April 4, 2017    13 minute read

Uber: A Busted Flush or Titan in the Making?

Looking into the Crystal Ball    April 4, 2017    13 minute read

Uber: A Busted Flush or Titan in the Making?

For a company that’s valued at over $60bn, operates in over 80 countries and reportedly has 40 million monthly users there is only one thing missing: profit. Of course, profit eluded companies like Google and Facebook for years before they finally found the right recipe, along with the road to stardom. Nevertheless, as Uber draws closer to a possible IPO in the future, is there still room for growth or are they nearing the end of the road?

Uber is shrouded in a level of mystique and secrecy that one would be unlikely to find in many other Californian-based companies. Despite an enormous valuation, Uber has yet to actually float, which is in stark contrast to many other big tech companies. Of course, one does not know exactly why that is, but the most probable reason is its financial situation.

Why the Mystery?

Uber has not actually released any public accounts, but reputable leaks give a pretty clear indication of the health of these accounts. Various reports by Bloomberg, the New York Times and other sources strongly suggest the Uber is bleeding cash at an astronomical rate. For years Uber has undercut the competition in a race to the bottom, with industry expert Hubert Horan estimating that passengers only pay around 41% of the actual cost.

Leaked information shows losses continuing to stack up, despite aggressive revenue growth. At points, their reported losses have exceeded 100% of their revenue which has given rise to the growing clamour that Uber is fundamentally uneconomical.

While at face value Uber seems destined for the stars, its financials endear it more to that of another cosmic entity, a black hole.

In its effort to monopolise the market, Uber has sacrificed profits in favour of expanding market share. There is nothing particularly questionable about that, but what is, however, is their future ability to capitalise on that market share and deliver for the bottom line in the future. At some point, Uber is going to have to raise fares or cut costs if it wants to become profitable.

The US vs. the World

Economics would suggest that if they raise fares, their competitiveness will fall, bringing them back down to a market equilibrium, in line with most of their competition. Cutting costs could involve reducing the share of income for drivers, which could force them out of the job, or deter potential new drivers.

As mentioned above, there are various examples of companies that went years before making significant profits to justify their huge valuations. Uber is not even ten years old, and so it is perfectly plausible that in a few years they will find a way to successfully profit off their market share.

Various reports point to profitability in their North American divisions while their huge losses would appear to be attributable to their expansion in emerging markets, particularly China. Their North American divisions are well established now, and if they really are profitable there, then there is hope yet that their loss-making ventures in other countries could become profitable over time.

Rotten Culture or Just a Bad Spell?

Aside from the financials, recent events have painted a stark portrayal of the corporate behemoth Uber has either warped into or always been.

  • This week, Uber pulled its self-driving cars from the roads after a crash in Arizona. They were operating self-driving vehicles in Arizona, California and Pennsylvania.
  • Jeff Jones (the company’s COO) quit this month citing corporate differences. His statement: “It is now clear, however, that the beliefs and approach to leadership that have guided my career are inconsistent with what I saw and experienced at Uber, and I can no longer continue as president of the ridesharing business”. One of Uber’s top autonomous driving engineers, Brian McClendon, also quit.
  • In February, a former engineer wrote a scathing blog about the culture within Uber, including the sexism and discrimination against women. The blog went viral and started a debate about the treatment of women in Silicon Valley. The blog has since fuelled the growing DeleteUber campaign which had previously centred on Kalanick’s (CEO) involvement on Trump’s economic advisory council. Around 200,000 people have deleted Uber as a result.
  • In February Waymo, the self-driving car company owned by Google’s parent company Alphabet, filed a suit against Uber. Waymo, alleges that Uber engaged in the ‘calculated theft’ of self-driving technology.
  • In December, Uber backed down from a high-profile standoff with the Californian state regulator over self-driving cars. The company had launched a pilot scheme in San Francisco without obtaining the required permits.

These recent issues only begin to shed light on some of the deeper and more systemic issues that the company faces. As negative reports continue to surface, Uber’s image is in tatters. Bearing in mind that Jeff Jones was hired as part of an effort to clean up Uber’s image, his departure after just six months speaks volumes.

Either Uber is simply experiencing a rough patch, or these are actually serious issues that have become endemic in the culture of the company.

