By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants
On June 13th Uber announced that its Board had accepted all of the management process recommendations of a study led by Eric Holder of the law firm Covington & Burling.[1] Uber also announced that CEO Travis Kalanick would take a temporary leave of absence and that SVP Emil Michael, Kalanick’s closest confidante, had been dismissed. The intent had been to turn the tide of highly negative stories on Uber since the beginning of the year.
Earlier installments in this Naked Capitalism series refrained from predicting Uber’s future. However, given a business strategy that depended on achieving global industry dominance, the critical question was always : could Uber achieve that dominance before it burned through its massive $13 billion war chest? Until recently it seems likely that it might, but recent events now strongly suggest that the answer may be no.
While Uber’s finances are currently secure (in April it was reported to have roughly $7 billion in cash on hand out of the $13 billion originally provided by investors), it is increasingly difficult to see how Uber can survive in the longer term. For any company to rebound from a major crisis, it must have correctly identified its major problems and workable solutions, and installed strong, positive leadership that staff and other stakeholders can trust to navigate near term turmoil successfully. Uber has done none of these things.
For an immature company like Uber that has always been highly unprofitable to survive a crisis, it must have a clear, widely understood plan that will rapidly reverse the multi-billion dollar losses of recent years, as well as maintain the goodwill of customers, suppliers and outside industry observers through the turnaround process. Recent events have badly undermined goodwill. There is no evidence that Uber has a credible profit turnaround plan. None of the alternative strategic paths that one can imagine appear to have much chance of success.
Mature companies facing crises of culture and executive leadership usually have the cash flow and management depth that will give them the time needed to make major personnel and strategic changes. Uber does not have that time, as it has been burning through its cash for seven years, and its executive ranks have been decimated.
Before laying out Uber’s existential crisis, let’s quickly summarize recent events.
Uber has endured six months of intensively negative publicity that goes well beyond the sexual harassment issues that the Holder study was intended to address
A February 19th blog post by former Uber engineer Susan Fowler triggered the Holder report.[2] Fowler described her own sexual harassment by senior Uber executives and argued that the Uber’s refusal to take any action reflected a systemic toleration of sexual harassment.
But Uber has faced a huge range of other bad publicity this year, including a major lawsuit from Alphabet (Google) alleging that Uber conspired with a former employee of its Waymo driverless car unit to steal critical intellectual property, news that Uber developed software (Greyball) that was used to obstruct law enforcement efforts in Philadelphia and Portland to determine whether Uber was violating local laws, 2016 financial results showing negative EBITDAR contribution of $2.8 billion (suggesting actual losses of over $3 billion), reports that Uber software changes led to passenger overcharges and driver underpayments, reports that SVP Emil Michael tried to silence a woman who filed an HR complaint after a management dinner in Seoul led by Kalanick where escorts were provided for the male Uber executives in attendance, and video showing Kalanick verbally abusing an Uber driver who complained how he had been hurt by recent unilateral Uber compensation changes.
After Fowler’s blog post appeared, a spate of news stories described a senior management culture that was highly insular and slavishly loyal to Kalanick. The New York Times said that Kalanick’s inner circle, known as the “A-Team” internally, had been expunged of people who had not demonstrated their complete commitment to Kalanick’s approach to competition and growth, described senior management as “a Hobbesian environment”. It confirmed Fowler’s observation that the A-team was “immune to internal scrutiny.”[3] A Financial Times story depicted senior management as “the cult of Travis.”[4] Uber’s board has never exercised any independent oversight over management because Kalanick and two close friends (co-founder Garrett Camp and Ryan Graves, Uber’s first employee) control 9 of the 11 board seats.
A spate of executive departures that have left Uber’s management in serious disarray generated more bad publicity. In addition to this week’s Kalanick and Michael moves, Uber had recently lost its President of Ridesharing (the nominal number 2 position), the CFO, the President of its Asia-Pacific operations, the EVP Engineering, the VPs of Public Policy/Communications, Product Growth and Mapping development and the Head of Driverless Car Development. Some of these were the dismissals of individuals who were PR liabilities in a post-Fowler world; others might be best characterized as “rats fleeing a sinking ship.” Uber has been unable to fill its Chief Operating Officer position, which has been open since March, perhaps because of the lack of people who would be attracted to “a Hobbesian environment” at a ccompany losing billions of dollars.
Uber’s original whitewash plan has gone badly wrong
Uber’s commissioning of the Holder study followed the standard crisis management playbook. It allowed the company to claim the review would be rigorous and independent, but Holder (and Covington & Burling) had done considerable work for Kalanick and Uber prior to the Fowler blogpost, so it wasn’t really independent. Predictably, it was not seriously threatening either.
