Uber is one company you don't want to see disappear, but the wildly popular ride-hailing service might be headed for the app junkyard.
Silicon Valley's most valuable private tech company is burning through billions of dollars. It has forfeited its operating licence in several big markets. It is being sued by Waymo, Alphabet's driverless car division, over allegedly stolen trade secrets, and the European Court of Justice will soon rule as to whether Uber is merely an app designer or a full-fledged transportation provider; if the latter, it will be subject to costly regulations.
Uber is also appealing a decision by a British employment tribunal last year that it has to treat drivers as workers, who are entitled to the minimum wage and benefits—such as holiday pay—instead of contractors, who are not. Scandals related to the company's bro culture have sent many of its top managers packing. The biggest departure came in June: cocky CEO Travis Kalanick, the computer whiz UCLA dropout who launched Uber in 2009 and pushed it into more than 600 cities, much to the indignation of conventional taxi services.
Fear not, you might say. If Uber vanishes, smaller rivals will fill the gap. That's how market capitalism works. Out with the pig and in with the swan. Indeed, dozens of competitors, among them Lyft, Gett and Careem, are already in the game, trying to take a piece of Uber's action.
Good luck to them. Uber isn't in trouble so much because it's a bad company; it's in trouble because it's in a bad business. Uber can only be profitable if it succeeds in re-creating the very monopolies—licensed taxi services in every city—it is trying to destroy. The company that preaches competition can't afford competition. If a miracle happened and Uber were to achieve monopoly status, it would be regulated like regular cab firms or broken up.
Traditional taxi services owed their profits to highly restricted supply—the ubi-quitous "medallion" system. The licensed black cabs in London, while spacious and equipped with drivers who never get lost, could charge obscene prices.
Along came Uber and its strategy to flood the market with supply, using drivers who owned or rented their own cars and were not paid wages or benefits. Customers loved the easy-to-use app, and the prices were a bargain. Uber's growth was phenomenal. Its most recent private funding round, in 2016, valued the business at $68 billion (all currency in U.S. dollars), or almost 50% more than Ford Motor Co.
Uber was, and remains, a consumers' dream because it represents a net transfer of wealth from the rich to the poor—almost every ride loses money. The rich are Uber's investors, the 0.01-per-centers. The poor are Uber's customers. What a delight. Many businesses shift money from the poor to the rich.
As a result, Uber is one of the most prolific loss-making tech companies in history. In 2016, it lost $2.8 billion on revenues of $6.5 billion, a figure that does not include the $1-billion investment loss on its China business, which Uber sold that year. The company's losses in the past six quarters have totalled an astounding $4.5 billon. The bigger Uber gets, the deeper it goes into the hole. That's partly because there are no economies of scale in any taxi venture. Drivers, cars and fuel compose the vast majority of the costs, and they don't decline, relatively speaking, as the business expands.
Obviously, Uber would like a monopoly, or close to one, so it can raise prices, as Amazon has done with many e-books. But licensed taxi services, governments and regulators are fighting back in several cities. In September, for instance, Transport for London ruled it would not renew Uber's licence. Its charges against the company ranged from failure to report criminal offences to allegedly designing a software program, called Greyball, to withhold information from regulators.
While many of the charges were sensational, it appears that Uber's most serious offence was "dumping"—charging fares below cost—on a massive scale. Uber claimed to have 40,000 drivers in London (presenting a congestion nightmare) and 3.5 million users of its app. That means Uber, in effect, was not just competing with the regular licensed taxis but with the city's public transportation systems. Governments hate to compete as much as private companies do.
Uber can't win. If it continues to use bargain prices to buy market share, its losses will keep piling up, and it will earn the retaliatory wrath of governments and licensed taxi operators. If it raises prices to stem its losses, it will forfeit market share and the compelling growth story it has peddled to eager investors. Uber seems to be committing slow-motion suicide. That's too bad. We need more rich investors who are willing to lose fortunes to subsidize the masses.