On Friday, Uber became a publicly traded company.
And to mark that occasion, Uber (and Lyft) drivers in the U. S. and parts of Canada went on strike last Wednesday.
Why did the drivers go on strike? And why has Uber’s stock price plunged since it went public Friday?
Ironically, the answer to both questions can be found in an April 11 document Uber released itself – its long-awaited Initial Public Offering (IPO) prospectus.
It is no secret that Uber loses money on almost every ride and burns through billions of dollars in capital every year subsidizing these rides.
The prospectus confirms this. What it all amounts to is a business strategy that is really little more than attracting ever more capital to subsidize low fares, so it can eventually make a profit by wiping out the competition.
But will the strategy work?
The risk factor section in an I.P.O. prospectus always serves as a sort of warning label for investors, and Uber’s is particularly comprehensive — totaling 35,000 words.
And, according to the prospectus, Uber actually making a profit is threatened by an onslaught of competition from all sides that has intensified in recent months and caused Uber’s loss to balloon to more than $3.7 billion in the 12 months through March—by far the largest loss ever for a U.S. startup in the year before an IPO, according to S&P Global Market Intelligence.
Startups with deep-pocketed backers are using heavy discounts to overtake Uber’s food delivery services in the U.S., India and Mexico. A well-funded competitor in Latin America has launched an assault on Uber’s ride-hailing business there. In the wake of price wars with competitors, Uber’s once-robust revenue growth has flattened and losses have ballooned.
Even Uber admits its operating expenses will “increase significantly in the foreseeable future, and we may not achieve profitability.”
Uber’s proficiency for dumping heavily subsidized, cheap fares into the market has made it one of the most prolific money losers in tech history as it tried to put regular taxis out of business and divert as many commuters as it could from public transportation. In 2018, Uber’s operating losses were US$3-billion, taking its total operating losses over three years to US$10-billion. Its 2018 net income of US$997-million was largely the result of asset sales in Russia and Southeast Asia, as well as gains from its investment in China’s biggest ride-hailing company, Didi Chuxing.
Uber’s answer to all doubters: once it eliminates the competition, it can raise prices and the profits will roll in.
It’s likely a nice fantasy that will forever remain a fantasy. There is no way Uber’s new breed of competitors (Lyft among them) is going to allow it to take full control of the ride sharing market.
Uber has a dilemma. If it raises fares to try to reduce losses, it will forfeit market share just as the competition is heating up. But to gain market share, it will have to take heavy losses by keeping fares low, or dropping them further, and giving drivers a bigger cut of the fares to reduce their horrendous attrition rate (most Uber drivers don’t last a year). How long can it afford to sustain these losses? Another way of asking this question is: How many more billions are investors willing to pump into the company?
The regulators are coming after Uber
Competition is one serious threat. The other is governments, many of which are pursuing regulatory measures that could seriously undermine Uber’s business model.
Many governments dislike Uber because they think that its business model is based on exploiting drivers, who Uber treats as independent contractors, not employees. As independent contractors, Uber drivers are underpaid and lack many of the protections that benefit employees under employment law.
Uber faces court challenges over the independent driver status of its drivers in dozens of jurisdictions. If enough courts in larger jurisdictions determine that Uber’s drivers are legally employees, Uber would face a serious threat.
The company essentially admits this in its prospectus.
The independent contractor status of Drivers is currently being challenged in courts and by government agencies in the United States and abroad. We are involved in numerous legal proceedings globally, including putative class and collective class action lawsuits, demands for arbitration, charges and claims before administrative agencies, and investigations or audits by labor, social security, and tax authorities that claim that Drivers should be treated as our employees (or as workers or quasi-employees where those statuses exist), rather than as independent contractors.
The prospectus goes on to say:
Nevertheless, we may not be successful in defending the independent contractor status of Drivers in some or all jurisdictions. Furthermore, the costs associated with defending, settling, or resolving pending and future lawsuits (including demands for arbitration) relating to the independent contractor status of Drivers could be material to our business.
Aside from court decisions not going Uber’s way, there is the real threat of jurisdictions changing the law making it difficult, if not impossible, for Uber to maintain the Independent Contractor status of its drivers in those jurisdictions. Again, according to its prospectus:
Changes to foreign, state, and local laws governing the definition or classification of independent contractors, or judicial decisions regarding independent contractor classification, could require classification of Drivers as employees (or workers or quasi-employees where those statuses exist). If, as a result of legislation or judicial decisions, we are required to classify Drivers as employees (or as workers or quasi-employees where those statuses exist), we would incur significant additional expenses for compensating Drivers, potentially including expenses associated with the application of wage and hour laws (including minimum wage, overtime, and meal and rest period requirements), employee benefits, social security contributions, taxes, and penalties. Further, any such reclassification would require us to fundamentally change our business model, and consequently have an adverse effect on our business and financial condition.
So who actually benefits from Uber?
Not Uber’s drivers. Again, recent studies show that Uber drivers make poverty wages — about $10 an hour after their vehicle expenses are deducted from their pay. And drivers’ fortunes might only worsen after the company goes public. Given its massive annual losses, the best long-term hope for Uber’s business is that drivers disappear altogether, replaced by cars that drive themselves. In rushed pursuit of that profitable vision, one of Uber’s self-driving cars killed a pedestrian last year.
The environmental gains have also yet to materialize. Though ride-sharing has prompted some people to go car-free, vehicle ownership has gone up in cities where Uber and Lyft are popular. Car services might also be prompting wealthier people to ditch public transit, thus reducing political support for it.
In summary, since its inception, Uber has skirted laws and cut corners to trample over regulators and competitors. And it pushed a frightening new picture of labor — one in which everyone is an independent contractor, toiling without protection, our hours and our lives ruled by uncaring algorithms that only Uber understands and can endlessly fine tune.
To repeat: Who actually benefits from Uber? Admittedly, the IPO will be a big day for a few privileged people in the tech and financial communities.
And pretty much nobody else.