Now we’ll see real value of the firm

Los Angeles Times - - BUSINESS - MICHAEL HILTZIK

Now that its bad-boy co-founder Travis Kalan­ick has re­signed as Uber’s CEO, the ques­tion will be asked: Is Kalan­ick’s de­par­ture bad for Uber, or good for Uber? The an­swer is yes. It’s good for Uber, be­cause the com­pany has a bet­ter chance of shed­ding its rep­u­ta­tion as a howl­ingly bad place to work un­less you’re a young white male; and its rep­u­ta­tion for get­ting its way with civic of­fi­cials by break­ing rules, reg­u­la­tions and norms. These changes, if they oc­cur, will im­prove its abil­ity to re­cruit tal­ented per­son­nel, and re­duce the fric­tion — ul­ti­mately costly — that at­tended its tru­cu­lent en­try into every new mar­ket and its con­tin­u­ing squeeze on its 200,000 driv­ers.

It’s bad for Uber, be­cause Kalan­ick’s mes­sianic sales pitch ob­scured the fun­da­men­tal un­prof­itabil­ity of its busi­ness model. It’s not that the com­pany’s hu­mon­gous losses were in­vis­i­ble, since its ven­ture in­vestors un­doubt­edly knew the num­bers and the few fi­nan­cial re­ports the pri­vately held com­pany drib­bled out were all writ­ten in deep red.

But Kalan­ick had per­suaded his back­ers and an un­crit­i­cal tech press that, trust him on this, the endgame would be glo­ri­ous — af­ter all, the com­pany was grow­ing in­cred­i­bly fast. Uber rode his self-con­fi­dence to a pu­ta­tive value of $70 bil­lion. Never mind that this val­u­a­tion was based only on arith­metic, de­rived from the mea­ger­ness of the stake in the com­pany pur­chased by the lat­est round of in­vest­ments. In the ven­ture world, you’re only as valu­able as the last round, so the next round will tell us a lot.

Ousted as CEO by Uber’s big­gest in­vestors af­ter a string of em­bar­rass­ing con­tro­ver­sies and scan­dals, Kalan­ick will re­main an Uber di­rec­tor and re­port­edly re­tain a com­mand­ing share of board votes. But it will be up to some­one else to de­fine Uber for the fu­ture. The search for a new CEO is un­der­way, and that choice will be cru­cial. So, too, will the fill­ing of the nu­mer­ous top jobs cur­rently va­cant, in­clud­ing chief op­er­at­ing of­fi­cer and chief fi­nan­cial of­fi­cer.

But the re­def­i­ni­tion of Uber will have to con­front re­al­ity, which is

far less rosy than the myth. Kalan­ick pro­moted the im­pres­sion that Uber’s cur­rent suc­cess and its world-dom­i­nat­ing fu­ture de­rive from the in­ex­orable ad­van­tages of tech­nol­ogy. The truth is that Uber’s suc­cess is based on two un­sus­tain­able tac­tics: sub­si­diz­ing fares and ex­ploit­ing driv­ers.

What’s the real cost of an Uber trip? The pas­sen­gers don’t know, and we don’t know. That’s be­cause cus­tomers pay only a por­tion of the fares shown on their Uber smart­phone apps; much, if not most, of the cost is cov­ered by the com­pany’s ven­ture in­vestors — that’s where a goodly por­tion of their in­vest­ments has been burned up.

What hap­pens when that well runs dry? The fares will rise, and one of Uber’s sell­ing points — its price ad­van­tage com­pared with yel­low­cab ser­vice — will nar­row or dis­ap­pear.

“Uber has not shown that it can prof­itably pro­duce bet­ter taxi ser­vice un­der com­pet­i­tive con­di­tions,” says Hu­bert Ho­ran, a trans­porta­tion ex­pert who has writ­ten ex­ten­sively about the com­pany at naked­cap­i­tal­ism.com. “A bat­tle be­tween frag­mented, poorly cap­i­tal­ized in­cum­bents and Sil­i­con Val­ley bil­lion­aires sup­ply­ing bil­lions in preda­tory sub­si­dies is not neu­tral mar­ket com­pe­ti­tion.”

That’s just the start of the ques­tions left over from the Kalan­ick regime. What if Uber has to build its self­driv­ing car busi­ness with­out (al­legedly) steal­ing the tech­nol­ogy from Google? Or win­ning lit­i­ga­tion with­out (al­legedly) in­ves­ti­gat­ing the plain­tiff in se­cret? Or win­ning con­ces­sions from mu­nic­i­pal of­fi­cials with­out (al­legedly) track­ing their move­ments covertly?

Can Uber con­tinue to stick its driv­ers with heavy ex­penses? That’s doubt­ful. Uber forces driv­ers to cover their own fuel, main­te­nance, ve­hi­cle wear and tear, and in­sur­ance. Driv­ers be­gin to get this mes­sage af­ter only a few months of work­ing for Uber, at which point they dis­cover that, net-net, they’re driv­ing for some­thing close to min­i­mum wage. A com­pany-funded study de­ter­mined in 2015 that nearly half of its driv­ers drop out within a year.

