The Trouble With Uber

Uber CEO Travis Kalanick's recent meltdown hints at problems with the company's business model. Photo:  Heisenberg Media via Creative Commons
Uber CEO Travis Kalanick's recent meltdown hints at problems with the company's business model. Photo: Heisenberg Media via Creative Commons

It’s been a bad few weeks for Uber. Revelations of sexual harassment in the company followed a very public blowback when Uber let its drivers break a taxi strike of JFK Airport protesting the Trump administration’s travel ban. A few days ago, CEO Travis Kalanick was recorded having a shouting match with a driver over Uber’s diminishing pay.

Joe Cortright at City Observatory says that beyond the public meltdowns, there are a growing number of signs that Uber’s business model just isn’t sustainable:

It’s losing money, and its competition is forcing it to lose even more money, in order to stay in business. In an effort to stay afloat, Uber’s passing its pain on to drivers, inventing a raft of lower-priced services (UberX, UberPool) and offering lower reimbursements to their drivers. Kalanick’s admission that competition is putting a cap on Uber’s prices–and profits–suggests that Uber’s $69 billion valuation may be excessive and that Uber’s critics may be right about the viability of its business model. The most strident critics maintain that the company will likely implode from its growing losses. Jalopnik’s Ryan Feltonhas been unstinting in his criticism of the company. Leaked financial reports from the company, analyzed by Hubert Horan at Naked Capitalism make a strong case that the company’s investors are subsidizing something like 59 percent of the cost of rides.

It remains to be seen whether the ride-sharing model is really economically viable, especially in face of competition. Our view at City Observatory has been that promoting competition among providers is a good thing, as a way of lowering prices and encouraging innovation: ‘Let a thousand Uber’s bloom‘ we said. And ultimately competition will help determine whether this business model actually makes any sense. To date, the companies have been propped up by the influx of money from venture capitalists, and, arguably, the willingness of driver/contractors to work for modest (and perhaps exploitative) wages.

Cortright continues:

There’s no question that ride-sharing and transportation network companies are “disruptive technologies.” But how disruptive they are depends directly on the prices they charge. The growth of Uber and Lyft is significantly due to the fact that their fares are lower than taxis and their service is better than taxis or transit. Earlier this week, a study of New York traffic trends attributed the rise in transportation network companies to the relatively low price of their service. The impact, and ultimately the success of these companies depends on what fares their customers are willing to pay.If Uber’s fares were say to double, its likely that its growth would decelerate significantly, and its mode share might actually decline.

More recommended reading today: The Political Environment reports that while Wisconsin lawmakers have been pouring billions into highways, some towns have been so deprived of transportation funds they’re reverting paved roads to gravel. Bike Portland explains that the family of a local bicyclist who was killed on an unsafe bike lane received a half-million-dollar settlement from the city. And the Urbanist reports that Seattle’s King County Metro is expanding bus service.

  • Larry Littlefield

    “It remains to be seen whether the ride-sharing model is really economically viable, especially in face of competition.”

    Not as a way to make a living. It takes an expensive mode of transportation — the auto — and makes it even more expensive by adding a driver. A taxi ride is a luxury good, not a mass solution. Uber is something most people can’t afford and a job most people can’t live on.

    But ride-sharing can work for dynamic carpooling, with people making a small amount of money filling empty seats in their vehicle for trips they would have taken anyway. Essentially splitting the cost of the vehicle.

    https://larrylittlefield.wordpress.com/2015/01/05/uber-uber-alles/

    Basically, dynamic carpooling should be organized as a non-profit organization for each metro area, because it is a natural monopoly. The organization would hire firms such as Uber, Lyft, etc. to provide the enabling technology.

  • reasonableexplanation

    Something I don’t quite understand regarding Uber not making money:

    In the city I’m familiar with (NYC), an Uber costs effectively the same amount as a yellow cab. Except Ubers don’t have to pay for a taxi medallion (hundreds of thousands of dollars). So why do yellow cabs make money while Ubers don’t?

  • Freeway

    Uber’s fares elsewhere are very low. In busy Washington DC metro area fares are cheap. Uber has special promotions to encourage drivers to get on the road especially during certain times in certain zones. This payout offsets their cut. Also, they have trying to, with difficulty, to expand aggressively overseas and that is costing a lot of money.