The review was narrowly limited to the discrimination and harassment charges in Fowler’s blog post since Uber wanted to focus public attention to diversity and inclusion issues, not core governance issues or the possible causes of intellectual property theft, obstruction of justice, or profitability problems. Board member Arianna Huffington, a strong Kalanick ally, led the review. She gave multiple press interviews claiming the sexual harassment problem was limited and would soon be under control. “Yes, there were some bad apples, unquestionably. But this is not a systemic problem.”[5] Immediately prior to the planned June 6th public release of Holder’s findings, Uber announced that 20 staff had been fired (none members of Kalanick’s A-Team), that two women had been hired into management positions, and that a female Nestle executive would become an independent Board member. The Holder management process recommendations were entirely generic steps such as rethinking Uber’s value statement, enhanced Board oversight, increased leadership training, reducing alcohol use at company events, and implementing a more formally structured complaint system.
On June 7th, Kara Swisher of Recode published a story revealing that Eric Alexander (Uber’s President for Asia-Pacific and an A-Team member) had somehow obtained the records of a police investigation of a 2014 rape of a Uber passenger by an Uber driver in India, and those records were shared among Alexander, Kalanick and Michael for over a year.[6] Those executives debated whether the evidence could be used to undermine the victim’s testimony, and whether the incident had been concocted by a competing taxi company, although Uber eventually settled with the victim and accepted a six month ban from operating in Delhi. This information was apparently leaked to Swisher by an Uber employee who realized that the outside lawyers had not been provided (or ignored) this information. When Swisher contacted Uber to confirm the account, the release of the Holder study was suddenly postponed, and Uber quickly announced Alexander’s dismissal.
A new Uber Board meeting was held on Sunday the 11th and lasted all day. Board members had only five days to rethink their plan, but realized that punishment for the rape documents would have to reach the top of the company. When those managers resisted, the Board increased pressure by leaking their demands to the press. Emil Michael was Kalanick’s closest confidante and was considered the most powerful member of the A-team. In addition to his involvement with the Seoul escort and Indian rape incidents, he had led efforts in 2014 to intimidate Uber’s strongest media critic by threatening to releasing information about her personal life. He had been in charge of Uber’s disastrously failed attempt to enter the China market, but there were never negative repercussions because all of this was at Kalanick’s direction.
Uber announced Michael’s departure on Monday, but Bloomberg reported that “Michael believes that a weak board of directors, a lax internal legal team, coupled with his tight friendship with co-founder Kalanick, ultimately led to his downfall—not the scandals.”[7] There were apparently major disagreements among board members about sanctions on Kalanick. Uber announced his leave of absence Tuesday morning without disclosing its expected duration There was also no explanation of how his responsibilities might change after he returns.
Recent events have badly undermined public goodwill towards Uber and the “narrative” explaining Uber’s path to profitability is no longer credible
As discussed in parts eight and nine of this series, Uber’s public goodwill depended in large measure upon a carefully developed PR/propaganda campaign designed to explain its inevitable success, and divert attention from the lack of evidence of profitability or competitiveness. Among other things, that narrative claimed Uber’s global dominance would be driven by cutting edge technological innovations that were so powerful they could overwhelm incumbent competitors anywhere in the world and could eventually displace car ownership, that startup losses would soon give way to robust profits just like other technologically driven startups, that its meteoric growth was the result of consumers choosing their vastly superior services in competitive markets, and resistance to Uber’s growth was entirely due to people fighting to preserve a status quo dominated by an Evil Taxi Cartel and corrupt regulators.
Until the events of this year, no one in the mainstream media bothered to scrutinize, much less question Uber’s story. But enough doubts has been raised in the last couple years as to whether Uber was really an avatar of economic progress so that Fowler’s description of a deeply flawed company was immediately and universally accepted. Last week’s Indian rape revelations effectively killed the effort to convince outsiders that the company’s only problem was a few bad actors who liked to hit on female staff and should similarly destroy any remaining perception that Uber management can be assumed to be wise or trustworthy.
It is not clear whether Uber will enjoy even a brief respite from its tsunami of negative publicity, as there may be further leaks of past bad behavior. In addition, court findings that Kalanick or other A-Team members had actively conspired in the Google IP theft would be far more damaging than any of Fowler’s statements.
Uber has no ability to earn profits within a competitive taxi industry
Uber could restore its credibility by presenting a convincing strategy to reverse its enormous losses. But no one at Uber has a credible plan and none of this week’s actions move Uber closer to developing one.
As previous installments of the Naked Capitalism Uber series have documented in detail, Uber’s real problem is that it is a staggeringly unprofitable company with fundamentally uncompetitive economics. It lost $2 billion in 2015, $3 billion in 2016, and another billion in China. It is a higher cost, less efficient producer of taxi service than traditional operators; all of its growth is explained by these multi-billion dollar subsidies as it has flooded markets with additional capacity offering unprofitably low fares.
