Loss-making Uber does not look like a business worth $90bn
Good luck to those Uber workers protesting about wages and working conditions. They picked their moment to coincide with this week’s IPO in New York, in which the company is set to be priced at $90bn (£70bn) or thereabouts, and they chose well. You do not have to be a bleeding heart liberal to think something obscene is happening when Uber drivers tell tales of sleeping in their cars to make ends meet while the founder, Travis Kalanick, has his shareholding valued at roughly $7bn.
Financial markets don’t waste much time pondering questions of moral justice, of course but even hard-hearted investors should ask if the implied hopes for Uber’s eventual profitability are even vaguely grounded in reality. Two passages in the IPO prospectus are striking. The first, on page 30, reveals more than Uber’s glib response to the protesters that it is continuously working to improve drivers’ “experience”. Here’s the long-term thinking:
“While we aim to provide an earnings opportunity comparable to that available in retail, wholesale, or restaurant services or other similar work, we continue to experience dissatisfaction with our platform from a significant number of Drivers. In particular, as we aim to reduce Driver incentives to improve our financial performance, we expect Driver dissatisfaction will generally increase.”
That’s reasonably clear: to wring profits from what Uber calls its “platform”, the company will have to cut top-up payments and “surge” incentives that are designed to keep the drivers keen and win market share. And the imperative to nudge the terms of trade further in its favour is also obvious: despite boasting revenues of $11bn last year, the company made operating losses of $3bn.
A strategy of annoying more drivers – or “valued partners”, as they’re oddly described elsewhere in the document – may or may not succeed in its own terms but it is hard to imagine it will yield fat Facebook-style profit margins in time. Even poorly paid drivers have greater bargaining clout than an algorithm. Driverless cars have not arrived yet but competition, from Lyft and others, has.
Then there’s the bigger question of what regulators will tolerate. It is less than two years since Uber’s largest owners forced Kalanick to resign as chief executive (he’s now hiding in plain sight as an ordinary board member) because his scandal-strewn reign was creating too many enemies and threatening the value of their investment. Dara Khosrowshahi, the new boss, cuts a cuddlier figure as he warbles about how Uber is a “citizen of the cities we serve”, yet the potential for employment legislation to wreck Uber’s design remains.
The major risk factor in the prospectus describes what would happen if Uber were forced to classify drivers as employees rather than contractors. “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,” it says on page 28. “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.”
In the heat and hype of an IPO roadshow, would-be investors might be tempted to dismiss such warnings as the overblown product of a pedantic securities regulator. Take a step back, though, and it’s hard to be so breezy. On one hand, Uber admits the need to press down harder on drivers’ incentives; on the other, the business model could be ruined if courts or politicians force the steering wheel in the opposite direction and insist on better employment terms.
The bet isn’t binary, of course. Even if politicians in major cities were to be tougher, the company might be able to find some form of tolerable accommodation; and the rules won’t be the same everywhere. Yet Uber is still a loss-making, cash-burning company with a poor reputation and its ability to arbitrage employment rules for its benefit remains deeply uncertain. It does not look like a business worth $90bn. Nothing like.