    The bottom line is that Uber can not keep fares low forever. Everyone thinking Uber being cheap now is great should enjoy it while it lasts. Uber can’t survive losing billions year after year. Investors will scram and the company will go bankrupt. We will have to wait and see.

  • Freeway

    All it would it take is for Apple and Google to decide they don’t want to feature Uber in their app stores and bam $69 billion valuation is gone. I don’t think that will happen though. Google’s self drive affiliate did file a lawsuit against Uber recently for stealing technology. Should be interesting to see how that plays out. Moreover, a hack of their servers could wreak irreversible damage. I think Uber has a shaky future ahead. It is losing money at an alarming rate and will eventually run out of cash. The only way to survive is to increase fares considerably which will stunt growth. They are in quite the predicament.

  • Vooch

    Self driving vehicles is the holy grail for TNCs

  • sam

    In the long run, it may turn out that the main benefit that Uber has brought us (at least the residents of densely packed cities like NYC) is the technology upgrade to our more traditional ride-hail services. Without uber, the dinosaur taxis (and the TLC, which was required to approve such things) might not have been forced to move into the 21st century and adopt credit card payment systems, app-hailing systems (like Curb and Arro), and other relatively modern conveniences. So that’s…something.

  • Chicagoan

    I seldom call a ride share, but when I do, I call Lyft and never Uber.

    Everytime I speak to somebody who drives for both companies, they always speak more highly of Lyft, which I think is telling.

  • Asher Of LA

    Waze has already deployed such a service in select locales. Looking forward to its wider deployment.

  • Vinstar

    It takes an expensive mode of transportation — the auto — and makes it even more expensive by adding a driver. A taxi ride is a luxury good, not a mass solution.

    I don’t get that argument, because the costs of owning and operating the vehicle falls entirely on the contractor/driver, not Uber. The driver is a contractor not employee so how is Uber losing any money when virtually all the costs are born by the driver? Uber simply collects the fee from the customer and gives a small portion of it to the driver so how could it possibly lose anything?

    Uber is something most people can’t afford and a job most people can’t live on.

    I can understand how the drivers are losing money being paid so little while burdened with the costs of fuel, insurance, maintenance, car payments and so on, but I cannot for the life of me understand how or why the company itself is losing so much money unless the people running it are either stealing from the company, incredibly incompetent or both.

  • Larry Littlefield

    The problem is the system doesn’t provide enough income savings between the two — the driver and the riders — because the driver is trying to do it as a job. So Uber has a choice of either paying far too little, or charging far too much, or both.

    As for how it is losing money, I suspect it is subsidizing drivers in some locations, or else there wouldn’t be any. And overpaying its top employees at the expense of shareholders, like all the other companies.

    http://www.marketwatch.com/story/stop-this-is-not-like-the-dot-com-bubble-its-much-worse-according-to-this-chart-2017-03-02?mod=MW_story_top_stories

  • Larry Littlefield

    There is a chicken and egg problem, as I described. If everyone was using dynamic carpooling, then anyone could be pretty sure of getting a ride from their origin to their destination at any time, and they could get rid of their cars and rely on it. If everyone isn’t doing it, then you need to have that car anyway for places you have to go to, so why not drive?

    And the way to maximize the odds of a hit is for everyone to be on the same platform.

    The way to do it is for some large group to kick off a non-profit organization dedicated to making it happen. And when it had enough people committed to do it, contract with someone to provide the service at 25 cents per ride.

  • Asher Of LA

    I don’t think that chicken and egg problem exists, because many people will have a need for a car beyond their basic commute, while others won’t. Say, a young single woman who can do all her errands locally by walking or biking, but needs a car to commute, vs a family who needs to haul its kids around.

    As for the provider of carpooling, an open-ended solution would be better. Platforms would communicate with each other, and form inter-platform pairs and split the resulting commissions.

    That would allow competition and innovation among platforms, instead of just one stagnant one. I’d love to see the same for Uber/Lyft ridesharing, but the dynamic nature of those rides could make it harder to integrate the platforms, compared to a simple static work commute.

    Waze has a big big advantage here, because it’s already widely used for commuting. It looks like carpooling on the app is as simple as contacting a driver who already has their commute saved in the app, which is likely tens of millions of people. That skips the big step such efforts face of getting a massive user base with little to offer initially. They’ve also enlisted a number of large employers in Northern California to kickstart the program. Waze plans to charge riders a 15% commission, above the IRS mileage rates.