It has none of the scale or network economies that allowed other startups to quickly grow into profitability. In its fifth year of operation Facebook had achieved 25% profit margins; in Uber’s fifth year its profit margins were negative 149%. Absolute Uber losses have continued to worsen with recent growth. Margins improved somewhat in 2016, but only because Uber unilaterally reduced driver compensation by $1 billion, leading to news reports of drivers sleeping in the cars in order to make ends meet. Uber never had any hope of profitability in a competitive market, even at its present scale.
Uber’s original strategy for investor returns required global industry dominance but this may no longer be achievable
Travis Kalanick’s goal was to build Uber into a globally dominant urban transport company. Its $68 billion valuation reflects the hope that–once dominant–the ubiquity of the Uber platform and market power over passengers and suppliers would give it the kind of power Facebook and Amazon now enjoy. But those companies achieved quasi-monopoly power by inventing entirely new products that people hugely valued or by figuring out how to provide services massively more efficiently than any existing competitor could.
Uber’s strategy was always to skip the hard “create real economic value” parts of this process, and focus strictly on the pursuit of artificial market power that global dominance would provide. As noted, Uber’s $13 billion investment base was used to fund the predatory competition needed to drive more efficient competitors out of business. This was 1600 times the investment funding Amazon needed prior to its IPO because Amazon could fund its growth out of positive cash flow. By contrast, Uber’s carefully crafted “narrative” allowed it to pursue predatory competition for seven years without serious scrutiny of its financial results or whether its anticipated dominance would improve industry efficiency or consumer welfare.
Uber was always an all-or-nothing bet on achieving global dominance. A year or two ago few doubted that Uber would eventually achieve it. But its failure in China and serious pushback in many other overseas markets have effectively killed the “global” part, and the growing losses combined with all the other recent negative events may have killed the perception of inevitable dominance at home.
The Board’s attempt to “fix” management culture cannot possibly work but will succeed in killing the culture that drove the company’s growth
Kalanick’s critical contribution was the creation of this tightly controlled, monomaniacal management culture willing to destroy anyone and anything standing in its way. The bad behavior that has been widely reported in 2017, such as theft of intellectual property and obstruction of justice, has existed over Uber’s entire history. Earlier examples include willful lawbreaking, competitor sabotage, journalist intimidation, and willful falsehoods, including ones designed to deceive drivers about their actual compensation.
Kalanick’s management culture, while repulsive on many levels, was actually brilliantly aligned with its business strategy and its investors’ objectives. Companies that can make money in competitive markets by creating real economic value do not have to create ruthless, hyper-competitive cultures where there are no constraints on management behavior as long as they are totally loyal to the CEO’s vision and can rapidly capture share from more efficient competitors. None of Uber’s bad behavior was aberrant—it was a completely integral part of its business strategy. Without this culture, Uber would have never grown as rapidly as it has, and would have never had any hope of industry dominance.
The actions announced this week to reform Uber’s culture will inevitably fail. Major cultural change in large companies is extraordinarily hard in the best of cases, and this may be one of the worst places to attempt it. The announced changes are based on the false presumption that the cultural “problem” is due to a few bad apples and is limited to diversity and inclusion type issues. They are also based on the false assumption that the company has solid cash flow and management resources that can keep the business strong while the areas affected by the toxic managers undergo some turmoil.
However, a longstanding culture where nothing is valued except the company’s growth and everyone in senior management believes that the rules and norms do not apply to them, cannot be suddenly modified to incorporate values such as empathy, inclusiveness and respect for others. Kalanick’s tight control of the Board and management ensured absolute focus on his strategic goals and approaches. The Board has weakened that control but has failed to replace it with any other means of ensuring strategic focus.
If the board somehow fosters cultural changes, or more likely, expends considerable energy in trying to do so. the focus on industry dominance will be lost. If they don’t take hold, the drumbeat of negative publicity will continue and Uber will lose even more of its public support.
No one at Uber can answer the question of how they can reverse multi-billion dollar losses and become profitable because there is no good answer and all of Uber’s potential paths forward are likely to fail
Uber’s narrative that its powerful business model will inevitably achieve global dominance is no longer credible and can no longer divert public attention from Uber’s dismal economics. If journalists or Uber staff ask Board members or senior managers to lay out the company’s strategy and the how it will reverse multi-billion dollar losses, no one has any plausible answers. There are several hypothetical paths. While Uber has enough cash to pursue any of them for a while, none have any serious chance of success.
Uber’s could stick with its original plan based for achieving investor returns, which was always based on exploiting market power once dominance was achieved. But no one can say this out loud, so it can’t be used to motivate staff, or convince journalists that Uber has emerged from recent crises with strong, positive management that has abandoned the bad behavior of the past. And without ruthless focus and leadership it has virtually no chance of succeeding this way.
