Why Uber Isn’t Built to Last
Uber has a massive flaw in its business model and nobody is talking about it
Last year, Uber went public and raised $8.1 billion from the I.P.O. The company is now the highest valued tech IPO since Facebook and Alibaba, but is it built to last?
U ber has been so successful because it doesn’t sell car rides, it sells time and convenience. Just open the app — almost anywhere — and you’ll be able to find a ride. And for the most part, they’ve found a way to keep prices low.
Uber’s way of calculating the ride cost is really quite simple, they start with the regular base fare, add the per-minute rate multiplied by the time spent in car, plus distance times the per-mile rate. All of this is — of course — dependent on the city.
Oh, and then add the booking fee and possible airport, toll, cancelation, cleaning, and lost item fee. And if there’s not enough drivers, the price gets multiplied by a surge price which can be 2x, 3x, or even 7x. Uber also uses machine learning to predict how much you’re willing to pay based on where you’re coming from and where you’re going.
Despite all these shenanigans, Uber is almost always cheaper, faster, and easier. Uber took the outdated taxi industry, sprinkled in some technology and completely reinvented the wheel, but the future doesn’t look so bright.
A Lesson From History
In the 1930’s The Great Depression happened. Every fourth American was out of a job and this drove many to start driving taxis. Meanwhile, far fewer people could actually afford to take a taxi. When supply goes up and demand goes down, prices fall dramatically.
Drivers got angry and rioted in the streets, causing the city of New York to write the Haas Act, which established the medallion system for New York taxi cabs. The city allotted 17,000 medallions to be given out, which were for all purposes, permits to drive a taxi.
This worked fine, but some 80 years later, with a million more people in NYC, the number of medallions dropped to 13,000. The number of medallions issued is now more political than practical.
One medallion, was once worth over $1 million, but then Uber happened and its drivers flooded the market by not requiring medallions, completely ruining a medallion’s value. Sound familiar?
High competition, meant low prices and angry calls for regulation. And now that many households are in an economic depression, many are looking to drive for Uber and other companies like it.
The Real Cost of Uber
If you ask an Uber driving how much they make an hour, they may point you in the direction of a couple articles floating around that say the average Uber driving makes around $20 an hour.
What most studies don’t include is the cost of the car, its depreciation over time, maintenance, gas, and the cost of insurance. Include these factors and the earnings don’t look stellar.
A recent study out of MIT, found that the true wages are closer to $8.55 an hour before taxes. They also found that 8% of drivers actually lose money.
Uber considers its driver not as employees but as independent contractors. Employees may be entitled to minimum wage, gas reimbursement, over-time, breaks, collective bargaining, paid leave, and health insurance. It’s been estimated that this would cost Uber more than $4 billion a year.
For this reason Uber is very careful about calling their drivers, partners and calling their company a “platform”. They simply connect riders to drivers, who decide when to work, what to wear, what to drive, and so on.
But Uber controls the prices, and that’s the catch.
If drivers are truly independent contractors, then Uber setting their fares could be considered price fixing. So, what are they — employees or independent contractors?
The truth is, nobody really has an answer, but this dilemma will shape the industry in the future.
Something Doesn’t Add Up
Uber makes more money with more drivers, but drivers want the opposite. They don’t want any competition at all. If a driver had it their way, they’d be the only ride in town.
Yes, Uber needs drivers, but the majority of their drivers leave the platform after one year. Uber has a constant cycle of new drivers and this makes them completely disposable.
From the outside, Uber and its drivers seem economically intertwined, but as long as Uber has a constant rotation of fresh drivers, they can keep prices competitive with other companies.
The real winners of the Haas Act weren’t the cab drivers — who can’t afford to buy a medallion — it was the owners.
At first taxi drivers gave away their first $100 of the day to “rent” a medallion, but now companies like Uber are straight up taking 25% of their driver’s earnings. And with Uber not having turned a profit since its inception, this percentage could go up.
For many, Uber is still a wonderful employment opportunity, but it’s not the ground-breaking revolution many people have made it out to be.
The Profit Problem
On paper, Uber has the perfect business model. It has a huge network of drivers, but it doesn’t need to buy a single car or gallon of fuel. It’s all perk and no work.
Yet Uber lost $4.5 billion in 2017 and last year, that almost doubled to $8.5 billion.
Uber’s biggest problem isn’t impending issues of legality or controversy, but basic holes in its business model.
The magic of many companies, is the network effect. Every new customer makes it easier to get another. For Uber, this effect is only regional. More drivers in NYC does nothing for Beijing. In fact, Uber recently failed in all of China.
Every city is a new city that needs to conquered. Think about starting a new company in every single city on Earth.
Drivers need riders before they drive and riders need drivers before they’ll ride. This helps keep prices low and profit non-existent.
Uber’s Escape from Unprofitability
Don’t get me wrong, Uber is doing a stellar job of diversifying, and they might actually make a profit this year, but they still need to change their business model.
One way out of this hole could be self-driving vehicles. If you remove the driver, you remove the money-eating machine. Then again, buying or developing a fleet of self-driving cars is a money-eating machine itself.
Will Uber become one of the biggest names in self-driving or will the company end all together?