How to Fix Uber in Six Not-So-Easy Steps
Thanks to Eric Newcomer and Brad Stone in the new issue of Bloomberg BusinessWeek, we now know that the departure of Travis Kalanick from his position as chief executive of Uber Technologies Inc. was “a lot weirder and darker than you thought.” Thanks to a recent story in The Information, a website covering technology, we know that eight years after it was founded, Uber continues to lose ridiculous sums of money: $743 million in the third quarter of 2017 alone.
We know that Uber’s well-publicized problems—everything from its bro culture to the five criminal investigations the company faces—have caused its valuation to decline 30 percent from its $69 billion peak. We know that even after the hiring of a new CEO, Dara Khosrowshahi, skeletons have continued to fall from the closet, like the recent news that Uber had a tool that allowed it to lock down computers in any office around the world if the cops showed up.
What no one seems to know is how Uber plans to fix its problems. My view is that Uber’s well-documented cultural issues will be easier to correct than its less publicized business problems.
Since he was lured to Uber late last summer from Expedia, Khosrowshahi has set the right cultural tone, combining humility with a determination to move forward in the right way. He has made it clear that Kalanick-era “virtues” like “stepping on toes” and thumbing noses at regulators will no longer be tolerated. He has apologized for the company’s previous behavior, most notably in London, where regulators shut Uber down. And he let go of certain executives who personified the old culture. All good moves.
A second problem—the Kalanick cloud, you might call it—has also been largely taken care of. Although the former CEO still has a seat on the Uber board, his influence has been significantly diminished. When Softbank recently took a 15 percent stake in Uber, Kalanick sold 26 percent of his stock to the Japanese investment firm. Perhaps more importantly, Kalanick and other early investors lost the 10-1 super-voting rights that used to come with their preferred shares. And the board has been increased to 17 seats, two of which go to Softbank, further decreasing Kalanick’s potential to stir up trouble.
Which brings us to Uber’s business problems. The core issue in the U.S. is that Uber is trying to hold onto its dominant share of the online ride-hailing market, which is anywhere between 70 and 80 percent, depending on who you ask.
And the primary strategy of both Uber and its closest competitor, Lyft, is to subsidize drivers and riders to an insane degree. As Amir Efrati put it in The Information, “Both Uber and Lyft are playing a game of chicken as to which one will cut spending first in order to reduce losses and stomach a much slower growth rate.”
Take another look at that third-quarter result. Eighty percent of the company’s $9.7 billion in quarterly revenue was eaten up by a combination of driver payouts and bonuses, along with discounts to riders. Toss in insurance costs, and you’re up to 90 percent—and that's before spending on marketing, research and development, overhead and so on. It’s unsustainable.
Thus, the first thing Uber needs to do is reduce or eliminate the subsidies. Precisely because it is the better known brand with the bigger market share, this will be easier for Uber to do than for Lyft.
One reason Uber has been able to spend so freely is that venture capitalists kept throwing money at the company—around $23 billion when you add up the various financing rounds. But the presence of Softbank is likely to change that dynamic. Softbank hasn’t just made a bet on Uber; it’s made a bet on the entire “on-demand transportation” sector. It has stakes in Grab, in Southeast Asia, in Didi Chuxing in China, and in 99, an Uber competitor in Brazil. It is more likely to push for co-existence than a battle to the death among these rivals. 1
Second, Uber should reduce or eliminate its local offices around the world. Whenever Uber starts up in a new city, it begins by setting up a satellite office—often a relatively big one—that can recruit drivers, market Uber locally, and deal with regulators.
Most of those offices are no longer needed. What would make more sense would be a centrally located customer-service operation (in Salt Lake City?) that would allow customers to actually call someone at Uber if a problem arises. The inability to talk to an actual person at Uber has been a source of frustration for riders. A customer service center could create some inexpensive good will.
Third: Stop trying to be a service that can be found everywhere. China isn’t the only place Uber should abandon. In India, it has been engaged in a price war with Ola, a local company that is also funded in part by Softbank. Uber isn’t close to breaking even in India.
Egypt is said to be a big growth market for Uber, but why is the company in the rest of the Middle East? If you look at a map of countries where Uber is banned, you’ll see that Europe is prominent. The regulatory hurdles there are immense. Maybe Khosrowshahi’s soft-touch approach can get the regulators to loosen up. If not, the company should move on.
Uber likes to boast that it is in over 600 cities; as it seeks profitability, it should probably be in half that number.
Fourth: stop trying to build a self-driving car. When you look at Uber’s driver costs—about $7 billion a quarter—you can see why the company is banking on autonomous automobiles. Theoretically, a fleet of self-driving cars could revolutionize the business, not to mention Uber’s bottom line.
But it makes no sense for Uber to be trying to build one itself. The research costs are immense—a top-flight engineer in the field makes upwards of $5 million a year. Google, which has sued Uber for alleged theft of trade secrets, is way ahead, as are other companies. And it is a major distraction for a company that should be straightening out its core business.
Besides, it will be decades before there are enough self-driving cars to satisfy Uber’s needs. The company would be far better off buying self-driving cars, when they are ready and the regulatory issues are worked out.
Fifth: Uber should double down on artificial intelligence and machine learning, an area where it is already investing its R&D money. Right now, it’s more or less a taxi company with a clever app. To manage its fleet more efficiently and maximize its (and its drivers’) income, and generate more loyal customers, it needs to be able to use technology in smarter ways. In a recent Uber blog post, it listed a variety of ways AI could improve Uber, from forecasting to identifying fraudulent accounts to suggesting optimal drop off and pickup points.
Last: Hire a chief financial officer. The role has gone unfilled for almost three years. The company hopes to go public in 2019, but that’s not going to happen without a CFO whom Wall Street trusts.
Then again, it also won’t be going public anyway if it doesn’t find a way to make its business model work.
In 2016, Uber wisely sold its Chinese operation to Didi Chuxing, with which it was engaged in an unwinnable price war. It now owns 17 percent of its rival. More recently, Didi Chuxing bought 99, Uber’s primary competitor in Brazil.
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Jonathan Landman at email@example.com