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Mar 092017
 

One of Uber’s experimental self-driving cars. Will they transform Uber’s business model and profitability?

Who doesn’t love Uber?

Who doesn’t love their astonishingly inexpensive rides that can be arranged from our phone with just a few taps of our finger.  Who doesn’t love the simple cashless transaction with no angst over how much to tip, a nice nearly new clean car with friendly driver that quickly arrives and pleasantly takes us to our destination.  (While we think these happy thoughts, let’s try to overlook their ‘surge pricing’ and occasional non-availability of cars, and the impossibility of talking to a real person in a real customer service department if we have a problem.)

Our love as passengers has been matched by lots of love from investors, too.  The company, which started from an initial $200,000 seed investment in 2010, is now generally considered to be worth in the region of $70 billion.  Being private, its valuation is somewhat theoretical, but based on earlier rounds of funding received, this seems to be what it was valued at the last time it went to the market.  Since then, who knows, but some observers believe Uber is waiting until it command a $100 billion valuation before conducting an IPO.

Whether we’re talking $70 or $100 billion, either is an astonishing value for a company that owns no tangible assets and which loses prodigious money every year, in what are apparently larger amounts with each passing quarter.  It seems that 2016 ended up with another $2 billion lost, maybe even more.

It is hard to understand how they anticipate their value to continue growing in that scenario, but no harder to comprehend than the concept of their commanding a $70 billion value currently.  One also has to note that the list of companies ascending all the way to sustainable $100 billion valuations is much shorter than the list of companies that peaked at whatever enormous number, and then watched as zeros were successively removed from their valuation, plunging down to almost nothing and renewed obscurity.  How many companies waited too late before cashing in, only to find that their financial prominence was evanescent?

Talking of the future, one also has to love Uber’s focus on the future, right?  Its aggressive research into driverless cars, passenger drones, and other futuristic potentially transformative travel technologies.  Whatever the future might hold for us, it seems that Uber will be in the forefront of driving that future to us as quickly and as best possible.  Yay for Uber.

It is also wonderful to see Uber –  ‘the little guy’ and underdog – fighting so assiduously against the vested interests of taxi companies and the city and state authorities that taxi companies have lobbied effectively to oppose Uber’s innovation, right?  It makes us all feel like we’re protesting against evil forces resisting change every time we enjoy an Uber ride, doesn’t it!  Yay again.

But how much of this is reality, and how much is hype?  Sure, it is hard to imagine a worse or more expensive travel experience than that offered by a regular taxi, much of the time, and that encourages us all to eagerly search out any sort of alternative.  But will Uber really fulfill the bold promises it is extending?  Can it truly transform the way we all travel short distances?  Or is it yet another example of a ridiculously overhyped concept with no sustainable business model at its core?

Positive perceptions notwitstanding, Uber has also attracted a lot of negative attention of late.  Few sins are as gleefully greeted as hubris, and Uber is definitely guilty of plenty of that.  This article reports on some of Uber’s recent bad press, and there’s plenty more where that came from, including lots linked from within the article.  In particular, the brilliant article written by former employee Susan Fowler makes for compelling reading.  Sure, her commentary doesn’t invalidate Uber’s core business model, but it does show a company that is far from holding the moral high ground.

Indeed, Uber’s core narrative of being the good guy and traditional taxis being the enemy is a questionable one on many fronts.  But do we (or even should we) care, as long as we get rides when we need them, the ride experience is positive, and the cost bargain-priced?

Some people might suggest that Uber’s current actions are akin to illegal ‘dumping’ of product into the market.  In our earlier look at Uber, we suggest Uber’s business model is unsustainable.  In the seven months since that article, the only thing that seems to have happened is that Uber’s cash-burn has accelerated, and its losses have continued to accumulate.  What would happen if after Uber destroys the traditional taxi industry, it then burns out, itself, too?

A recent disclosure suggests that one of Uber’s hoped for transformations may not be as valuable as it had expected.  Uber has been pushing as hard as it can to eliminate the drivers in its cars.  On the face of it, if you no longer have to pay a driver, then the cost of the ride surely must go down, right?  That seems to be an unchallengeable assertion, but the problem comes when you try to quantize exactly how much Uber’s costs would reduce.  When you consider that drivers are often netting substantially less than minimum wage, working enormous hours and even sleeping in their cars, clearly the saving isn’t going to be as massive as would be the case if drivers were being paid the same gold-plated salaries with generous benefit packages that Uber’s administrative staff (now some 10,000 in number) enjoy.

An internal Uber study has now been cited suggesting that driverless cars might only ‘increase profits by about 5%’ (a curious phrase for a company that has never seen a profit to increase – if you increase profits by 5% for a company making a $3 billion loss, what does that actually mean?).  The study is cited two-thirds of the way down this article, a subscription is required to read the originating article.

Is it overly simplistic to say that Uber’s entire business plan boils down to ‘selling services for less than they cost us’ – a concept that will never scale its way to anything other than ever larger losses?  What will happen to the public’s love for Uber when Uber finally starts to charge for the services it provides at a necessary level to break even and to start to earn some money back for its investors?  Most of all – is its promise of revolutionizing future transport options realistic?  Is the new ‘gig economy’ it is based upon going to prove to be as insubstantial as ‘the emperor’s new clothes’?

Uber founder and CEO Travis Kalanick has joined in the currently popular idea of crying on stage in the hope that this demonstrates strong leadership and a universal panacea for all the ills that Uber suffers from.  More substantial is his promise to now hire a COO and to take some leadership/management lessons.  But if Uber becomes more corporate and no longer revels in its ‘bad boy’ iconoclastic image quite so much, will this hasten a move to profitability, or a move to failure?

Our observation and conclusion in our earlier article remains unchanged.  Uber is essentially a generic supplier of a generic transportation service in an industry that will be marked by successively lower cost of entry for new competitors (for example, Via in New York), and a service which evokes no more loyalty among its clientele than do airlines or brands of milk.  The only loyalty you have to your preferred airline is almost surely one that the airline has bought, by way of frequent flier benefits, possibly boosted by the convenience of their schedules and routes compared to other carriers.

What affordable loyalty strategy can Uber come up with to differentiate itself from Lyft and all the other Uber-like services out there?

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  2 Responses to “Is There a Road Ahead for Uber?”

  1. Well articulated. Seems like another bubble waiting to burst. One of the other issues not touched on is the risk to the passengers from the poorly screened drivers.

    • I was deliberately silent on the driver point, because I’m not sure how substantial it really is.

      My sense is that it has become a meme eagerly pushed by the taxi companies, and eagerly seized upon uncritically by the press, always eager for a ‘good story’, any time an opportunity presents itself. So we have much more prominence given to what in reality is only a dozen or so instances of problems, spread among over a million drivers and who only knows how many billions of rides.

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