Daily Archives: February 24, 2017

Illustration credit: Jim Cooke/Jalopnik

If there is one quote that sums up the ethos of Uber, it might be this cut from the companys 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, its hard to see how Ubers defiant, confrontational attitude hasnt blown up in its face. And those disasters mask one key, critical issue: Uber is doomed because it cant actually make money.

After a discombobulated 2016, in which Uber burned through more than $2 billion, amid findings that rider fares only cover roughly 40 percent of a ride, with the remainder subsidized by venture capitalists, its hard to imagine Kalanick could take the company public at its stunning current valuation of nearly $70 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, its becoming more evident that Uber will collapse on its own. Barring a drastic shift in the companys businessan 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 marketsUbers 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 its representative of the ride-hailing giants 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 Kalanicks libertarian ideals have paid off. Most recently valued at a reported $69 billion, Uber has captured a majority of the ground transportation market and flipped the taxi industrya sector Kalanick once famously and snidely referred to as the Big Taxi Cartelon its head. His philosophy mirrors the mindset of one of his favorite authors, the laissez-faire Ayn Rand. In 2012, Kalanick proffered that Ubers battle against government regulations has an uncanny resemblance to the Randian philosophy. A billionaire fighting The Systemand prevailing. Its a good story for those who find truth in Atlas Shrugged.

Ubers long had skeptics, and its not innovative to paint Kalanick, 40, as the boogeyman of Silicon Valley, where unseemly savants exist in vast supply.

The precarious moment in the companys eight-year history falls on Kalanicks lap. Its his baby after alla 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 Ubers death would probably be as much of a rebuke of Kalanicks 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 Kalanicks decision to submit to that philosophywhich, 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.

One of the biggest issues that has left Ubers business model hanging in the balance is its resistance to classifying its driversthere are reportedly600,000 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 protectionsthat an employee may enjoyhealth care, benefits, gasoline and work reimbursements, vehicle maintenance, all of which could reportedly total as much as $730 millioncomplaints from drivers have piled up, ranging from low pay to new services like UberEats (a loathed food delivery service thats reportedly set to lose over $100 million annually) and UberPOOL, its carpool option which increases the companys 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 Ubers president.

The counter-argumentperhaps one that would come from Kalanick himselfis 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 didnt respond to questions from Jalopnik about its viability, recently paid $20 million to settle claims that it grossly misled how much drivers could earn on Craigslist ads. The companys 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 percent of Ubers driver force has no other source of income, while 30 percent work for Uber while holding down a second part-time job.)

To maximize 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 for a ride, and all the sudden you have these people who mightve been taking the bus, and now all the sudden theyre your boss for 80 cents and you better hop to and do what they say with a smile, or youre going to get a 1 star rating, if not [physically] assaulted in some cases.

That strikes at a core tenet of Ubers case that it provides a far-superior taxi service. Violent incidents, for example, involving drivers and passengers have popped up timeandagain against a backdrop of the companys 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 Michigans Ross School of Business. The Uber thing worked because it was cheaper and, initially, it was more pleasant than the typical taxi. So thats why it worked. But people dont 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 its the driver classification as contractors thats routinely staked out as potentially devastating for Uber. A $100 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 companys 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 statethe state asserts theyre employees for state lawit would encourage other states to file lawsuits, but you only lose state by state, Gordon said. If you lose it at the federal level theyre 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.

Its 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 companys headquarters as a space that fostered repeated, systemic sexual harassment.

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 wasnt. He was trying to stay out of trouble at work, he said, but he couldnt 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 mans first offense ... 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 hed 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: Its 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 organization. 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 doesnt lend credence to the idea that its facilitating a decent work environment to succeed going forward.

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 companys 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.

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. Labor 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 $11 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 materialize is muddled.

Even then, Ubers 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 its 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. Horans analysis found that Uber has maintained operating losses of $2 billion a year, surpassing any start-up in history, with a negative 143 percent profit margin. Thus Ubers current operations depend on $2 billion in subsidies, funded out of the $13 billion in cash its investors have provided, he wrote.

Further, Horan found that Uber passengers fares only covered 41 percent 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 nations capital, accounts for 47 percent 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 percent of their costs out of passenger fares, Horan wrote.

If a monopoly is the key to success, its hard to figure how Uber can achieve total dominance. In the third quarter of 2016, for instance, Uber lost $800 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 Lyfts continued relevance in the U.S. has changed the math 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 criticized 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 thats 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, its 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 hes doing.

I mean, seven out of 10 silicon valley startups fail, Hill went on. Theyre producing a product or service that no one necessarily wants to buy at the cost you can produce it for. Capitalism 101, right? So thats what were 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.

Its 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 $100 million per year.

Its also striking that Uber tapped Wall Street banks for a billion dollar loan by convincing several financial institutions to focus only on its nearly $70 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 Ubers more mature operations from the rest of the business.

Thats 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, its 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, its going to turn profitable, and its going to turn highly profitable, said Gordon, the University of Michigan business professor.

A common comparison to describe Ubers approach is Amazon, which lost money consistently over the first several years of its existence. As Horan notes, however, Amazons worst losses were $1.4 billion in its fifth year of operations, but shrank rapidly thereafter, while Ubers losses have been steadily growing and will be over $3 billion in its seventh year.

The problem with Uber, Horan argued, is that it doesnt 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 percent of Ubers 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 thats why the typical approach by venture capitalists with Uber probably wont work.

They dont have an economy of scale, he said. So, every day, venture capitalists fund loss-making companies, but not one [with] a model you cant see how its going to flip twice as many rides that you keep losing money on. Youre not going to start making twice as much money because youre doing twice as much rides. Its not like a factory [with fixed costs].

Maybe Kalanick knows something we all dont. Maybe Uber has a secret team of genius scientists wholl 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 modelor, perhaps, stop the investor leaks of its financialstheres little to suggest it has the bandwidth to survive. Whether its sold, drastically shrinks its market footprint, or just outright shutters, its 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 isnt working.

Excerpt from:

Uber Is Doomed - Jalopnik