Slowly but surely it looks like the Uber/Softbank deal is going through, but what does this deal mean for the future of Uber? In other news, how safe is Uber? A new case in the courts is demanding passenger safety information from Uber, but is it in Uber’s best interests to release this information? These questions addressed by senior RSG contributor John Ince – plus, a new study says raising rates on passengers wouldn’t increase driver earnings.
Uber Hopes a New Investment Keeps It Afloat After the First $11.6 Billion [Inc.com]
Sum and Substance: Ride-sharing and self-driving vehicle company Uber reportedly has an impending multi-billion investment from Softbank. But what seems on the surface to be great news looks more like a sign that things are really bad and that Uber will have a big challenge surviving, let alone making the big profits that early investors had expected. …
The new deal Softbank deal, reported by the Wall Street Journal, should be additional glad tidings. But when you think about what they really represent, it’s more like hearing that a hasty medical procedure is keeping someone alive for now. That’s better than a failure, and yet the future is still dark. You can move only so far beyond fundamental business models. The U.K. labor tribunal ruling that Uber drivers were actually employees and not contractors was a serious blow. Uber depends on shifting operational costs onto others. Even doing so, it’s been losing an estimated $2 billion a year, at least over the last couple of years.
That would put any company into dire straits. You need a fat piggy bank to fund all that red ink. Uber has never made a penny in profit as it funded expansion and attempts to push into markets with little regard for regulatory realities or compliance. Instead, the money has flowed like crimson flood waters over worn levies. With a funding deal last September, the total reached $11.6 billion, according to Crunchbase’s tally. That’s before any new Softbank deal. That amount is staggering and utterly insane.
My Take: Uber and Softbank finally appear to have resolved their differences and arrived at an agreement in principle for their mammoth $10+ billion investment – the largest purchase of stock in a private company on record. It’s a blockbuster deal that at least, on the surface, appears to make everybody happy.
Softbank gets approximately 15% of Uber and will now be a major player in all major ridehailing markets, with the ability to alter the competitive dynamics of the industry by nudging companies to work with each other rather than against each other.
There are all kinds of murky legal ramifications that will likely be played out behind the scenes. Uber gets a $1 billion cash infusion, shares sold at its current $68 billion valuation. At its current burn rate of $2.8 billion/yr, that will last them all of about 4-5 months.
Early investors and employees get to cash out their investments at a lower valuation, estimated around $50 billion. Those investments surely had been causing a lot of heartburn – as they all read all the negative news about the company, but selling even at this discount is still a home run. As one of those early investors told me recently when I asked him why he would sell his shares, “Warren Buffet put it best, ‘Nobody ever went broke selling at a profit.'”
But, as the author of this article points out, any celebration might be premature to anyone who wants Uber to succeed over the long term. The investment doesn’t address root causes of Uber’s astounding level of cash drain. Remember this – by almost 10:1 the funds from this investment are going to people who want to unload their shares – at a deep discount from the current “market rate” of $68 billion. That tells you all you need to know about what those who know most about the company think about Uber’s future.
Lawyer to Uber: Turn over data on rape, assault reports from riders [CNN/Money]
Sum and Substance: A new lawsuit is again calling into question Uber’s background check policies and how it monitors its drivers. On Tuesday, two anonymous women filed a complaint in California against Uber claiming the ridesharing company had falsely presented its service as safe to passengers. Both women say they were raped by drivers. They state that they ordered the service after a couple of drinks, believing it to be safe.
“Uber’s advertising campaigns make the assertion that it provides the best option for a safe ride home after a night of drinking,” the suit alleges. “[But] what happened to Ms. Does 1 and 2 is happening to women across the U.S. Shockingly, it is happening with greater frequency.” The new suit is seeking class action status to include individuals who have alleged or reported “rape, sexual assault or gender-motivated violence or harassment” by Uber drivers in the past four year. The lawsuit claims that “thousands of female passengers have endured unlawful conduct by their Uber drivers” over the past seven years.
The suit asks for an injunction that would direct the company to make changes to its screening process, as well as implement new monitoring of drivers to protect riders from rape, assault, and gender-based harassment. Uber has in the past shunned the idea of fingerprint-based background tests in most markets, saying the checks can be costly and slow, and impact the company’s ability to constantly bring on new drivers. Questions about how the company screens its drivers were raised again earlier this month after the suspect in a terror attack in Manhattan was revealed to be a driver for both Uber and Lyft.
My Take: If I were inside Uber’s inner circle, this lawsuit would really scare me. First, if the plaintive gains class action status, then more accusers will surely be coming out from the shadows. We see this phenomenon manifest itself all over the news these days, from Bill Cosby, to Harvey Weinstein, to Roy Moore to you-name-it.
Combine Uber’s media magnetism, with a potential sex scandal, with the lure of a big settlement and you’ve got a combustible mixture that could explode in Uber’s face. But the thing that would really scare me from Uber’s perspective is if the judge rules that Uber has to make public the data it has about passenger safety.
After all is said and done – Uber has no business model if passengers widely begin to question whether the service is safe. All we’ve got to go on now is a lot of big headlines about salacious incidents and assaults. That’s not good – but hard data might be a lot worse. Only those inside the circle know for sure how bad or good the data is. The fact that they haven’t made any of it public suggests it’s not good.
Uber, Tech Firms Helping Their Contract Workers Sign onto Obamacare [Insurance Journal]
Sum and Substance: Uber Technologies Inc. and some smaller technology companies are launching campaigns to publicize Obamacare enrollment among their contract workers after the Trump administration slashed government marketing for the health program by 90 percent.
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Simple economics explain why driving for Uber will never be a great job [Quartz Media]
Sum and Substance: Tired of reading about the Uber-Travis-SoftBank drama? Try this working paper from John Horton at NYU Stern and two researchers at Uber Technologies Inc. It argues that it’s pointless for Uber to raise fares, because the market will relatively quickly return to an equilibrium where drivers aren’t making any more per hour than they were before.
Here’s the logic: Imagine Uber normally charges $1 per minute and $1 per mile, and it increases that to $2 per minute and $2 per mile (these numbers are obviously made up). In the short term, drivers will earn a lot more, because, well, both rates have doubled. But over time, a couple things happen. One, because Uber suddenly lets them earn more, drivers work more hours. Two, because Uber is now more expensive, people order fewer Ubers.
When supply (driver labor) goes up but demand (trip requests) goes down, there’s less work to go around. Although drivers are getting paid more per trip, the overall time they work—the study calls this “utilization”—falls. After about eight weeks, their hourly earnings (“marginal revenue product”) return to what they were before the fare increase.
The Independent Drivers Guild, a non-union group that represents ride-hailing drivers in New York, slammed the study. “The notion that Uber has no way to increase driver wages is absolutely ludicrous,” guild director Ryan Price said in a statement. “The company is pocketing higher fees than ever before, as high as double what the driver is paid for a trip, while drivers get pennies. If there is room for 220% Uber fees and projects like flying cars, there is room for a raise for drivers.”
My Take: This paper put forth an interesting thesis that undercuts the strategy I and others have frequently suggested – why don’t Uber/Lyft just raise fares? Seems so simple and logical: more income for drivers = more revenues for the companies.
But wait – maybe it isn’t so simple. The article suggests that demand will go way down. I question that. I also question the objectivity of this study. After all – two of the researchers in this study work for Uber.
Readers, what do you think of this week’s round up? If Uber raised prices on passengers and passed it on to drivers, do you think we’d still end up making the same we’re making now?
-John @ RSG
Latest posts by John Ince (see all)
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