Some enterprises should not exist.
Uber Technologies Inc., for instance.
The problem with Uber is, well, everything.
Everything save that the app-based mobility firm has sufficient cash reserves for now to carry on despite huge chronic losses.
But first, the news.
Uber has enraged U.S. lawmakers this month by abruptly raising prices in its two main businesses, ride-hailing and food-delivery services (Uber Eats). It is doing so in tandem with its largest rivals.
That looks to antitrust regulators like collusion. It also looks like unfair labour practices since Uber’s underpaid drivers — some making less than half the Ontario minimum wage — won’t see a dime of that increase.
And Uber is coming off a quarter, ending March 31, in which its $134 million loss includes $349 million in stock-based compensation expenses for Uber’s executives.
You read that right. If Uber’s executives had paid themselves less — in a quarter in which their efforts yielded losses, after all — Uber might have surprised the market with a rare profit.
Now, back to what else is wrong with Uber.
Uber has too much competition.
With Silicon Valley arrogance, Uber’s founders in 2009 assumed that with high tech they could create a lucrative ride-hailing monopoly, later twinned with dominance in app-based delivery services, that would also improve mobility in big cities.
Twelve years on, Uber has been proved wrong on both counts. Uber operates in one of the most fiercely competitive of all industries and is therefore chronically unprofitable. And it has worsened rather than improved traffic congestion in the nearly 10,000 cities it serves.
And so, Uber has lost more than $27 billion in the past four years. It is one of the least successful big companies on Earth.
Uber didn’t anticipate the galaxy of tenacious rivals it would have to compete with.
Its competitors include the personal vehicles and taxis it expected to displace. Uber must also compete with public transit and traditional delivery firms like FedEx and Canada Post and their local peers.
Uber is in competition with Amazon.com Inc.’s burgeoning delivery service, and with delivery services launched during the pandemic by grocery, restaurant, pharmacy chains and Torstar Corp.
And Uber vies for business against ultra-low-cost neighbourhood passenger and delivery services that are proliferating like crab grass in Uber’s South Asian and Asia-Pacific markets. These are soon to make their presence felt in North America, where Uber derives 62 per cent of its revenues.
There are no barriers to entry in this industry. Anyone with a vehicle can set themselves up as a driving service.
Uber can’t cover its costs.
That means Uber has no pricing power, the term economists use to describe a company’s ability to raise prices. Because Uber’s services are not differentiated in any meaningful way from those of its competitors, customers gravitate to the lowest-price provider.
Which, as it happens, is often Uber. For years, Uber has engaged in fits of irrational pricing, subsidizing its customers with below-cost fares in order not to lose market share to competitors. More often than not, an Uber passenger is paying only 40 per cent or so of the cost of the ride.
Lately, the app-based mobility firms have been trying to raise prices to match increased demand as economies reopen, in what we hope are the last stages of the pandemic.
But, in a long-established pattern over the years, every price increase attempted by the app-based firms triggers pushback from customers and government authorities. Transportation is an acutely price-sensitive industry, as the app-based firms should have known from studying how taxi, public-transit and traditional delivery prices are set.
Sure enough, the latest price increases have drawn the ire of customers and U.S. authorities, as delivery charges by Uber Eats have risen to as much as 60 per cent of the price of the meal itself.
The authorities want to impose caps on what app-based delivery firms can charge and make them conform with federal and state labour laws they’ve so far evaded.
Uber, which helped create and legitimize the gig-economy underclass, is obliged to nickel-and-dime its workforce of more than five million drivers. With a ceiling on prices, Uber’s only hope of making its business model work is by operating a sweatshop on wheels.
In most of the 71 countries in which Uber operates, Uber’s drivers are classified as independent contractors rather than employees. That deprives them of standard employment protections the law provides employees, including minimum-wage pay, unemployment benefits, paid sick leave and vacation pay.
To deal with the resulting, ruinous turnover in drivers, Uber spends hundreds of millions of dollars each year on signing bonuses for new drivers; one-time driver retention bonuses, and payments to drivers who recruit other drivers.
And still Uber drivers are stuck in a low-pay ghetto because Uber and its peers stubbornly refuse to raise base pay.
But Uber was recently forced to do just that by U.K. authorities. To keep its license to do business in Britain, Uber in March agreed to reclassify its U.K. drivers as employees. The drivers’ enhanced compensation includes minimum wages, vacation pay, and enrolment in a pension plan.
Uber’s negative social impact.
App-based mobility has resulted in a net increase in vehicles on the road. That has worsened traffic congestion and made more difficult the fight against climate crisis.
Uber tried to discredit the many reports on its role in congestion until a 2019 report commissioned by Uber and rival Lyft Inc. themselves found that ride-hailing accounted for significant net increases in vehicles on the road in six U.S. cities studied.
That prompted Janette Sadik-Khan, former New York City transportation commissioner, to tweet that “As Uber & Lyft add to city traffic, lose $billions, and undermine transit, we need to ask ourselves what transportation problems they solve.”
That is still a valid question, and it’s a wonder that public officials in Toronto aren’t raising it.
Ahead of its initial public offering of stock in 2019, Uber warned that it “may not achieve profitability.”
That warning gets hauled out a lot these days because it was so well-advised.
It is difficult to see any upside for Uber, only downside, as regulators in more and more of Uber’s markets impose additional costs on a business model that is already a proven failure even with lax regulation.
In business, if your losses equal more than half of revenues in three of the past four years, as Uber’s have, you’d better be working on a cure for cancer, or you should have filed for bankruptcy by now. Which in Uber’s case would wipe out the firm’s ludicrous $118-billion stock-market valuation.
An enterprise that makes huge and growing losses every year without providing social value represents a gross misallocation of capital, and really shouldn’t exist.
Be well. Stay safe.