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Could the Uber boat be secretly sinking under the weight of its overvaluation?

All[e]s Not Well at Uber. An opinion by Bobby Healy

Can a reformed Uber thrive without the advantages of loose regulation it enjoys today?

Dara Khosrowshahi- the new Uber CEO has inherited a mess not of his own making and is certainly skilled in the diplomacy it’s going to take to clean up after Travis. Having navigated Expedia through 12 successful years of growth and responding to all manner of macro economic headwinds – as well as driving a tech re-platforming of a very complex and diverse business – his credentials are solid.

But the very same 40,000 Uber drivers in London that Khosrowshahi shed crocodile tears for this week HAVE to lose their jobs for the business model and valuation of Uber to work. The drivers themselves know that. Ask them. It’s a temporary love affair.

Transportation as a Service (TAAS) that Uber (and others) provide is a commodity product, measured on varying permutations of ETA and price depending on the customer segment. Safety and security are a given, with quality – in the form of tiered products such as “exec”, “lux”, “standard” etc simply stratifying the business according to customer segments. There are other attributes that influence a customer’s choice and loyalty, but their importance is dwarfed by ETA and price.

In fact, when it comes to price and ETA, Uber do a better job for the consumer than anyone else – the company has more cars at better prices – all the time. However, Uber takes a shabby approach to its customers’ personal welfare as evidenced by Transport for London’s (TFL) revocation of their operator’s license in London. The problem for Uber’s competitors though, is that customers don’t factor in their personal welfare when they chose a ride hailing operator. They assume that some magical government entity is watching out for them. At peak times all a customer cares about is ETA. At off peak and at higher frequency usage, they care more about price – and that’s where ride sharing and bill splitting options come in.

It’s a simple thing really – customers don’t want to be left standing in the rain, or the cold, or the dark waiting for a taxi, and that’s exactly what would happen when the same regulator that cares only about their safety, refuses to adjust to the dynamics of supply and demand and almost insist on a mismatch between price, supply and demand. Uber fills the void left by a lethargic regulator with the simple device of surge pricing. If it rains, up the prices. If the prices go up, more drivers will get into their cars and work for the higher reward. Demand will be satisfied. Customers will always be able to get home. The regulators solution? Sell more umbrellas, and ironically – young ladies – wobble home alone in the dark in your high heels? The regulator is actually helping Uber to destroy the taxi industry.

Just look at the following diagram from Evercore on how the regulator fails to respond to consumer needs. Is it any wonder the traditional taxi industry is being destroyed when they are force-fed such poor pricing? Demand in mobility is elastic as hell. Is it that regulators don’t understand that, or simply don’t have the tech wherewithal to deliver a price-elasticity model to the taxi industry?

Cost of Mobility has been coming down for 4 years

(Credit: Evercore)

Uber also has an open goal when it comes to competing for its customers on price. Because of its legal relationship with drivers, they don’t have a VAT exposure – rides are at least cheaper by the cost of VAT than those of its competitors, and that’s before ride subsidies and awful driver economics even kick in. Uber’s competitors simply don’t have a level playing field. And BOY are Uber scoring goals when the referee is asleep…signing up 30,000 new customers in London a week by their own account.

Diagram: Uber drivers are essentially minimum wage contractors.

(Courtesy: Evercore)

Regulators in some markets are oblivious – or ambivalent – to the genuine needs of the travelling public they are supposed to serve. And then – they go nuclear and simply pull the plug on a company that were genuinely solving the customers’ needs?

And what about that mouth-watering $69 billion valuation the company attracts? You’d have to conclude that its private investors know something we don’t. After all, how can a company lose so much money and still become the most highly valued private company in the history of capitalism? What magical business model is justifying such a gargantuan price tag?

Well, just as Jack had faith in the magic beans he bought on the way to the market, so too do Uber’s investors. When self-driving, autonomous cars come along, a substantial part of the cost of servicing Uber’s customer disappears. By various estimates, 80% of the overall unit cost is the guy behind the wheel. Uber calls them “contractors” in public, and a “temporary cost” in other forums. Truth is, the Uber model collapses without self-driving cars. That’s another reason why its drivers are contractors and not employees. “We’re a tech company” is the mantra. Yeh right.