Uber ex­ploits its driv­ers in other ways. The com­pany re­cruits as many driv­ers as it can in any re­gion, then tries to man­age their move­ment by rais­ing fares in high-de­mand places or times, whether it’s rush hour, the lo­ca­tion of a big event, or the site of an emer­gency. That means that in nor­mal con­di­tions the sup­ply of driv­ers ex­ceeds de­mand. That’s good for pas­sen­gers, who of­ten can sum­mon a driver within min­utes, but bad for driv­ers, who scram­ble for work. The co­nun­drum was best ex­pressed to me by an Uber driver in Wash­ing­ton, D.C., who ex­plained that he fled the yel­low-cab taxi busi­ness be­cause of com­pe­ti­tion from Uber, only to dis­cover as an Uber driver that he was still fac­ing com­pe­ti­tion from Uber.

The push­back against this em­ploy­ment model is com­ing from sev­eral sources. They in­clude state and fed­eral la­bor reg­u­la­tors, who have been in­creas­ingly look­ing askance at the claim by Uber — and many other such com­pa­nies — that their core em­ploy­ees are re­ally only “in­de­pen­dent con­trac­tors” work­ing for them­selves and there­fore not en­ti­tled to em­ploy­ment rights or fringe ben­e­fits.

It’s com­ing from driv­ers them­selves, who are be­gin­ning to or­ga­nize (with the as­sis­tance of gov­ern­ment of­fi­cials in places like Seat­tle, which has passed a law al­low­ing the driv­ers to union­ize). It’s likely that Uber’s cost of em­ploy­ing driv­ers is des­tined to rise, another ero­sion of its busi­ness model.

The im­pact of those forces emerged quickly af­ter the first signs of Kalan­ick’s loos­ened grip, the an­nounce­ment last week that he would be tak­ing a leave of absence from the CEO’s job to grieve for his re­cently de­ceased mother and ponder his per­son­al­ity. As part of a “180 days of change” PR cam­paign, the com­pany added a tip­ping func­tion to its smart­phone app, af­ter years of re­fus­ing to coun­te­nance this ben­e­fit to driv­ers. Uber also nar­rowed the pe­riod in which cus­tomers could can­cel their rides to two min­utes from five, and added a charge to cus­tomers for every minute they keep a driver wait­ing af­ter a brief grace pe­riod. The ef­fect of these changes, of course, is to raise the price of an Uber trip for pas­sen­gers — the first glim­mer of a move to­ward real cost.

The most im­por­tant con­se­quence of Kalan­ick’s ouster as CEO may be that all these fac­tors will get re­con­sid­ered by in­vestors. What they may dis­cover is that the as­sump­tions on which Uber’s vaunted $70bil­lion val­u­a­tion are just that — as­sump­tions.

As we ob­served back in 2015, the fi­nan­cial and mar­ket ar­gu­ments un­der­ly­ing Uber’s am­bi­tions are based on a lot of ifs. No one is quite sure how to mea­sure its core mar­ket. If it’s the ex­ist­ing taxi busi­ness, it could be any­where from $20 bil­lion to $100 bil­lion.

What’s Uber’s po­ten­tial share of this mar­ket? Take a wild guess, be­cause that’s all any­one can do. If it’s 50% of the top es­ti­mate, then Uber would cap­ture gross rev­enue of $50 bil­lion a year; if it’s 5% of the lower es­ti­mate, that num­ber would be $4 bil­lion. Kalan­ick was a mas­ter at fo­cus­ing in­vestors’ at­ten­tion on the big­gest es­ti­mates, but he won’t be able to do that any­more.

Kalan­ick also was able to com­mu­ni­cate a Sil­i­con Val­ley-cen­tric vi­sion of a world trans­formed by tech­nol­ogy. This mod­est lit­tle app was ca­pa­ble of up­end­ing an old, in­ef­fi­cient trans­porta­tion ser­vice model. The pos­si­bil­i­ties were lim­it­less. That’s why we’ve seen an un­end­ing stream of pitches for “the Uber of (fill in the blank)” mak­ing their way through the halls of ven­ture firms and across the pix­els of tech­nol­ogy web­sites. In vir­tu­ally every case, the prom­ise has turned out to be more com­pli­cated. That may be be­cause even in Uber’s case, the prom­ise has been more com­pli­cated.

Uber’s per­sona was Kalan­ick’s per­sona. Be­yond ques­tion he de­serves credit for the com­pany’s growth in val­u­a­tion. But it will be a mis­take to think that the com­pany’s flaws de­rived only from his per­sonal short­com­ings. They’re more ba­sic, and now they will be on dis­play, un­der a glar­ing spot­light. Be ready for a trans­formed Uber, and don’t be sur­prised if its fu­ture is less com­pelling, emo­tion­ally and eco­nom­i­cally, than its past.

Wally Skalij Los Angeles Times

UBER’S suc­cess is based on two un­sus­tain­able tac­tics: sub­si­diz­ing fares and ex­ploit­ing driv­ers.

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