availability. Uber and Lyft have already pushed down fares and expanded availability, and Uber may achieve further improvements on both fronts in the coming years. In the process, they may significantly expand the overall market.

And there could be a lot of room for expansion. The current size of the US taxi market — $11 billion, according to one estimate — represents just $35 per American. That's largely because only a handful of large cities are dense enough to support a large-scale taxi market based on taxis being hailed from the street.

Uber makes it possible to offer taxi services in low-density cities and even suburbs where cabs are rare today. In the traditional model, you'd call a cab company and ask them to send you a taxi. But because each company controls only a small fraction of cars in the city, they might not have anyone nearby, and you might be forced to wait a long time. Uber drastically improves the customer experience here: the company is likely to find a car that's relatively nearby, and because you can follow its progress in realtime, you know exactly how long you'll have to wait.

And as Vox's Matt Yglesias has noted, the market could expand even further with the emergence of self-driving vehicles. If users around the world become accustomed to hailing cars using Uber, it will be easy to convince them to use Uber to hail self-driving cars once those become available. And because self-driving taxis have no driver, they could be dramatically cheaper than the traditional kind.

People tend to systematically under-estimate the growth potential of the most successful technology startups because they fail to appreciate how much new technologies can change peoples behaviors. The high quality of Google's search engine made the web dramatically more useful, causing people to use Google far more than they used previous search engines. Facebook didn't just become another website people visit, it has become the default way many people interact with the web.

By the same token, Uber has the potential to dominate and reshape the taxi market in a way that no traditional taxi company could have hoped to do. Models that assume Uber will gain a modest slice of a static market are going to systematically underestimate its potential.