By Steven Hill, New York Times, August 30, 2017
Uber’s board has picked Dara Khosrowshahi, leader of the online travel company Expedia, to replace the embattled chief executive, Travis Kalanick. But the company’s troubles run deeper than Mr. Kalanick’s flubs and scandals, and new leadership alone won’t be able to right this distressed ship.
If Mr. Khosrowshahi is to succeed, he’ll have to do what his predecessor refused to do: confront the reality that Uber’s business model simply doesn’t work.
While Uber has become popular as a taxi company for the digital age, and has been valued at nearly $70 billion — more than Ford, G.M. or Tesla — the company has been losing money faster than any technology company ever. It lost nearly $3 billion in 2016 (plus another billion or two in China), and it has already lost over $1.3 billion in the first half of 2017.
The dirty little secret of Silicon Valley is that seven out of 10 venture-backed start-ups fail because they never become profitable. The company Mr. Khosrowshahi will take over is on track to becoming one of those failures.
That’s in part because Uber has never figured out how to offer taxi service at a lower price and still earn a profit. Consequently, it has become stuck in a trap, using its venture capital funding to subsidize at least 50 percent of every ride to cut fares and try to gain a monopoly position that can drive the competition out of business. As a result, the more customers use Uber, the greater into debt it goes.
Uber can subsidize rides for only so long. At some point, investors want a return on their money. They want to get to the stage where they can profit from the company’s I.P.O., or they turn off the spigot. Uber is standing at that precipice. More than anything, that’s what the recent revolt by Uber board members has been about. Uber’s initial investors and board members were willing to look the other way as scandal after scandal erupted because the business model seemed to be on track. But now some investors are publicly saying Uber is worth far less than $70 billion, and the Uber board is offering shares to new investors at a discount.
These are troubling signs. Every start-up must one day fulfill the market’s demand that it turn a profit, but Uber has never figured out how to do that. While ride sharing in some form will probably survive, it’s more likely that without some drastic changes, Uber won’t be around in three to five years.
Mr. Khosrowshahi must avoid the mistakes of his predecessor by accepting that “pivots” (Silicon Valley-speak for the desperate changes troubled companies make to reassure their venture capitalist funders) are not the answer. None of the pivots Mr. Kalanick tried — like on-demand delivery of food and packages through UberEats and UberRush, packing in more passengers via UberPool, and expansions into China, India and Russia — improved the bottom line.
Why? Because none introduced efficiencies or changed the basic underlying economics of the taxi industry, the way Amazon did with retail by getting rid of brick-and-mortar stores through online sales.
Confronted with this reality, a desperate Mr. Kalanick set his sights on deleting drivers and their wages from the expense sheet through the development of autonomous vehicles. But it is increasingly clear that this is another huge gamble that Uber cannot win, at least not in time to save itself. Most experts (including those previously bullish on self-driving technology, such as the editors of The Economist magazine) have recognized that autonomous vehicles are at least 20 years from fruition. We will continue to see various experiments, and autonomous service vehicles used in very limited settings, but Mr. Kalanick’s promise of a self-driving transportation grid dominated by Uber is pure science fiction.
Uber’s only chance to survive at this point is to actually make its taxi business work. If he’s to have any chance of doing that, Mr. Khosrowshahi will need to make major changes.
First, he should parlay Uber’s popularity among its users into a significant increase in fares.
Second, he should follow the recommendations of Eric H. Holder Jr., the former attorney general, to root out the company’s destructive “bro culture.”
Third, he should find a way to repair Uber’s poor relationship with its drivers, since the company will need them for a good while longer. One study found that only 4 percent of people who sign up to drive for Uber are still driving a year later. Uber burns through drivers as fast as it burns through its investors’ cash.
Fourth, Mr. Khosrowshahi should drop foolhardy futurist ideas like self-driving or self-flying vehicles (the latter was Mr. Kalanick’s latest brain storm) that have no chance of success in the near future and are a waste of resources and attention span.
Fifth, he should shut down Uber’s foreign operations everywhere except London, where it has had a degree of success.
Finally, he should head off the coming backlash over urban congestion by cooperating more with local officials to use the company’s tracking technology to reduce the horrible traffic (much of it caused by Uber and its competitor Lyft) that is plaguing cities. That would mean sharing driver data so cities can track traffic flows and create congestion zones like the ones in London and Stockholm.
If Mr. Khosrowshahi follows this blueprint, the company has a chance of surviving. If not, Uber will burn through its remaining estimated $6.6 billion in cash and go out of business in three to five years, and he’ll be its final chief executive.