A new strategy based on limiting growth to “big but not dominant” in combination with some variety of cost cuts and price increases cannot possibly work given actual Uber economics. It is “big but not dominant” in many markets now yet the company is massively unprofitable. Driver compensation has already been cut to the bone. Many of Uber’s drivers are locked into expensive vehicle financing commitments and cannot quit tomorrow but the number of people willing to work on Uber’s terms is rapidly shrinking. Major capacity cuts and price increases cannot lead to profits. This would quickly kill the brand loyalty low fares had built and would accelerate negative press and the overall downward spiral.
Uber’s massive $68 billion valuation is also a major obstacle going forward. Uber could hypothetically undertake a major restructuring, refocusing on a smaller set of markets but this would require a radical downsizing of the valuation and investor expectations. Uber’s investors have told themselves (and the rest of the world) that their investment in the taxicab industry would produce fabulous wealth, but never clearly explained where these huge returns would come from, or why no one else in taxicab history had ever discovered them. It will be interesting to see how these investors react once people start to ask whether that $68 billion could completely disappear.
[1] Covington & Burling’s 13 page summary of its recommendations to the Uber Board are available at https://drive.google.com/file/d/0B1s08BdVqCgrUVM4UHBpTGROLXM/view. The law firm of Perkins & Cole conducted a linked review of individual sexual harassment claims
[2] Fowler, Susan J., Reflecting On One Very, Very Strange Year at Uber, 19 Feb 2017.
[3] Issac, Mike, Inside Uber’s Aggressive, Unrestrained Workplace Culture, New York Times, 22 Feb 2017.
[4] Hook, Leslie, Uber: the crisis inside the ‘cult of Travis’, Financial Times, 9 Mar 2017.
[5] O’Brien, Sara, Arianna Huffington: Sexual harassment isn’t a ‘systemic problem’ at Uber, CNNMoney, 23 Mar 2017.
[6] Swisher, Kara, A top Uber executive, who obtained the medical records of a customer who was a rape victim, has been fired, Recode, 7 Jun 2017.
[7] Newcomer, Eric & Stone, Brad, Uber’s Michael Is Said to Blame Board, Not Behavior, for Ouster, Bloomberg, 12 Jun 2017
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Given the derailing of the no-longer-so-inexorable progress towards dominance, and the probably devastating IPR fight with Google, I fully expect the next stage in Uber’s decline to be the shelving of all plans for self-driving automobiles.
If they need a constant stream of new distractions for investors (like the new and perhaps-not-so-innovative Uber Freight) they might go in the opposite direction and launch even more outlandish initiatives as a PR exercise. Uber for intergalactic travel!
Are the more efficient competitors the Evil Taxi Cartel? Or even other “Mobility Service Providers”? Is a competitor like Lyft, which Wikipedia says has a $7.5 billion valuation but still lost $600M in 2016, just a scaled-down version of the same graft? I couldn’t remember seeing this in part 1-9 of the series and just did a quick glance through to confirm.
I do not know to what extent subsidizing drivers is part of Lyft’s model. But to your point, if they can’t make money, they won’t be around forever. And good old fashioned cabs have developed apps if you must (due to being in a city with low cab density) or prefer to order them rather then hail them or go to a cab stand.
Maybe time to pick up an NYC medallion on the cheap? :)
Lived in Singapore for years, had no car and relied on taxi, MRT and walking as transport. The economics of this over owning a car was a no brainer.
Highly efficient transportation market, heavily invested and mostly owned by the government, so YMMV on analogies to middletown America where rides of 20 miles or more is commonplace vs way outside the norm.
Lots of apps flooded the market when I was there, and the only ones that were somewhat successful aggregated supply across multiple companies during peak periods. Individual company apps countered this through “rewards” type incentives that gave higher priority during peak periods.
Personally, I used the app for the largest taxi company 95% or more of the time. The other 5% was exclusively during peak periods when everyone and their brother is playing taxi roulette hoping their query comes up next.
While the market itself is unique, I think it serves as an example of how a well run efficient market base of companies is somewhat impervious to the Uber phenomena. Reading through this multiple part series only reinforced my initial skepticism of their model.
I’m in a similar situation here in Ireland. There is one dominant app for taxis which is universally popular, especially with women and teenagers (it identifies the driver before you get a pick up, so it gives an extra layer of security). Drivers also seem to really like it. The only thing Uber (who don’t operate here) would offer is cheaper rides, but I suspect that would just be a smaller market at the margin.
Das Uber hast nein cloths.
My apologies to the Germanic languages…and English language as well.
Dass Geschäft “Uber” hat gar keine Kleidung!
or more simply:
Uber, unbekleidet.
Einverstanden.
