Uber Is Doomed

Uber Is Doomed

Illustration credit: Jim Cooke/Jalopnik

If there is one quote that sums up the ethos of Uber, it might be this cut from the company’s firebrand CEO Travis Kalanick: “Stand by your principles and be comfortable with confrontation. So few people are, so when the people with the red tape come, it becomes a negotiation.” But after a month marked by one disaster after another, it’s hard to see how Uber’s defiant, confrontational attitude hasn’t blown up in its face. And those disasters mask one key, critical issue: Uber is doomed because it can’t actually make money.

After a discombobulated 2016, in which Uber burned through more than $US2 ($3) billion, amid findings that rider fares only cover roughly 40 per cent of a ride, with the remainder subsidized by venture capitalists, it’s hard to imagine Kalanick could take the company public at its stunning current valuation of nearly $US70 ($91) billion.

And now, in the past few weeks alone, Uber has been accused of having a workplace that fosters a culture of misogyny, accused of stealing from Google the blueprint of a successful self-driving system, and has lost 200,000 customers over ties to President Donald Trump and how it responded to a taxi driver boycott.

Yet even when those factors are removed, it’s becoming more evident that Uber will collapse on its own. Barring a drastic shift in the company’s business — an implausible rollout of self-driving car fleets across the U.S., an increase of fares by three-fold, or a complete monopolization of the taxi and ride-hailing markets — Uber’s lifeline is shrinking. Its business model could collapse if one court case, and there are many, goes against it. Or perhaps more pressing, if it simply runs out of cash.

That Kalanick quote about confrontation may be as innocuous as a random sound bite, but it’s representative of the ride-hailing giant’s methodology since its founding in 2009: a perpetual resistance to regulatory oversight; a belief that, ultimately, an unfettered market is the key to prosperity. 

At first glance it seems like Kalanick’s libertarian ideals have paid off. Most recently valued at a reported $US69 ($90) billion, Uber has captured a majority of the ground transportation market and flipped the taxi industry — a sector Kalanick once famously and snidely referred to as the Big Taxi Cartel — on its head. His philosophy mirrors the mindset of one of his favourite authors, the laissez-faire Ayn Rand. In 2012, Kalanick proffered that Uber’s battle against government regulations has an “uncanny resemblance” to the Randian philosophy. A billionaire fighting The System — and prevailing. It’s a good story for those who find truth in Atlas Shrugged.

Uber Is DoomedPhoto: Getty

Photo: Getty

Uber’s long had sceptics, and it’s not innovative to paint Kalanick, 40, as the boogeyman of Silicon Valley, where unseemly savants exist in vast supply.

The precarious moment in the company’s eight-year history falls on Kalanick’s lap. It’s his baby after all — a startup founded on seemingly nothing more than a vague idea, without much regard for the workforce to make it possible, or even a clear idea of what business model it actually wants to pursue. Uber has jumped from one idea to the next: UberX, UberEats, autonomous cars, and now flying cars, of all things.

The impact of Uber’s death would probably be as much of a rebuke of Kalanick’s vision of running on a scatterbrained dream, not so much a solid business model and philosophy, that you could muster.

It would also be devastating for some. The livelihood of 11,000 employees across the world rests on Kalanick’s decision to submit to that philosophy — which, at its core, is a ruthless way of doing business. At the very least, drivers in the pre-Uber market could earn a decent living. Conversely, for example, Uber drivers taking advantage of new “vehicle solution” pilot program in Boston — renting cars by the hour through Zipcar — will earn less than Massachusetts’ minimum wage. How innovative.

The Contractor Problem

One of the biggest issues that has left Uber’s business model hanging in the balance is its resistance to classifying its drivers — there are reportedly 600,000 in the U.S. — as employees, not contractors. If Uber is a house of cards, this is a key part of the foundation that, once removed, would demolish the structure.

Indeed, the company has said reclassifying drivers could “force Uber to restructure its entire business model.” The result of its opposition to readjust has been entirely expected. Without the perks and protections that an employee may enjoy health care, benefits, gasoline and work reimbursements, vehicle maintenance, all of which could reportedly total as much as $US730 ($951) million — complaints from drivers have piled up, ranging from low pay to new services like UberEats (a loathed food delivery service that’s reportedly set to lose over $US100 ($130) million annually) and UberPOOL, its carpool option which increases the company’s take per-ride, lowers the take-home pay for drives, and is understood to be quite a drag for drivers and passengers alike. Drivers themselves said as much in a recent, disastrous question-and-answer session with Uber’s president.