Evercore sees price/mile continuing to fall over time to drive consumer elastic demand in ride-sharing miles driven.

(Credit: Evercore)

But when will driverless cars come? Optimists like Elon Musk are saying “5 years or so”. Realists put it at about 10 years. I’m in the 10 years+ camp myself. Both Uber and Lyft have declared that 100% of their journeys will be driverless in less than 10 years. I read the fine print. There are no exclusions. This feels like a pretty big “assumption” as it’s called in the investment world. It’s called a “hail Mary pass” in the sporting world.

All or nothing.

Worse still, Lyft have partnered with Alphabet’s Waymo for their self-driving technology – acknowledging the latter’s lead in a winner takes all race. And why haven’t Uber killed Lyft anyway? In fact, there are many disruptors succeeding in cities that Uber should have already claimed the monopoly it seeks. Could it be that – when the rules are the same for both sides – the only tool available to build market share is unsustainable discounted pricing (Uber is pricing below its variable costs). No amount of volume turns a negative number positive. Worth remembering too, what happened when that strategy was applied in China. Any well capitalised business can beat Uber in their home market – so long as Uber can’t flout regulation to their cost and pricing advantage. Yandex in Russia are another good example of Uber not having the killer app valuations imply. Could it be that ride-hailing is not a “one size fits all” business and that market specific variants a condition of success?

Uber isn’t the only company doing well in NYC.

 (Source: toddwschneider.com)

The real threat of the ongoing Alphabet Waymo lawsuit is that Uber fall even further behind in the race to level 5 autonomy. What then? What does Uber provide in the value chain that others can’t easily provide? Manufacturers provide the cars. “Somebody” will maintain them. Car hire companies such as Hertz and Avis maybe? Google will provide the location based services to locate and hail rides. Waymo, or somebody nimbler perhaps, will provide the enabling software to remove the driver cost from the equation. Sure, there’s a role in optimising live fleets based on traffic patterns, customer locations, historical data etc. but that’s a machine-learning egghead away from a solution in any number of qualified tech companies. I really struggle to see what value Uber are bringing to the table that can’t be easily replicated through investment and/or partnerships.

Finally, if ever there was a poster child for exuberance, let me remind you of the numbers here. In 2016 Uber lost $2.8bn on the back of revenue of only $6.5bn (and that’s not even including the $1bn a year the company was losing in China). Compare that to just the travel arm of Google that has revenue in the same year of $11.2bn and with a POSITIVE margin in the low 30s. When you consider that Google seem to be way ahead in the technology that really matters in Uber’s space, namely autonomous driving, you’d have to look at Uber as a rather expensive lottery ticket.

The key difference enabling Uber to decimate the traditional taxi industry is their side-stepping of regulation and all the constraints that come with that. The company argues that because their customer is not waving their hand up in the air to call a taxi, their drivers don’t need a taxi license. It’s literally that simple; Giving the metaphorical one finger salute to governments, mayors and cities everywhere the company goes. No wonder the general public love them.

The company is decelerating it’s cash burn – only losing $700m for Q1 2017, which gives Dara about 2 years to steady the ship before he needs to deal again – whether by IPO or otherwise. Public market investors will be no pushover if they’re only being asked to cash out insiders…

If I was Benchmark Capital (who invested $12mn in the company), and if the latest $69bn valuation is based on the premise that Uber will have a winner takes all advantage because it will be the first company to power autonomous taxis (and the consequent unit cost advantage that comes with that) what I’d be doing now is cleaning up my public image, hiring a CEO that is a well-known face to the tech markets, share the risk with somebody else (Softbank), race towards an IPO and unwind my position before the tidal wave of regulation and competition knocks the valuation hailo {sic} off my head.

Oh wait…

Good luck with that Dara.

(Disclosure: I’m the CTO at CarTrawler who provide ground transportation services to its airline and other online clients. These products include car hire, private transfers, and on demand taxi rides using an aggregator model.)


Email: marketing@cartrawler.com