Uber: The Road Not Taken

Harry here.  Today, RSG senior contributor John Ince takes a look at Uber’s history of pivots, an update on Juno vs. Uber and another Uber lawsuit settlement.

Uber: The Road Not Taken [The American Prospect]

Sum and Substance: Uber, the wildly popular ride-sharing company, now hopes to pioneer both self-driving and self-flying vehicles. But long before Uber gets to that futuristic strategy, the company’s core business model appears to be in serious trouble. 

There are other roads that Uber might take, ones that could combine the company’s innovative ride-hailing technology with practical solutions to urban congestion and decent driver pay. But Uber and its grandiose CEO Travis Kalanick seem more interested in pursuing mega-profits and mega-gambles. 

Over the past year, even as its valuation has soared to $69 billion—now greater than Ford, GM, or Tesla—Uber has been losing money at a rate that some tech analysts say is faster than any technology company ever. The company lost “significantly more” than $2.2 billion in the first nine months of 2016, and more than $800 million in the third quarter alone, according to Bloomberg’s Eric Newcomer.

The primary reason is that Uber is charging too little for passenger rides. In its price war with traditional taxi companies and its chief ride-sharing competitor Lyft, Uber is heavily subsidizing each ride with its own venture capital funders’ money.

Transportation industry expert Hubert Horan analyzed what he called “Uber’s bleak operating expenses,” finding that Uber passengers have been “paying only 41 percent of the actual cost of their trips.” So an Uber passenger isn’t paying even half the cost of that ride. “That’s a subsidy greater than what public transit systems receive,” according to transportation reporter Ryan Felton. Bloomberg reports that these passenger subsidies comprise the majority of Uber’s losses.

To understand why Uber is in trouble, you have to understand something about how Silicon Valley operates. Frequently one hears the word “pivot” tossed around the valley; that’s a sugarcoated way to say that a company’s business model is struggling to earn enough revenue to reach profitability, and is burning through the venture capital funding that gives it life. If the VCs get spooked and start pulling back on their investment, that company is toast.

That forces the CEO to pivot—change strategy to reassure the VC investors and keep their subsidies flowing. In the back of everyone’s mind is the whispered secret that three out of four Silicon Valley startups fail, and nine out of 10 never earn a profit. Over the last few years, one can see numerous examples of Uber pivots that have led to one dead end after another. “Many other tech startups lost money as they pursued growth and market share, but losses of this magnitude are unprecedented,” according to Horan. In its worst-ever four quarters, Amazon lost money at just a third of the rate of Uber; and at this point in Facebook’s trajectory, six years following its launch, it was achieving over 25 percent profit margins.

My Take:  Steven Hill, the author of this article and author of the book, Raw Deal: How the “Uber Economy” and Runaway Capitalism Are Screwing American Workers, has established himself as one of the most astute observers of this industry.   With this article he condenses many of the points made in his book.

He gives five examples of “pivots” Uber has made to attempt to turn towards profitability, each time unsuccessful.  Hill then suggests a much more commonsense pivot, what he calls in the title the “road not taken”: why not just charge passengers more – just charge them what the ride actually costs rather than the current 41% of cost?

He then concludes with an eminently reasonable suggestion: portable benefits for drivers.  Here’s Hill’s conclusion, which basically nails it, “the sooner Kalanick recognizes the real potential of the business he has in hand, and quits chasing quixotic chimeras to charm venture capitalists, the greater his company’s chance of survival. To reach modest profitability, Uber would have to stop subsidizing its passengers and allow its fares to rise, finding that sweet spot in the price point between true supply and demand.”

Miss our podcast with Steven Hill? Click here to listen!

Can Juno be the labor-friendly alternative to Uber? [Curbed]

Sum and Substance: Ever since the #DeleteUber movement in response to the company’s reaction to the taxi cab strike at New York’s JFK airport, the fact that users of the ridehailing app so eagerly declared their intent to delete their accounts and switch to a competitor has underlined a big problem for the industry. Ridehailing companies offer an easily replaceable commodity, and if the price is right, it’s incredibly easy to take your business elsewhere.

For those who don’t live in more competitive ridehailing markets, such as Austin, that leaves just one option for unhappy Uber uses, Lyft. And indeed, Lyft downloads in the App Store outnumbered Uber’s for the first time on Monday, according to analysts. But in New York City, the switch may have given a boost to a relative newcomer trying to reshape the way that ridehailing works, or at least offer contractors a better deal. Juno, currently only available in New York, takes a lower commission from drivers and offers them shares in the company, among other benefits. Can they continue to parlay a more favorable deal with drivers into big business?

Analyst and writer Harry Campbell, who runs The Rideshare Guy, a publication that provides driver’s-eye view of the industry, has spoken to thousands of drivers, as well as logged hours a driver himself. He believes that in an industry so dominated by price points and the network effect, Juno can swoop in with discounts and build up market share 

“The apps are all pretty much the same,” says Campbell. “It’s pretty much a commodity product.” What is different, however, is the way that companies treat their drivers. According to Marco, the company formed in 2014 when the founders noticed reports of unhappiness within the ranks of ridesharing drivers. To see if that was true or not, they held a series of focus groups with drivers and came to realize it was a real problem; Marco himself has said that Uber was, “in its heart, truly evil.”

My Take: Juno’s strategy of fine-tuning their app and refining their business model in the New York City market before expanding to other cities seems eminently reasonable to me.  It’s kind of like Muhammed Ali’s famous “rope a dope” strategy where he lets his opponent expend vital energy pummeling him on the ropes, until he’s really ready to fight back and then explodes with a flurry of punches.