The Waymo IP left is really the most brazen and to me indicates how rudderless and arrogant the company is. If the mission of the company is mobility, why the need to develop the technology for driverless cars in house other than for bragging rights? Scaling and hiring software and manufacturing teams is no small task, which is why Uber just tried to steal it’s way to the front of the class, coasting on the decade plus investment Google had placed into autonomous technology. If Uber is just a mobility company, they can let other companies duke it out and spend a fortune on R&D while they just sit back and wait to operate the company. There’s a reason that Ford is in the business of selling trucks and not running trucking companies for instance.
As a former driver, the 99% of Uber-Lyft passengers have zero idea that their fares are so subsidized by shareholder losses.
Zero chance that the current pricing structure is sustainable (even with “surge pricing”).
Base rates would have to go up 150+% to even start making it rational for drivers to drive (Uber-Lyft benefits from their drivers giving away the depreciation of their cars a/k/a use your car as a pay-day loan).
Base rates would have to go up 200+% for Uber to grind out decent positive cash flow—never mind sustain its current valuation.
This was going to be my next question.. is Lyft just as bad at undercharging/subsidizing it’s rides? If so the whole industry might just disappearing except in some markets (NY/SF) where the customer is willing to pay a higher price.
Lyft burns through cash just as badly as Uber (on a relative basis). Uber is burning cash globally. Lyft is just burning shareholder cash nationally.
and from a driver’s perspective if one cares about prioritizing labor versus upper management/capital—-Uber = a diaper full of poo + pee. Lyft = a diaper of just poo.
Lyft lucked out at having a dominant competitor who (a) has zero emotional intelligence and (b) constantly sticks their foot in their mouth—and never learns from its mistakes.
Thank you for the reply. This just increases my resolve to never use a ride sharing service.
Lyft doesn’t have Uber’s inexplicable hostility to tipping (does Uber want to punish its drivers for working for them? it’s bizarre), so you could theoretically pay your Lyft driver a fair price. But the base rate is still predatory, and Lyft doesn’t take a cut of the tip so it doesn’t help their bottom line any.
of course at those increased base rates, having your own car probably makes more sense to many users. I’ve heard people who use things like uber to avoid garage fees for their vehicles in dense urban areas, but at a certain point paying parking garage fees makes a lot more sense. Public transport is nice if you can get it to work for you, let’s face it, that’s not always possible.
I avoid Uber as it is, as I already pay $85/mo for a Charlie card. I may use Uber a couple times a month, but if rates doubled, I’d probably only use it on the rare night I’m out past midnight and the subway shuts down.
Do these figures include the SS and Medicare taxes that self-employed people are required to pay from net income, since they’re not withheld by the employer they don’t have? (You get a deduction for the amount your employer would have paid if you had an employer, but you then have to pay twice the regular rate of 6.2% SS and 1.45% Medicare on your net income after the deduction, or 92.35% of your net income before the deuction. That’s because you’re paying for yourself and your non-existent employer. SurePayroll has a handy calculator at https://www.surepayroll.com/resources/calculator/payroll/self-employment-tax.)
I suspect that, like most self-employed people, Uber drivers don’t set money aside for these taxes, but simply spend it. Creating a problem at tax time, when the entire year’s tax is due.
Not to mention the calculation is needlessly complicated and non-intuitive.
I’ve often wondered about the tax problems that Uber drivers encounter. Most of them seem rather fuzzy about mathematics and economics to begin with (which is why they are Uber drivers?!?). When the 1099’s fly in January, I’ll bet a good number of drivers take flight from driving for Uber. Word on the street is that Uber, at least in my city, is desperate for drivers, and is willing to relax vehicle standards to attract drivers. This rumor is confirmed partly by my own observation of older model cars (more than a decade old) with dents and scrapes bearing the Uber tag.
So, what does the end look like for Uber? I’m not all that familiar with how these companies secure funding – will the company collapse when they fail at that next round of funding? At the rate they’re burning through cash, it seems like the company has 3 – 4 years left, unless they can get an infusion of money from somewhere.
Uber will be around in 10 years but definitely regarded as some laudable juggernaut.
I’ll bet Uber will eventually be bought by a ‘legacy’ automaker. But at a fraction of its mythical $60b+ valuation. Maybe $6b in 2021?
mark your calendars :)
Given the fact that it is going to fail spectacularly, will the name Uber really retain any cachet?
Pets.com just re-directs to Petsmart now.
I’m thinking the recent selloff in FANG stocks was related to an expectation that Uber’s valuation would be revised down substantially. Early Uber investors may have borrowed heavily against their Uber shares to buy FANGs and now those loans are being called.
Is it me, or is this deja vu bullsh*t all over again?
https://www.wired.com/2015/10/theranos-scandal-exposes-the-problem-with-techs-hype-cycle/
makes me think the idea that capitalism is efficient, effective, and always best allocates resources is bullsh*t too….but I’m a cynic….
Will Dr. Pangloss please pick up the white courtesy phone?
Theranos is another example of how a well crafted narrative can divert attention away from underlying realities. We humans do love a good story.
