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Grand Theft Uber

Matt’s note: Today, we take a break from Jim Amrheim’s three-part series on America’s mass shooting crisis. And instead, we discuss how Silicon Valley’s recent multi-billion valuations are coming at the expense of the workers who sacrifice a whole lot more than other people’s money.

Not long ago, I picked up my smart phone and touched the icon for Uber.

I was traveling, and needed a ride to the airport.

Within about 15 minutes, a polite young guy showed up in front of my house, driving a late model car which was very clean and comfortable. We headed off…

I like to talk with drivers. By definition, they get around. They see things. They know things. In my experience, you can learn a lot about what’s happening with the world by speaking with drivers.

So, we spoke. And my immediate takeaway was… If you own Uber shares, sell them.

“You doing this full time, or just as a gig?” I asked.

“A gig,” said the driver. “But I hate it. I hate Uber.”

His tone of voice just dripped with disgust… It’s one heck of a way to begin a conversation.

“What’s the issue with Uber?” I inquired.

“Buncha thieves,” said the driver. “The fare settings are too low. Uber jams a lot of costs back onto the drivers. Any time it looks like you’ve found a way to make money, they change the rules so your reimbursement goes down.”

It’s not just one disgruntled driver, either. The New York Times recently ran an article entitled How Uber Got Lost. The summary stated “The once-swaggering company is losing more money and growing more slowly than ever.” 1

Just a few weeks ago, Uber announced a quarterly loss of over $5.2 billion. Its revenue growth hit a record low.

Meanwhile, across the U.S. and around the world, Uber faces well-financed competitors offering a similar product. Even Uber’s relatively new foray into the rapid-delivery business for food “is in danger of becoming another cash-suck,” per the Times.

In May, Uber went public with a splashy debut on the New York Stock Exchange. Towards the end of 2018, Uber’s bankers pitched a $120 billion value for the company; the largest ever for a new company coming to market.

By May, Uber’s valuation was down around $80 billion for the initial public offering (IPO).

Since the May IPO, Uber’s market capitalization has shrunk 30%, down to $56 billion. The share price is from the $45 IPO level, to a recent $33.

Can Uber’s valuation drop even more?

Well… Markets go up and down. But Uber drivers with whom I speak sure seem to hate the ride-hailing company.

I spoke with my airport driver about how he accounted for depreciation on his car. That is, the car belongs to the driver. And as with all cars, the general rule is that every mile on the odometer removes value from the vehicle. So, how does Uber account for that?

Answer… Uber does not account for the lost value of vehicles its drivers use. It all comes out of the car-owner’s hide. Meanwhile, Uber drivers pay for their own gas, oil changes, tires and other maintenance.

Theoretically, drivers have to maintain their car, offer ride services and deal with the wear and tear on the vehicle their net “reimbursement” from Uber. Does it all balance out in the end? Nope… If you drive for Uber, they’re benefitting from your work and car, while you get a pittance. Grand Theft Uber, so to speak.

Here’s an example. Let’s say that the cost for an Uber trip from my house to the airport is $50. Uber takes $10 off the top, and the driver gets $40.

That $40 has to pay for the driver’s time and effort, plus gas, oil, tires and other maintenance. And from an accounting standpoint, the net-sum must allow for some level of set-aside to pay for another vehicle when the current one wears out.

Does the system work? Nope… Not even close.

In a recent article in the Wall Street Journal, one commentator explained how Uber drivers are, in effect, “liquidating the value of their vehicles” while “receiving payday loans with their cars as collateral.” 2

Uber’s exploitation of drivers for the use of their vehicles is not some bug in the software. It’s a feature of the overall Uber business model.

Let’s start with the general idea that a parked car, sitting in the driveway or at the curb, is an under-utilized asset. And through its software, Uber can connect a driver with an under-utilized car to someone else who needs a ride… to the airport, or anywhere else.

Ideally, it’s win-win. The passenger gets a lift somewhere. The driver uses the car and makes a few bucks. (Hold that thought…)

Uber is the largest company to evolve out of the smartphone revolution which began in 2007, when Apple introduced its iPhone. Using a myriad of new apps, companies built businesses around people’s mobile devices. So far, so good.

Uber was in the forefront of the smartphone revolution. It’s a software play, built upon a mixture of location-mapping and queuing algorithms that permit smartphone users to hail rides and connect with drivers with the touch of a button. Seems easy today, but it was revolutionary when it first rolled out.

Looking back, Uber changed how people move around. Uber enabled vast numbers of people across the U.S. and world – generally, people lacking a chauffeur or taxi license – to become drivers.

Yet the Uber drivers are not formal employees. It’s an arrangement known as “gig work.” In a legal sense, it’s somewhere between “casual labor” and being an “independent contractor.” Give someone a lift and get paid a few bucks. Uber takes a cut off the top.

To its credit, Uber challenged entrenched business models. Uber shook things up in a good way, it’s fair to say.

Think of the municipal taxi monopolies that formerly controlled many locales. You had little or no choice about hailing a dirty, broken-down vehicle, staffed by a surly grumpy driver. The reporting chain rose upwards to a “don’t care” style of management, joined at the hip with a local or state “regulatory” body that was nothing but raw politics at the worst levels. (Ask me how I know all this!)

If nothing else, give Uber credit for forcing the century-old taxicab business model to up its game, big time. Your local taxicab company is likely better these days; nicer vehicles and more polite drivers.

But back to Uber…  Where the overall money-side never really worked. There was never “enough” money to make it all pay off.

Uber is an example of how modern venture finance works in the U.S. Uber was one of those Silicon Valley “unicorn” companies; a privately-held startup that quickly became valued at over $1 billion. The term unicorn reflects the general rarity of success amongst such startup beasts.

Uber raised plenty of “other people’s money” (OPM) and spent it on go-go growth, technology, legal fees (lots of those!) and much more. Uber even hired Beyonce one time to sing for a big party. Typical Silicon Valley extravagance, especially with OPM.

But despite its fundraising and market growth, Uber was always a cash-sink. Unlike many other successful businesses, the company lost money overall. That is, despite millions of drivers across the world giving billions of rides to every point of the compass, Uber has never made a dime of profit.

You might think that a company would show how it can make money before doing an IPO. No, not Uber.

You might think that a company would throttle back on growth to focus on internal efficiencies, such that the cash flow simply covered costs. Not Uber.

You might think that a company that replies on “gig” drivers would do things to encourage more people to want to join up. But no.

Indeed, a key element of Uber’s business model is to exploit drivers, such that the car-owner takes the major hit for depreciation over time. When the car wears out, the driver is left with memories of making some pocket-money and little or nothing with which to replace the vehicle.

Can Uber fix itself? Good question. But really, where do you go as a business when the entire model is to burn cash and take value out from under your “gig” workers?

Yes, I use Uber and will likely continue to do so – unless they shadow-ban me for writing this article. But to assuage my guilty conscience, my standard technique is to tip the Uber driver generously for that ride to the airport. It’s the least I can do.

And on that note, I rest my case.

Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King
Managing Editor, Whiskey & Gunpowder
WhiskeyAndGunpowderFeedback@StPaulResearch.com

1 How Uber Got Lost, New York Times
2 How Uber Makes Its Drivers Pay, WSJ

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