Uber Is Doomed

The counter-argument — perhaps one that would come from Kalanick himself — is that Uber drivers have the freedom to work whenever and wherever they want, or for the company at all. But the reality is that perception is built on a lie.

Uber, which didn’t respond to questions from Jalopnik about its viability, recently paid $US20 ($26) million to settle claims that it grossly misled how much drivers could earn on Craigslist ads. The company’s explosive growth also fundamentally required it to begin offering subprime auto loans to prospective drivers without a vehicle.

Drivers with loans need to work to pay their monthly tab, thereby necessitating they work more for less, and so on. (Figures released in 2015 indicated that nearly 40 per cent of Uber’s driver force has no other source of income, while 30 per cent work for Uber while holding down a second part-time job.)

To maximise their income, some have taken to sleeping in their car to be close to busier work areas. And beyond drivers, the company has also been accused of lying to prospective engineers about promises of lucrative stock options, in a move that could allegedly save it “millions of dollars of tax deductions.”

The Craigslist ads, for one thing, succeeded in reeling in drivers.

“I thought I would try it out because I was desperate,” said one driver who learned about the company after reading an online ad and declined to be named for fear of retribution in an interview with Jalopnik. “Back then, the pay was quite a bit more than it is now. There have been a number of fare cuts since then. So, at the beginning, it was kind of different because not only was the pay higher, [but] because the pay was higher, there was a different type of customer that was using the service.”

He added, “And then contrast that with now with uberPOOL, a driver can be getting paid just 80 cents ($1.04) for a ride, and all the sudden you have these people who might’ve been taking the bus, and now all the sudden they’re your boss for 80 cents ($1.04) and you better hop to and do what they say with a smile, or you’re going to get a 1 star rating, if not [physically] assaulted in some cases.”

That strikes at a core tenet of Uber’s case that it provides a far-superior taxi service. Violent incidents, for example, involving drivers and passengers have popped up time and again against a backdrop of the company’s campaign to prevent it from having to subject prospective drivers to extensive fingerprint background checks. Really, what is an Uber but a taxi with a smartphone app? Even then, taxi services have launched apps of their own.

“Customers want to get from A to B quickly, pleasantly, and at a reasonable price,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “The Uber thing worked because it was cheaper and, initially, it was more pleasant than the typical taxi. So that’s why it worked. But people don’t have loyalty to Uber, not even the drivers. The drivers tend to drive for both” Uber and Lyft, its chief competitor and a company with a remarkably more cuddly public image, albeit one that is probably not deserved.

But it’s the driver classification as contractors that’s routinely staked out as potentially devastating for Uber. A $US100 ($130) million settlement for a high-profile federal class-action suit over driver classification was denied last year, but the judge in the case believes Uber has enough wiggle room to readjust and still survive, despite the company’s insistence that it would have to wholly restructure its operations. While that case remains pending, more suits over the driver classification have continued to emerge.

“If you lose a case in a state — the state asserts they’re employees for state law — it would encourage other states to file lawsuits, but you only lose state by state,” Gordon said. “If you lose it at the federal level they’re in huge trouble.”

“The part-time model can last forever,” he continued. But with drivers doing this more or less full time, he said, “Something has to change; the price of the rides has to change… And if what changes is these people end up being employees, then I think the whole house falls down.”

It’s Bad At The Company Too

It’s not just Uber drivers who feel downtrodden. A widely-circulated essay published last week by a former engineer described a series of incidents that painted the company’s headquarters as a space that fostered repeated, systemic sexual harassment.

Uber Is DoomedPhoto: Getty

Photo: Getty

The essay by Susan Fowler Rigetti alleged that her former boss, for instance, solicited her for sex.

On my first official day rotating on the team, my new manager sent me a string of messages over company chat. He was in an open relationship, he said, and his girlfriend was having an easy time finding new partners but he wasn’t. He was trying to stay out of trouble at work, he said, but he couldn’t help getting in trouble, because he was looking for women to have sex with. It was clear that he was trying to get me to have sex with him, and it was so clearly out of line that I immediately took screenshots of these chat messages and reported him to HR.

When Fowler Rigetti engaged with HR, she said, they responded that “even though this was clearly sexual harassment and he was propositioning me, it was this man’s first offence … he ‘was a high performer.'” Translation: Nothing would happen to him.