Silicon Valley: Birthplace of IPO fraud!
Typo alert: The Uber exec involved with the purloined rape victim medical records was Eric Alexander, not Eric Anderson. My mistake
Fixed, thanks.
One problem with your analysis is that you dob’t think driver pay can be further cut, but literally, it already has been, with Ubers upfront pricing and the death of surge.
I’m on a puny smartphone, but Ubers newest policy and rate change wrt upfront pricing literally allows Uber to “steal” all of the drivers surge incentives, paying the drivers strictly per mile and minute while literally pricing each ride differently based on machine learning of what riders will pay for any given time and what a specific riders history shows that Rider willing to pay.
It’s also opaque, unregulated, and quite likely to lead to disparate impact discrimination if you ask me (not a lawyer).
Please do check into this, regulators and consumers should no longer allowed surge pricing of any sort since it will not go to drivers and do cannot incent them to drive. And it’s grossly unfair to customers.
Uber is having trouble getting new drivers. And I don’t think you are right re the surge pricing, since most drivers in NYC drive mainly to get the surge pricing periods and run multiple apps (Lyft and others). If Uber won’t give them surge pay, they won’t drive for Uber or won’t drive at all. Switching costs for drivers are low in cities with Lyft.
Currently, as I understand it, Uber has a 96% turnover rate, every 12 months. The reason is simple, driving earnings are not enough to compensate drivers for use of their vehicles. I drive 250 miles per day, taking in about $140 per day, that’s about 56 cents per mile, and vehicle costs are about that, so it’s a break even proposition. For Uber to work profitably, the rate of fare should be about twice what it is now, which would put the rates about what Taxis charge. Taxis, a long time ago, figured out what the profitable rate is.
> As discussed in parts eight and nine of this series
Ya know, I’m beginning to think this Uber thing is some sort of scam.
Not a scam – ideology.
Uber taps into a number of ideological fantasies held by libertarians. The most important of which is a concept they call “free labor.” That is not labor that costs nothing, but labor that is free of the “constraints” of government and corporate regulations. Drivers are free to pick their routs, hours, vehicle, can accommodate smokers (they are really big about “accommodating smokers” for some reason.) and so forth. They aren’t working for a cap company, but rather self employed cab-drivers.
This should, in their eyes, make Uber an attractive company, err scratch that, an attractive labor model to work under. Who wouldn’t want to be free?
But of course its the evil gom’nt that is preventing Uber’s free market brilliance from shining through.
Honestly, its hard to tell where ideology ends and Uber propaganda begins.
The Uber driver receives 75 to 80% of the total fare. For the 20 to 25% kept by Uber, they provide dispatching service, they take the overall risk (reimburse driver for cleaning if passenger pukes in the back seat, reimburse passenger if driver screws up or behave unprofessionally), provide insurance for the ride, meaning the passenger is still protected (financially if not physically) if the driver has let his personal auto insurance laps.
There are 2 questions here:
1. Are the overhead charges subsidized?
2. Is the ride part subsidized?
The answer to (1) is very likely yes, as Uber is indeed bleeding money. Regarding (2), I know my neighbor is happy to drive for 80% of the revenue collected by passengers, and it is not clear to me that he is less paid than an employee taxi driver here in Portland.
Could google take over the dispatching, and provide the service profitably at an equal or lesser price?
Is the insurance provided by Uber subsidized?
I know that here in Portland, a taxi ride to the airport will cost at least $50 for 20 miles traveled. Even if you assume car costs are $1 per mile, that leaves $30 for labor + profits. Since there is no large investment, and there is no way the employee driver gets anything near $30, there is lots of monopoly profits in the taxi version of this.
The driver does not get 75-80% of the total fare. The “booking fee” (formerly “safe rider fee” before a lawsuit changed that) gets taken out first and the driver USED to get a percentage of what was left. The trip cost was figured by the miles and time. For a trip that the passenger pays $5.35 for, I, paying uber supposedly 20%, get $2.44 which is ($5.35-$2.30 booking fee) times 80%. Newer drivers get even less.
Yes, that’s sometimes 4 drunk people in my car for up to about 1.5 miles for less than $3!
Now the driver is paid by miles and time at the same rate as before, but the rider is given a price up front. It may or may not relate to what the driver is paid. Most times when I’ve asked what the rider is paying it is clear Uber is adding a few bucks to the trip.
So the rider is now paying more when uber thinks they’re willing to, but it may or may not be “surging” for the driver.
They’ve given themselves a raise, but not the driver.
Depending on the city, surges have become less common. I’m in Houston. Riders wait out surges, which rarely last more than 10 or 15 minutes. Mostly what happens is you just get sent trips outside the surge area at no surge. But there are so many drivers willing to work for what is here less than $10 an hour most times (BEFORE EXPENSES–so way below minimum wage quite often, and at a loss per the IRS after mileage) that uber still keeps getting more drivers.
