MarketWatch: Uber must raise fares — and do 5 more things — to survive
By Steven Hill, MarketWatch, June 24, 2017
Uber risks burning through its remaining $7 billion in startup capital within about 3 years
The dirty little secret of Silicon Valley is that seven out of 10 startups fail. Uber is on track to become one of them.
While Uber has become popular as a taxi company for the digital age, and its valuation has reached $70 billion — now greater than Ford, General Motors 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 billion in 2016 (and another billion or two in China), and another $700 million in the first quarter of 2017.
The core problem is that Travis Kalanick, who was forced out as CEO by some of the firm’s biggest backers on Tuesday, never figured out a way to introduce any new efficiencies 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 to cut fares and try to gain a monopoly position that can drive the competition out of business.
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 standing at that precipice. More than anything, that’s what the revolt by key Uber board members was about. Every startup company must one day face the realities of the market, which say that a company must turn a profit.
Uber has never figured out how to do that.
No question, ride-sharing has shown its worth. It has become popular with consumers in many U.S. cities where taxi service has been inadequate, due to a taxi shortage caused by the outdated medallion system. While ride-sharing in some form will likely survive, it’s more likely that without some drastic changes to its business model, Uber won’t be around in three to five years.
And Uber has already tried several times to save itself with “pivots,” Silicon Valley’s sugarcoated term to say a company is struggling to reach profitability and needs to change strategy to reassure the venture capitalist who provide the funds to keep it alive.
But each pivot has led to a dead end.
Pivot No. 1: On-demand delivery of food and packages. Since subsidizing passengers’ rides has been such a financial sinkhole, Uber has become obsessed with finding additional ways to squeeze more revenue out of each driver’s car. Kalanick created two services, UberEats and UberRush, to deliver food and packages in between passenger pickups.
But this is a very competitive market with low profit margins. Uber drivers avoid these services because they earn peanuts (less than minimum wage, say some drivers) for a lot of hassle and long (mostly unpaid) wait times when picking up the food or package. Many customers have found the quality of service to be lacking. Uber says the reaction has been “overwhelmingly positive.”
The bottom line is that there’s not a lot of profit to wring out of delivering an $8 burrito.
Pivot No. 2: Packing in more passengers via UberPool. Uber has tried to stuff more passengers into the same vehicle to increase revenue. The company’s latest strategy is UberPool, as in carpool, which allows its drivers to pick up multiple passengers who share part of the same ride in serial fashion for a lower fare (much like a commercial airport shuttle).
But it turns out driving passenger after passenger is a real grind for drivers. Driver-support websites like UberPeople.net and various Facebook groups have lit up with drivers’ complaints, and a recent survey found that only 13% are satisfied with their UberPool experience. And passengers get frustrated too.
Uber has called UberPool “the future of transportation in America,” but the service is failing to win over either passengers or drivers, or to significantly improve Uber’s bottom line.
Pivot No. 3: Foreign misadventures. Uber lost $2 billion during its two-year stint in China, the land of capitalist-communism, and has invested at least $1 billion in India with mixed success. In Europe, the company thought it could get away with using unlicensed drivers in Germany and other European Union member states. Instead, many countries have outright banned Uber, which has appealed to the European Court of Justice. But the court appears ready to rule against the company.
Pivot No. 4: Uber drivers’ lawsuit. Uber has always insisted that drivers are independent contractors and not employees. Yet in April, Uber abruptly agreed to pay $80 million-$100 million to settle a class-action lawsuit by 300,000 drivers in California and Massachusetts who claimed that they are Uber employees and thus entitled to reimbursement for driving expenses.
It was surprising that Uber suddenly backed down, but if it had lost, that would have completely overturned its business model and sent investors running.
Uber recently lost similar cases in the U.K. and Switzerland. It is fighting more than 70 federal lawsuits in U.S. courts, all of which are expensive and a permanent drain on its bottom line.
Read: Uber adds tipping to its app as it tries to make broader changes to its culture
But here’s the final dagger in Uber’s future: the very nature of the business Uber has chosen to “revolutionize” – being a taxi company.
Drivers, vehicles and fuel comprise 85% of livery service costs, none of which decline significantly as companies grow. So there isn’t much room for Uber to find new efficiencies that would allow it to outcompete its competitors. Losses have been endemic to the ride-sharing industry, including at Lyft, which has been losing massive amounts of money from subsidizing fares to compete with Uber. It’s likely not fixable unless companies drastically raise their fares — which won’t make their customers happy.
Making Uber’s situation even more precarious, Kalanick’s mania over cutting costs has alienated one of his most important assets — his drivers. By regularly slashing wages and generally treating his “driver-partners” (as Kalanick likes to call them) with disdain, Uber has burned through drivers as fast as it has been burning through its venture capital subsidies. Uber’s own internal numbers, as revealed in a report co-authored by Princeton University economist Alan Krueger, show about half of its drivers last only a year on the platform, clearly an unsustainable burn rate.
Read: Uber’s housecleaning needs to go beyond the C-suite to actually work
The only escape for Uber imagined by Kalanick was to delete drivers and their wages from the picture through the development of autonomous vehicles. But it is increasingly clear that this is another massive 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 Economist magazine, have recognized that autonomous vehicles are at least 20 years from fruition.
Uber’s only chance to survive at this point is to focus on making its taxi business work. Whoever replaces Kalanick should focus the company on:
1) being a U.S.-based taxi business;
2) follow former Obama Attorney General Eric Holder’s recommendations to root out the destructive bro culture;
3) parlay its popularity among its user base into an increase in fares;
4) hit “reset” on its relationship with its drivers, since it looks like it is stuck with them for a long time;
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 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. But if the new leadership continues to bleed money and chase some distant transportation revolution instead of paying attention to the taxi business it has in hand, it will burn through its remaining $7 billion in startup capital within about three years and then will go out of business
If that happens, Uber’s legacy will be that of becoming the Enron of the transportation industry.
Steven Hill is the author of “Raw Deal: How the ‘Uber Economy’ and Runaway Capitalism Are Screwing American Workers,” which will be published in paperback on June 27.