What Exactly IS Uber’s USP Now?

Despite repeated efforts, Uber has not really been able to patent many of the key features that drove its success. Furthermore, the technology, while a revolutionary concept at its point of inception, does not appear to be particularly challenging to replicate today. In fact, its use of technology to call and locate drivers has now essentially been copied across a multitude of different platforms.

New entrants like Lyft and Curb have successfully emulated many of the best selling points in Uber’s own backyard, America. Companies like Didi Chuxing dominate the Chinese market, Grab Southeast Asia and Ola India, to name but a few.

Even if Uber was able to patent some of its features, realistically that is only going to help protect their established hold over Western markets. A patent’s ability to protect against infringement is dubious at best in many markets around the world, especially in those that present significant growth opportunities for Uber.

One might argue that the only significant difference between Uber and many of its competitors now is brand image. Given everything that is currently going on with Uber, brand image is only going to protect the company for so long; and that is assuming it changes its negative trajectory.

The Retreat from China

In 2016, Uber sold off its Chinese division to Didi Chuxing, in return for a 20% stake in the combined company and a $1bn investment in Uber’s global company. After the deal, Didi Chuxing became the largest ridesharing business in the world.

Uber officially entered the Chinese market in 2014 with no real competitors, except for Didi. It performed well initially, with Beijing becoming its most popular city in China. The problems began when Didi merged with Kuaidi in late 2015, creating a homegrown adversary to face off the American giant. The merger brought backers Alibaba Group and Tencent Holdings together (China’s most valuable internet businesses), with Apple coming in later with a $1bn investment in Didi.

With huge pockets, Didi financially outmuscled Uber’s Chinese division to the point where Uber was said to have lost over $2bn in just two years while trying to compete. In the end, whether it was shareholder pressure or simply the realisation that they were fighting a losing battle, it made more sense to cut a deal with Didi than continue burning through cash trying to stay above the water.

Open to Interpretation

On the one hand, the situation was no longer financially tenable. Uber’s losses in China were beginning to threaten the financial viability of the whole company, and so in the long term losing a battle to focus on the war may prove justified. In fact, Uber now has a 20% stake in Didi Chuxing, while Didi founder Cheng Wei and Uber CEO Travis Kalanick will join each other’s boards.

Previously, Didi Chuxing had aligned itself with Uber’s other competitors, Lyft, Ola and Grab, in a coordinated effort to create a global competitor to Uber. With Uber and Didi Chuxing’s deal, that alliance could stall as Didi and Uber focus on working collaboratively rather than against each other. In this case, weakening the alliance could prove beneficial for Uber in its expansion to other markets.

Having cut much of its losses, Uber’s retreat from China could pave the way for an IPO in the near future. Reportedly, one of the main reasons that Uber has not floated yet were its losses. With Uber having cut much of those, the company could become more attractive to potential investors as they see management actively taking steps to improve the financial situation.

“China is such a tough market, in terms of regulation, competition and culture; they faced challenges on so many fronts,” said Li Yujie, an analyst at RHB Research Institute Sdn in Hong Kong. “Cooperating with rather than fighting Didi might not be such a bad idea.”

Taking on Didi

As much as cutting one’s losses could be seen as a strength, Uber’s failure to capture the biggest market in the world represents a missed opportunity. China is certainly a tough market to crack, proving difficult for even the most seasoned of companies let alone a startup. Nevertheless, Uber’s retreat has highlighted how thin it is stretched at times.

Uber had the technology, had the successful interface and even had somewhat of a head start against Didi, but was still forced out of the market. What Didi essentially had was the cash and determination to undercut Uber for long enough, and it worked. Uber blinked in the face of shareholder pressure and amounting losses. Didi has figuratively drawn blood. For every other competitor out there, Didi’s victory could be used as a template to beat Uber. If companies like Ola and Grab are able to attract big investors, then what Didi has achieved in China could be replicated in other countries.

The big advantage some of these companies have is that they are only focused on their domestic market. Uber operates globally and is engaged in expansion all over the world. One of the significant drawbacks of their expansion is that these ventures leak money over a few years before eventually yielding a profit. Right now, Uber is making losses in many of its ventures which are only partly being funded through profits from elsewhere around the world and the rest by investors.