Btw cleaning fees are charged to the rider. So they cost uber nothing besides the time to process them.
Currect, because when I see what Uber bills the rider, and see what I’m paid, doing the math, it’s about 62% or thereabouts. Taxi companies do not keep all of the “flag drop” which is roughly the same as the Uber “booking fee”, which Uber does keep all of. This booking fee business is a ruse to tell drivers they are paying them 75%, but in truth, are paying them less than that, factoring in the booking fee they keep all of.
Uber == Silicon Valley Enron.
When reading the how’s this going to play out comments, this was my first reaction.
The secretive way that Uber went about price discrimination was not very nice, and it was just one more debacle that they had to disclose it due to discrepancies between what drivers were getting and what customers were paying…. That said: it could be their only chance to make the unit economics work.
See here for detail:
https://www.bloomberg.com/news/articles/2017-05-19/uber-s-future-may-rely-on-predicting-how-much-you-re-willing-to-pay
“However, a longstanding culture where nothing is valued except the company’s growth and everyone in senior management believes that the rules and norms do not apply to them, cannot be suddenly modified to incorporate values such as empathy, inclusiveness and respect for others.”
There seem to be more and more of these ‘above the rules’ management teams in the past few decades. This won’t end well….
Big story on the local radio on how Uber is driving out of business immigrant cab drivers. They gave an example of Haitian man who bought a cab medallion for 7,500.00 watched it’s value grow to $360,000.00 , borrow against it to buy a home, watch it’s value fall as Uber moves into the market, and now with the increased competition his take home pay is not enough to make his mortage or loan payments
When Uber goes under, there will be a popcorn event when their massive, incredibly detailed customer tracking database gets sold.
Great point. Maybe they’ll find some way to monetize their data before it goes under. It would fit with the current global trend to gather data of all kinds.
I absolutely love this series. This entire “gig/1099 economy” is such a total fraud.
In this case, it’s unlikely Uber can rebound to success. Last month’s Waymo(Google)-Lyft partnership and the toxic culture are two powerful challenges.
BUT A crisis is an opportunity. For both people and companies, growth and innovation come best through crisis. Uber still has a lot of powder left. Losing customers could be positive financially (less rides to subsidize) and to dispel world domination dreams or instill change.
I’m certainly not rooting for their success (but I kinda am). The conversation should include this narrative given the ‘uber-esque’ state of other institutions, companies, and powers that be. They seem like a real evil group so we can paint them with black and discount changes they make as lip service or meaningless PR. Watching Uber crash and burn will be fun and certainly something we can afford.
The best chance we have to fixing our totally FUCKED situation (corp., political, environmental, cultural, etc.) quickly is rehabilitation and changing existing institutions and culture. And that’s probably only going to happen during a crisis.
A roadmap would be nice to have when the situation arrives (if we’re not here already) but that’s only gonna happen if we find some nuance and impartiality for people who probably don’t deserve it.
To be clear, Hubert Horan has done a fantastic job with this series. I’m not against this necessary and helpful discussion just looking for an instructional path forward.
Huge liability judgments might also hasten Uber’s fall. Uber & Lyft have gone to extraordinary lengths to write their own driver background and other safety rules. In Austin TX last year they sought to avoid municipal driver fingerprinting requirements by mounting a recall campaign against one city councilwoman, lobbying the hell out of everyone else, and then, when they couldn’t get their way with the city council, demanding a special hissy-fit election on their little issue, which cost the taxpayers well north of $500K. They lost the election by a wide margin, despite spending nearly $10 Mn on their PR/election campaign versus a pittance for the opposition. The PR campaign included the usual crap about how this was about sharing, free markets and innovation, and not a couple of gypsy cab networks bent on predatory pricing and dominance. Local voters saw through the PR, and the obfuscatory wording of Prop 1, and to their very great credit decided that local public safety matters should be governed by the local public. Uber-Lyft then stomped out of town in a huff, expecting us all to faint. They were soon replaced by several other services that worked just as well, including one non-profit (RideAustin) that really does have something to do with sharing. They’ve already donated over $200K to local charities and Uber drivers from Houston have been traveling here to drive for them so they can make a real living.
But there’s always hope in TX for the would-be monopolist. This year Uber-Lyft got the TX state legislature to pause long enough in their weighty battles over where transgender people will be allowed to pee in order to pass a bill that overrides local control of “transportation network companies”. Yes, this is the same legislature that routinely threatens succession when Washington overrides their local control. Uber & Lyft are both back, but many of us would never use them again.
In all of this, what Uber-Lyft have established beyond any doubt is that the safety regime under which they operate is of their own making. That means that when one of their drivers does something ghastly to a passenger or a pedestrian, it’s all on them – there is no local regulatory compliance to hide behind. So, tell your friends in the plaintiff’s bar – in a macabre way someone may make a lot money off of Uber & Lyft. It could be billions and it couldn’t happen to a nicer bunch of guys.
