Uber’s business strategy has involved trampling government regulations and daring the relevant regulators to do something about it. That strategy has been worked so far, but regulators and the public have begun to show more spine in the face of Uber’s arrogance. Meanwhile, financial analysts have been turning a more critical eye on Uber’s growth and profit potential, and not always liking what they see. Whether the company can sustain its putative $65 billion valuation — derived not from actual financial results, but on the expectations of private investors — is in question.
Uber’s current strategy of dominating local taxi markets depends heavily on the cooperation of regulators (or on intimidating them) and maintaining a positive image with the public. As far as their image, Uber seems to follow the old adage that there is no such thing as bad public relations. To them, all news on Uber is good news. But in public view there are so many horror stories of customers getting assaulted that it astounds me that anyone would ever use them.
On the regulatory front, just two weeks ago Uber agreed to pay $20,000,000.00 ($20 million dollars) that it had systematically deceived drivers about their potential earnings and the terms of a lease deal it offered to help them acquire cars. Uber got away without admitting or denying the charges, but a picture has been painted as a result showing a company that engaged in wholesale deception in order to recruit drivers. In 2014 and 2015, the FTC said, Uber asserted on its website that its UberX drivers earned median incomes of more than $90,000 a year in New York. The truth, according to figures from 2013 to 2014, was that the median driver’s income was only $61,000 in New York. Fewer than 10% of all drivers in New York made as much as Uber had claimed.
Meanwhile, in 17 markets including Los Angeles and Orange County, Uber placed help-wanted ads on Craigslist offering the enticing prospect of making as much as $25 an hour, even driving part-time. In truth, the FTC said, only a fraction of drivers could clear that much. For example, in L.A. and Orange County, where Uber quoted fares of $20 an hour, fewer than 20% of the drivers reached that mark.
Uber’s representations about its auto sales and leasing program were also deceitful, the FTC said. From 2013 through mid-2015, some 7,000 drivers signed up with three subprime auto financing companies with which Uber made deals for a four-year “lease to own” arrangement or installment credit exclusively for its drivers. Uber claimed the drivers would get preferential interest rates, the FTC said; instead, many were saddled with higher rates than other buyers with similar credit scores — in some cases more than double. The bottom line is that Uber has ahabit of doing what it wants regardless of law
Uber is also running up against labor regulators calling foul on its claim that its drivers are independent contractors not entitled to the benefits of employment. The New York State Department of Labor has ruled that two former drivers are entitled to unemployment compensation. The ruling follows a similar one in 2015 by the California labor commissioner for a San Francisco driver. And in Seattle, Uber has just filed suit to invalidate a 2015 city law that gave its drivers, and those for other such services, the right to unionize.
These battles strike at the heart of Uber’s business model, which depends on flooding markets with platoons of drivers, sticking them with such expenses as gas, insurance and maintenance, and skimming 25% of the fare off the top. Drivers get the benefit of being linked with passengers via Uber’s ride-hailing app, but they’re powerless to control their fares, which Uber sometimes discounts to attract passengers, or the level of competition. Uber’s interest lies in hiring as many drivers as it can for a given market; the drivers, however, end up cannibalizing each others’ opportunities.
This looks like a win for Uber and its investors, but the scanty financial information that has dribbled out about the firm’s revenue and earnings suggests that it’s nothing like a profit-making machine. Bloomberg, reporting from unofficial sources, calculated that Uber lost more than 2.2 billion in the first nine months of 2016, including $800 million in the third quarter alone. Is that really a path to profitability?
Financial analysts are beginning to question whether Uber’s profit potential is all it’s cracked up to be. Transportation industry experts have interpreted Uber’s losses as implicit subsidies to attract riders, meaning that riders were paying only 41% of the cost of their trips. The question is how Uber would keep their business if fares had to more than double to allow the company to break even.
Additionally, Uber’s growth seems entirely explained by its willingness to engage in predatory competition funded by Silicon Valley billionaires pursuing industry dominance. Uber’s business model is focused on the pursuit of monopoly power. But that’s an expensive global quest, and there’s no telling how long Silicon Valley venture investors will bankroll it. Uber already lost the battle in China, potentially a transportation goldmine. Uber gave up the battle in China last year, selling its subsidiary there to domestic company Didi Chuxing — which has hinted that it might wish to expand to new national markets.
Perhaps in recognition of the limitations of the ride-hailing market, Uber is investing heavily in self-driving cars. But launching its own fleet of vehicles would mean a drastic transformation of its business model. Whether its investors will keep their money in a hardware company rather than a purveyor of software isn’t clear.