    I could see Waze getting an iron grip on this market, with little in the way of competitive alternatives until self-driving cars become available. But Waze is pretty competent and non-rapacious so it’s not a problem for now. I know Uber tested a similar system in Chicago but considering it hasn’t been rolled out elsewhere, it probably didn’t work.

  • Larry Littlefield

    “Waze has a big big advantage here, because it’s already widely used for commuting. It looks like carpooling on the app is as simple as contacting a driver who already has their commute saved in the app.”

    Is it dynamic? That is, are riders paired with drivers for each trip individually, depending on when they are leaving and where they are going?

  • Asher Of LA

    No, it’s not dynamic, it’s pre-scheduled. But there are lots of trips that aren’t dynamic (like people going to work every weekday), and they’re easier to address. Try solving a simple problem, and then move on to the bigger ones…

  • Larry Littlefield

    That doesn’t solve the problem of the young, the old, the handicapped, and the poor, who might not have a car at all. And their numbers are rising in the suburbs, where mass transit is not a realistic (or cost effective) option.

    Perhaps after Uber goes broke, its former female employees who fled the company might buy it out of bankruptcy, accept a lower stock market valuation, and use its ride-matching technology for dynamic carpooling.

  • Jacob Wilson

    You’re mistaken to think they’re any different. Both are working with wealthy private investors to systematically lower wages of workers.

    It only plays into their hand that consumers feel they can make ethical choices by the products and services they buy. The end result is the same: privatization, compromised public transit and safety and lower wages.

  • mcas

    Agreed – I can’t wait for 2045! But, pray tell, technophiliacs: what shall we do in the meantime?

  • Vooch

    you going to be in for a ton of heartbreak, by 2025 there will be at least 30 million SD machines on America’s roads.

  • calwatch

    I think there are many people who drive Uber and Lyft who are doing so to monetize time that would be spent doing non-paid things. This is especially the case on weekends and nights. So the wages required for a “side hustle” like this are less than if they did a part time job. And unlike a regular part time job at a restaurant or retail store, you can determine your own availability.

  • BlueFairlane

    I think it far more likely that by 2025 there will be at least 30 million tech heads saying that by 2033 there will be at least 30 million SD machines on America’s roads.

  • Vooch

    good comeback and funny also. Here is the math:
    2016 – few thousand SD vehicles operating in test mode
    2017 – Widespread beta testing of tens of thousands of level 4 SDVs
    2018 – 100,000 SDVs shipped to fleets; mainly trucking & for hire vehicles
    2019 – 200,000 SDVs
    2020 – 400,000 SDVs
    2021 – first widespread retail sales of SDVs figure 5% of market 1 million
    2022 – 7% market share (1.5 mill)
    2023 – 10% market share (2 mill)
    2024 – 20% market share (4 million)
    2025 – 40% market share (8 mill)
    2026 – 50% market share (10 mill)

    a mere 27 million plus add in perhaps 10% of existing vehicles retrofitted and the number is 40 million

  • BlueFairlane

    The fun thing is that all you have to do is remember to add 1 to all the dates, and you can cut-paste this comment forever.

  • Vooch

    you do realize that over 20,000 level 4 vehicles are already operating on our roads

  • Gene

    Right now Uber owns nothing. They claim to every regulatory agency they are NOT a taxi company and therefore do not have to play by those rules. They are a technology company! Their drivers are not employees they are independent contractors. The drivers work for pennies and supply the cars, a place to park them, service them and obtain and pay the insurance. Flash forward “x” number of years in Uber’s dream world. They now have a fleet of self driving cars. They are now a taxi company!! Hello regulation! Yes they save the huge portion of the fare they pay the driver with self driving cars, but they now must buy the cars. New York City has 50k Ride Share cars and they need more, Right now these cars are owned/leased by drivers who bring them home, park them in their driveways or on the base they are affiliated with. The car may drive itself but it needs service. If electric it needs to be charged. They have a long way to go. Right now the fleet on the road being tested has a lot of coddling, works in a small area, when that expands the costs and problems will rise tremendously. The way Uber burns through cash they better have lots of investors willing to risk money to get them to that point

  • Andrew

    New York City taxis have accepted credit cards since 2007. Uber was founded in 2009.

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