Will Uber in flames have any effect on misclassification by the ones that are branded more “nice”? (Some even have female founders – oh what an empathetic startup they must have!) Do they make hay off not being mean, nasty Uber, and carry on flogging 1099? For the baby-startups that are only now emerging from the womb raising an A round or whatnot, is misclassification seen as toxic or just as good an idea as ever?
Uber is not one of the “systemically important” start-ups. The FAANG/FAAMG enterprises are important to the Feral Gov’t. because all are used to spy on citizens, thereby, making these entities important enough to qualify for taxpayer ‘subsidies.’ Without these subsidies most of these companies would not exist today. They most certainly would not ever have achieved, in the real world, the extreme over-valuations that have been assigned to them.
Many thanks to NC and Hubert Horan for examining in detail the many and myriad reasons why Uber will never become disruptive to the taxi service industry that Uber founders claim it to be.
“Feral Govt” was probably a typo, but if not… it’s effin’ brilliant!
Thank you for the comprehensive reporting on this subject. There have been many, many arguments in my circles about whether Uber could (or should) succeed in its aims. “But technology” seems to be the main argument in its favour; the only other skeptic on my side is an IT systems administrator.
I just updated a blog post of mine from March and linked in chapters 9 and 10 of this great series (I report mostly on the Health IT startup space). See “Health care needs an Uber like it needs another Gruber.”
I think Uber will be around for a long time. It will be part of the Universal Basic Income program or is it Uber Basic Income? MMT money will be printed by the Fed and channeled to Uber. Taxpayers will be promised a “profit”.
Just using the numbers I’ve gleaned from Mr. Horan”s perspicacious series, Uber should be out of money by the end of 2018, if not sooner. If the 2016 losses were 3B, preceded by previous losses of 2B in 2014 and a bit more in 2015, that means at the start of the year they had about 6-7B of their start-up capital. Assuming losses in 2017 and 2018 of a size similar to 2016, they will be a beggar by the end of 2018. And of course, who in their right mind would pour more money into this fiasco? Kalanick will wriggle around trying to save his baby, but in the end, it will likely be absorbed by some entity more interested in Uber’s data and software and very less interested in operating a scabrous taxi service. And then we can go back to some semblance of normalcy in the cab business–I hope!
If Uber survives taxis will disappear. Then after 12 years of court trials and unions and government regulations all Uber and Lyft cabs will have a sign on top of the roof with “taxi” on it. Also inside there will be a ” meter taxameter” monitoring the wheels turning and connecting to apps and monitoring m/ per hour stats and seat sensor monitoring if passangers gets a ride or not for “free” cash outside government controle or Uber controle. Prices and rates will be higher than todays taxi fares and drivers will earn less. Uber will go without any further loss and be selling gps and mobile position info to advertising companies. Government will record your every step of the way in databases. Good luck.
Uber and the Trump administration seems to have an amazing number of similarities. Unfortunately, I can only ignore one of them.
Dear Yves,
I drive for uber. I drive about 250 miles per day, and average $140 per day. That’s about 56 cents per mile, average. That’s for 12 hours of driving. That’s not enough to live on, let alone enough to compensate me for use of my vehicle.
According to a recent survey of the AAA, it cost, for a midsized car, all costs considering, over a 5 year period, about 57 cents per mile, and this is what the IRS deduction is based on, 57 cents per mile. ( or thereabouts ) so, I’m losing a penny per mile, and this is why, I, plus 96% of all Uber drivers, quit within 12 months of working for Uber. In essence, the money we make is merely converting out vehicle’s auto equity into daily cash. The car is literally depreciating
at a rate faster than the cash is being earned.
The simple solution is to double the rate of fare, which would put Uber raters about what Taxi rates are. See, taxi companies figured out, years ago, what the profitable price point is, it’s about twice the Uber rate. Sure, it would result in fewer trips, but at least it would be a profitable rate. Someone should pass this message on to Uber management, because they are not getting this message.
Uber’s fundamental flaws were, from the beginning, “market dominance”, and “an Uber ride to be cheaper than owning a car”. That last one didn’t square with the driver, because what is cheap for a rider, is also cheap for the driver, and the driver is the ONLY face of uber with the public, and if drivers are not happy, that is not good for business, in the long run.
Ha! Kalanick sacked!
I will calm down now — it is merely one guy , and he’s still on the board — and will wait for part eleven of the series.
Thank you Mr. Horan
Mr. Hubert Horan and Mr. Yves Smith, I am sure both of you have already got the news about Mr. Kalanick being sacked.
Same with Kevin Carhart comment above, I can’t wait to read the part 11 of this series!
Thank you