Uber has been slowly depleting its war chest of VC capital, spending lavishly on consumer subsidies, driver bonuses and political campaigns in cities all across the world, essentially doing the bidding for Juno or anyone else that wants to enter this space.  Juno swoops in, like a white knight,  with a brand unblemished by the fights Uber has been fighting.  Okay, maybe that’s a fairy tale, but I do think that we’re going to see some major shifts in this industry.

Uber Offers Drivers $1 Each to Wipe Away Labor Threats Valued in Billions [Bloomberg]

Sum and Substance: Drivers’ lawyer said in June penalty could be ‘staggering’. Uber Technologies Inc. is offering its drivers an average of about a dollar apiece to dispose of alleged labor code violations that their own lawyer said might be worth billions. The ride-hailing company asked a state judge in Los Angeles Wednesday to approve a $7.75 million settlement to resolve claims stemming from the company’s refusal to give California drivers the protections and benefits of employees. The accord doesn’t require Uber to stop classifying the drivers as independent contractors.

The claims by Steven Price, who sought to represent as many as 1.6 million California drivers in a class action, were brought under the state’s Private Attorneys General Act, or PAGA, which gives employees the right to step into the shoes of the state labor secretary to bring enforcement actions. Under the 2004 law, the state keeps 75 percent of any penalties won.

Attorneys for employers have nicknamed it the “bounty hunter” and “sue your boss” law because of the remaining 25 percent is a reward for the workers who bring the case. Thousands of such lawsuits have been filed in the past 12 years. The Price case poses a special threat to Uber. The company in September won an appeals court ruling that potentially eviscerated a more advanced class action in San Francisco federal court by forcing the vast majority of 385,000 California and Massachusetts drivers in the case to proceed through arbitration one at a time. But PAGA claims, like those filed by Price in state court, can’t be shunted into arbitration.

Christopher Morosoff, a lawyer representing Price, said at a June hearing in San Francisco that his case cited 17 labor code violations, compared with just two claims — tips and mileage — in the federal case for which the PAGA penalties were estimated at $1 billion by the state agency that oversees labor code enforcement. “Do the math there,” he told U.S. District Judge Edward Chen at the time. “The numbers may be staggering, and they may be in the billions, and you may not want to look at them, but they are real.”

The agreement calls for about $1.7 million to paid to drivers and earmarks about $2.9 million in PAGA penalties for California’s Labor and Workforce Development Agency, with the rest of the settlement sum going toward attorney fees and administration costs. The amount each driver gets depends on how many weeks they have actively driven for Uber. Court approval of the accord isn’t a sure thing. In the San Francisco case, which would have resolved claims for tips and mileage valued by the drivers’ lawyer at $852 million, Chen rejected a $100 million settlement in August. He said the $1 million allotted to resolve PAGA claims was inadequate in light of those claims being valued at as much as $1 billion.

My Take:  Another week, another Uber lawsuit settlement.  Tough to keep track of them all these days.  Looks like Uber’s getting off really easy, if this stands.  This article, while interesting, isn’t nearly as fascinating as the accompanying video on the Bloomberg website, “How Uber and Airbnb Bent Laws and Made Billions” about how these on-demand companies made billions by skirting laws.  The video introduces what they call “Travis’ Law.”  Curious what it is?  Check out the video.

Uber sues Seattle over law allowing drivers to unionize [The Verge]

Sum and Substance: Late last month, Uber sued the city of Seattle, challenging the city’s authority to implement a landmark law allowing drivers in the gig economy to unionize. It was an opening shot in what is likely to be a long and costly legal battle. 

Uber’s legal challenge comes at an awkward time for the ride-hailing juggernaut. The company recently named 2017 “the year of the driver” and has said it will devote energy and resources to improving its relationship with the hundreds of thousands of people who drive on its platform.

This latest situation in Seattle may further complicate Uber’s attempts to reverse the negative effects of that campaign. The law in Seattle, passed by the city council in a 9–0 vote, was a first of its kind. It allows drivers for ride-hailing apps like Uber and Lyft to unionize and collectively bargain for better working conditions, earnings, and other benefits. The bill was a victory for the App-Based Drivers Association, which had lobbied with the local Teamsters union on behalf of freelance contractors. 

After its passage in December 2015, Uber and Lyft declined to challenge it outright, instead supporting a lawsuit brought by the pro-business, anti-union US Chamber of Commerce. But then in August, a judge tossed the chamber’s lawsuit, calling it premature until the city moved forward with implementation.

Shortly thereafter, Uber filed a lawsuit challenging the city’s rulemaking authority, calling it “arbitrary and capricious” and inconsistent with “fundamental labor laws,” according to court documents. “The City must follow a lawful rulemaking process and adopt rules which properly consider the facts and circumstances of drivers and the industry, and labor law precedent,” Uber argues in the suit.

My Take:  Uber has much to fear for what’s happening in Seattle  – witness their hiring to a CIA affiliated PI firm to “research” City Hall politics in Seattle. This is high stakes for Uber, because Seattle could set precedent.  Uber’s entire business model is predicated on the assumption that drivers are not organized and have no effective way to communicate with each other.  If drivers become organized and start presenting unified demands to the company, the game suddenly changes.  What will be your top three demands of Travis & Company?

Readers, what do you think of this week’s round up?

-John @ RSG