by Steven Hill, Quartz, June 26, 2017
CEO Travis Kalanick’s departure from Uber is not a surprise to those who have been following this company for the last several years. In my book Raw Deal about what I call the “Uber Economy,” I predicted this would happen. With Kalanick gone, does Uber stand a better chance now of turning around its fortunes? Maybe.
To understand the obstacles to its survival, it is necessary to understand why Uber is failing. And it’s not just because of the recent slew of scandals. After all, the last six months was hardly the beginning of Uber’s pirate ways. Previously Kalanick had danced artfully, like a wide receiver skipping along the out of bounds line, around an ongoing “parade of horribles” that dogged the company from its inception. No, at the end of the day, Uber’s biggest problem has been financial—it is yet another Silicon Valley startup company that has failed to figure out a way to earn a profit.
The dirty little secret of Silicon Valley is that seven out of 10 startups fail, and Uber is on track to becoming one of them. While Uber has become popular as a taxi company for the digital age, and its valuation has gone through the roof to $70 billion—now greater than Ford, GM or Tesla—the company has been losing money at a rate that some tech analysts say is faster than any technology company ever. It lost nearly $3 billions in 2016 (and another billion or two in China), and it has already lost $700 million in the first quarter of 2017.
The core problem is that Travis Kalanick never figured out a way to introduce any new efficiencies into his business model that would allow this company to provide a taxi service in a more competitive, cost-effective way than regular taxi companies. Consequently, Uber has become stuck in a pattern of using its venture capital funding to subsidize at least 50% of every ride in order to cut fares and try to gain a monopoly position that can drive the competition out of business. In short, Uber is charging too little for each passenger ride. In the ultimate irony, the more customers use Uber, the greater into debt it goes.
But you can only subsidize rides for so long. At some point, the VC investors want a return on their money, or they turn off the spigot. Uber is dangerously standing at that precipice. More than anything, that’s what the recent revolt by key Uber board members who forced Kalanick’s ouster was about. Every startup company, including Uber’s ridesharing competitor Lyft which also has been losing money from subsidizing fares in order to compete with Uber, must one day face the laws of gravity. In this case that means the realities of the market which say that a company must turn a profit. Uber has never figured out how to do that.
Uber has also amplified its troubles with its blind pursuit of ideas like self-driving cars (and its latest laugh-out-loud venture, self-flying cars). Most experts, including those previously bullish on self-driving technology such as Economist magazine, have recognized that self driving vehicles are at least 20 years from fruition. They will not be appearing on our streets anytime soon, other than in more experiments. Kalanick himself has said that winning the race for self driving cars is an “existential issue” for his company, so he has gambled Uber’s survival on this outcome. That spells big trouble because, at the rate things are going, Uber will not be able to delete the cost of its drivers’ wages from its bottom line in time to save the company from bankruptcy.
Kalanick, in his bid to uphold his company’s reputation as a cutting edge technology company and keep the venture capital subsidies flowing, has also launched other foolhardy ventures such as attempts at global domination in places like India and China where Uber does not understand the culture. Uber is still trying to find solid footing in Europe, where the company is widely despised as an arrogant serial law breaker.
Uber’s only chance to survive at this point is to focus like a laser on making its taxi business work. Here’s my recommendation for the “new Uber” and its new leadership. Whoever replaces Kalanick should:
1) re-focus Uber on what it’s good at: being a US-based taxi business,
2) follow former Obama attorney general Eric Holder’s recommendations to root out the destructive bro culture,
3) parlay Uber’s popularity among its user base into an increase in its fares,
4) hit ‘reset’ on Uber’s relationship with its drivers, since it looks like it is stuck with them for a good while longer,
5) drop foolhardy futurist ideas like self-driving or self-flying vehicles that have no chance of succeeding in the near-future and are a waste of its resources and attention span
6) cooperate more with local officials to use the company’s tracking technology in an effort to reduce the horrible traffic congestion that is plaguing city after city. That would mean sharing data so its drivers can be tracked, and helping cities to use its technology to track traffic flows and create congestion zones like in London and Stockholm.
If Kalanick’s successor follows that blueprint, the company has a chance of surviving. If the new leadership does not, it will burn through its remaining $7 billion in startup capital within about three years, and then will go out of business. It will be another startup failure, but in this case a colossal collapse in Silicon Valley. If that happens, Uber’s legacy will be that of becoming the Enron of the transportation industry. I predicted this possibility in my book Raw Deal, and now it looks like it is much closer to coming to pass.