Kalanick immediately issued a statement that what Fowler Rigetti described is “abhorrent and against everything Uber stands for and believes in.” He added that it was the first time he’d learned of the allegations. An investigation was ordered, and Uber hired former U.S. Attorney General Eric Holder to conduct the internal probe.

But Silicon Valley is a small place, where high-profile talent bounce around companies on a regular basis. People talk. For Uber, the damage may have already been done.

“I think this could definitely take a toll,” said one former Uber exec who requested anonymity, adding: “It’s going to be difficult to continue to recruit the best and brightest talent.”

Fowler Rigetti claims Uber had a “game-of-thrones political war ranging within the ranks of upper management in the infrastructure engineering organisation.” Managers and peers duked it out, she said, while some attempted to undermine their direct supervisors with the intention of taking their job.

“The ramifications of these political games were significant: projects were abandoned left and right,” she said. The discontent and disorder at Uber HQ that she describes doesn’t lend credence to the idea that it’s facilitating a decent work environment to succeed going forward.

A Fleet Of Robot Cars Because Robots Aren’t People

In late November, the financial blog Naked Capitalism published the first of a series of pieces by transportation industry analyst Hubert Horan on the financial viability of Uber. The posts asked a simple question: “Can Uber Ever Deliver?” According to Horan, based on a significant amount of data on the company’s finances that has been released, the answer is no.

Horan argues that, in order for Uber to prove that its domination of the taxi industry will improve overall economic welfare, it would have to earn sustainable profits; provide service at a significantly lower cost; create new competitive advantages through “major product redesigns and technology/process innovations”; and, eventually, be incentivized to pass on its efficiency gains to consumers.

Uber Is DoomedUber’s autonomous test cars. Photo: AP

Uber’s autonomous test cars. Photo: AP

This hinges on an autonomous driving fleet. Despite optimistic overtures from automakers and self-driving car start-ups, the likelihood of that coming to fruition, if ever, is decades away. Ford has an optimistic plan to roll out fully-autonomous cars by 2021, for example, but they would be limited to use in a geo-fenced area.

Kalanick himself has said the development of self-driving cars is “existential” to Uber. Labour drives up operating costs; removing 160,000 drivers from the equation makes it a lot easier to balance the books. Though Uber has a reported $US11 ($14) billion war chest stowed away, by burning through billions at a rapid clip, the path and timeline to becoming a driverless car company — however that would materialise — is muddled.

Even then, Uber’s likelihood of success appears slim.

“If you put driverless cars totally aside, the near-term future of Uber is the question of whether they could succeed in establishing a reasonably secure quasi-monopoly position in the United States and other large developed country markets before the cash runs out,” Horan said in an email to Jalopnik. “This is certainly possible but by no means certain. If yes, cash flow would improve considerably. If no, cash flow problems could get worse as the world becomes increasingly aware that it will never generate sustainable profits in its core business. Kalanick said that Uber had an ‘existential’ need to succeed in driverless cars. This suggests his optimism about taxi profitability is not what it used to be.” And at the rate it’s going, Uber could crash and burn through its stockpile of cash by the end of the decade.

Like a lot of Silicon Valley companies, Uber has survived on the backs of wealthy investors that have propped it up, despite eye-popping losses for several years. Horan’s analysis found that Uber has maintained operating losses of $US2 ($3) billion a year, surpassing any start-up in history, with a negative 143 per cent profit margin. “Thus Uber’s current operations depend on $US2 ($3) billion in subsidies, funded out of the $US13 ($17) billion in cash its investors have provided,” he wrote.

Further, Horan found that Uber passengers fares only covered 41 per cent of the actual trip cost, suggesting it charges far-too little for fares. Even public transit systems, long lambasted for being money-losing ventures, perform better: for instance, fare revenue for the Washington Metropolitan Area Transit Authority, which serves the nation’s capital, accounts for 47 per cent of its operating costs.

“Uber … was using these massive [investor] subsidies to undercut the fares and provide more capacity than the competitors who had to cover 100 per cent of their costs out of passenger fares,” Horan wrote.

How To Stop The Cash Hemorrhage

If a monopoly is the key to success, it’s hard to figure how Uber can achieve total dominance. In the third quarter of 2016, for instance, Uber lost $US800 ($1,042) million, according to The Information, a tech news site. Its chief rival, Lyft, is backed by General Motors and recently secured market share gains against Uber in significant U.S. markets, the site said, adding that Lyft’s “continued relevance in the U.S. has changed the maths for Uber in terms how much it projected it could profit from developed markets in the next few years.”