Hypnotically then, if some of these local companies have enough money to fight Uber for long enough, then it is quite possible that they can keep Uber out of these markets.

Autonomous Vehicles

The future of autonomous vehicles is a prominent selling point for Uber from an investment point of view. If they could crack autonomous technology, then they could redefine ridesharing once again and take their market dominance to a whole new level. Many market analysts see Uber’s foray into self-driving technology as its long-term road to profitability. Imagine how much they would be worth if they were the company to perfect driverless cars and what kind of avenues for growth that would give them.

It is completely possible, with the money Uber is investing into autonomous technology, that they could do it. They acquired Otto in 2016 for $680m and, more recently, Geometric Intelligence (undisclosed amount), as they continue to step up their efforts to crack the market.

Unfortunately for Uber, they are not the only player. To say the potential market for autonomous technology is huge is a bit of an understatement. Autonomous vehicles, at the moment, seem to be the figurehead of this drive and seemingly everybody wants a share of what could come to be a very large pie.

The Market Trends

Major car companies like Ford, GM, Mercedes, Tesla, etc. are partnering up with tech firms; Alphabet has its Waymo division (specialising in autonomous vehicles) while Apple apparently has an initiative called Project Titan (information is scarce regarding what exactly Apple is doing). The overarching issue in this craze, though, is the number of different companies and startups that are involved.

In fact, there are so many different players involved that an emerging issue in this race is the lack of human talent available. Poaching engineers and experts in the field has apparently become endemic between companies, particularly in Silicon Valley. Tangentially, workers leaving to start their own companies is becoming an issue. There are various reports from different companies of workers leaving, having taken prized technology or knowledge with them.

Given the market’s scarcity for human talent then, Uber’s loss of almost 20 people last November and December does not look great, to say the least. The workers were based in Uber’s Pittsburgh R&D centre (one of the locations Uber was testing self-driving cars in), with many of them joining a startup called Argo AI, which had been created by an ex-Uber engineer.

The Google War

More troubling for Uber is the lawsuit Google has filed against them. The lawsuit alleges that former Google engineer Antony Levandowski stole around 14,000 technical proprietary files from Waymo, before leaving Google to start Otto (which was later acquired by Uber, and Levandowski is now running Uber’s self-driving division).

“Otto and Uber have taken Waymo’s intellectual property so that they could avoid incurring the risk, time and expense of independently developing their own technology,” Waymo said in the lawsuit it filed on February 23rd with the US District Court in San Francisco. “Ultimately, this calculated theft reportedly netted Otto employees over half a billion dollars and allowed Uber to revive a stalled program, all at Waymo’s expense.”

The outcome of this case could have very significant implications for the future of Uber’s self-driving program. Whether Uber was complicit at all or Google can prove that Levandowski stole technology is still to be decided, but it does not look good for Uber.

A worst case scenario could see Uber face fines and have its program shut down indefinitely. As uncertain as the outcome is at this point; what is certain, however, is that the ramifications of the verdict could seriously affect Uber’s program one way or another.

Conclusion

“What would happen if we weren’t a part of that future? If we weren’t part of the autonomy thing? Then the future passes us by basically, in a very expeditious and efficient way… If we are not tied for first, then the person who is in first, or the entity that’s in first, then rolls out a ride-sharing network that is far cheaper or far higher-quality than Uber’s, then Uber is no longer a thing,” Uber’s CEO, Travis Kalanick, said in an interview last year.

Straight off the bat then, how is Uber going to succeed in this market against so many other players? Or more accurately, how is a company that is not a decade old, has made losses over the last the few years and is being sued over the theft of driverless technology going to crack a market that established companies with huge revenue sources and capital will fail to do so in?

As Ricky Bobby put it so eloquently: “if you’re not first, then you’re last”, especially in a market like this.

The future of Uber would appear somewhat uncertain at the moment. It is worth pointing out that every successful company will have faced problems along the road. What defines these companies is their ability to beat away the problems and keep moving forward.

2017 promises to be an interesting year for Uber and only time will tell whether management can take it to the next level or whether the company will begin to stall.

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