CEO Travis Kalanick’s departure from Uber is not a surprise to those who have been closely following this company. In my book “Raw Deal,” about what I call the “Uber Economy,” I predicted this would happen. Now, with Kalanick gone, does Uber stand a chance of righting the distressed ship?
To understand the obstacles to its survival, it is necessary to understand why Uber is failing. It’s not just the recent slew of scandals. Previously, Kalanick had been embroiled in a number of imbroglios around law-breaking, driver background checks, under-insured drivers, cyber-stalking and threatening critics. No, Uber’s biggest problem really is financial — it is yet another Silicon Valley startup company that is failing to earn a profit.
The dirty little secret of Silicon Valley is that seven out of 10 startups fail, and Uber is on track to becoming one of them. While Uber has become popular as a taxi company for the digital age, and its valuation has zoomed to $70 billion — greater than Ford, GM or Tesla — the company has been losing money at a faster rate than any technology company ever. It lost nearly $3 billions in 2016 (and another billion or two in China), and it has already lost $700 million in the first quarter of 2017.
Kalanick never figured out a way to introduce new efficiencies into his business that provided taxi service in a more cost-effective way than regular taxi companies. Consequently, Uber has become stuck using its venture capital funding to subsidize at least 50 percent of every ride in order to cut fares and gain a monopoly that can drive the competition out of business. In short, Uber is charging too little for each passenger ride, resulting in low fares but no profitability. The more customers use Uber, the greater into debt it goes.
But at some point, the VC investors want a return on their money, or they turn off the spigot. More than anything, that’s what the recent mutiny by key Uber board members, who forced Kalanick’s ouster, was about. Every startup company, including Uber’s competitor Lyft, which also has been losing money from subsidizing fares, must one day face the realities of the market which say that a company must turn a profit.
Uber has suffered also from pursuing expensive ideas like self-driving cars (and its latest laugh-out-loud venture, self-flying cars). Most experts, including those previously bullish on self-driving technology like Economist magazine, have recognized that self-driving vehicles have at least 20 more years of development ahead. Yet, Kalanick gambled his company’s survival on being able to delete the cost of his drivers’ wages from his expense sheet. That won’t happen in time to save the company from bankruptcy.
Kalanick also launched other foolhardy ventures, such as unsuccessful attempts at global domination in places like India and China, where Uber did not understand the cultures. Uber is still trying to find footing in Europe, where the company is widely despised as an arrogant lawbreaking exporter of “cowboy capitalism.”
Uber’s only chance to survive is to focus like a laser on making its taxi business work. Here’s my recommendation for the “new Uber” and its new leadership:
1. Parlay popularity among users into an increase in fares.
2. Follow former Obama attorney general Eric Holder’s recommendations to root out destructive bro culture.
3. Hit reset on the relationship with drivers.
4. Drop foolhardy futurist ideas that have no chance of success in the near-future and are a waste of resources and attention span.
5. Shut down foreign operations outside London; focus on the U.S.
6. Cooperate more with local officials to use the company’s tracking technology for reducing the horrible traffic congestion and share its driver data so cities can track traffic flows.
If Kalanick’s successor follows that blueprint, the company has a chance of surviving. If not, Uber will burn through its remaining $7 billion in startup capital and go out of business in about three years. That would result in a colossal collapse in Silicon Valley, and Uber’s legacy would be that of being the Enron of the transportation industry. I predicted this possibility, and now it looks like it’s much closer to coming to pass.
Steven Hill is a journalist and author of “Raw Deal: How the ‘Uber Economy’ and Runaway Capitalism Are Screwing American Workers.”