Steven Hill, a former fellow at the New America Foundation think tank, who has regularly criticised Uber, said the company has been successful only because “taxi service has kind of sucked.”

“I think ride-sharing may survive, but Uber may not,” said Hill, who published a book on the so-called gig economy called Raw Deal: How The “Uber Economy” Runaway Capitalism Are Screwing American Workers.

“Because the other thing that’s really bedeviling Uber: instead of just focusing on being a good taxi company for the digital age … finding the way, a sweet spot, to make that work, it’s blowing all sots of money [on] self driving-cars and China and now India. The company just so much reflects the megalomania of Travis Kalanick and whatever he thinks he’s doing.”

Uber Is DoomedPhoto: Uber

Photo: Uber

“I mean, seven out of 10 silicon valley startups fail,” Hill went on. “They’re producing a product or service that no one necessarily wants to buy at the cost you can produce it for. Capitalism 101, right? So that’s what we’re seeing with Uber. At this moment, it does not appear that Uber is able to produce a service that customers will pay enough more to make it sustainable.”

It’s unclear in what markets Uber may be turning a profit, if any at all. The company reportedly said it wanted to achieve profitability in the second quarter of 2016, and it claimed at the time it had reached that goal in the U.S. and Canada. But by December, according to Bloomberg, Uber was losing money again in the U.S., to the tune of $US100 ($130) million per year.

It’s also striking that Uber tapped Wall Street banks for a billion dollar loan by convincing several financial institutions to focus only on its nearly $US70 ($91) billion valuation, and not operating losses in certain markets. According to Reuters, regulators at the Financial Reserve were bothered by the loan because the banks “carved out Uber’s more mature operations from the rest of the business.”

That’s a vague statement, but Reuters said the regulators’ scrutiny was “not a surprise because it is rare for young, unprofitable technology firms to tap the leveraged loan market which is traditionally restricted to companies with long histories of generating cash.” (The reserve declined to release any documents related to the loan in response to a Freedom of Information Act request, saying: “Such information, including any statement confirming or denying that any such information exists, would constitute a disclosure of confidential supervisory information” and thereby was exempt from public release.)

Again, it’s commonplace for venture capitalists and early stage investors to fund operating deficits. The belief is that “the company is going to grow fast enough and that, with enough growth, it’s going to turn profitable, and it’s going to turn highly profitable,” said Gordon, the University of Michigan business professor.

A common comparison to describe Uber’s approach is Amazon, which lost money consistently over the first several years of its existence. As Horan notes, however, Amazon’s “worst losses were $US1.4 ($2) billion in its fifth year of operations, but shrank rapidly thereafter, while Uber’s losses have been steadily growing and will be over $US3 ($4) billion in its seventh year.”

The problem with Uber, Horan argued, is that it doesn’t have a powerful economy of scale — that is, the savings in cost that are produced when production increases, particularly through fixed costs being spread out. Unlike Amazon, which had significant fixed costs, Horan said that 85 per cent of Uber’s costs are variable.

“Uber cannot expand into new markets at very low cost since it faces unique driver recruitment, political lobbying and competitive marketing challenges in each city,” Horan said.

Gordon said that’s why the typical approach by venture capitalists with Uber probably won’t work.

“They don’t have an economy of scale,” he said. “So, every day, venture capitalists fund loss-making companies, but not one [with] a model you can’t see how it’s going to flip twice as many rides that you keep losing money on. You’re not going to start making twice as much money because you’re doing twice as much rides. It’s not like a factory [with fixed costs].”

Maybe Kalanick knows something we all don’t. Maybe Uber has a secret team of genius scientists who’ll surpass all expectations of driverless cars and, somehow, have a fully-automated fleet of vehicles for the company to use everywhere within a few years. Maybe billionaire investors are actually fine with propping up a money-losing venture into perpetuity.

But until Uber can prove it has found a sustainable model — or, perhaps, stop the investor leaks of its financials — there’s little to suggest it has the bandwidth to survive. Whether it’s sold, drastically shrinks its market footprint, or just outright shutters, it’s untenable for Uber to exist long term as the tech juggernaut it is today.

Kalanick has pushed an enterprise on little more than a grandiose bet: that Uber could exist on a playing field of its own with few regulations, carving a path to financial salvation by dominating the taxi market simply through the sheer force of investors with bottomless pockets. It isn’t working.