Drivers have no future with Uber and here is just a few reasons why. Uber is the archetypal billion dollar unicorn. How it’s managed to convince investors of its hyper-valuation is the real mystery, given its business model is arguably neither innovative nor viable.
To put it more bluntly, what Uber has really managed to do is persuade the residents and visitors of New York City (and elsewhere), which on the whole is a smart and efficient urban transport system geared towards mass transit.
Uber’s business model is rally based on the good old fashioned exploitation of suppliers, more specifically the paying of below-cost earnings to drivers as well as the transfer of investor money directly to customers in the form of subsidies. Crucially, they’ve also been based on transference of risk from its own corporate balance sheet to those of its suppliers (drivers), most of whom lack the expertise to absorb those risks as efficiently. Investors, for some inexplicable reason, have failed to see this.
If Uber is cheap it is not because it has out innovated the incumbent cab and car service market, which at the end of the day has access to exactly the same ride-hailing technology. To the contrary, it’s because investors have failed to recognize that the source of its greatest innovations is and always has been cheap money.
Indeed, from egregious undercutting tactics based on promotional giveaways to turning a blind eye to exploitative labor practices thanks to the cheap funding of aggressive lobbying campaigns aimed at changing legal frameworks or the reckless flooding of the market with huge amounts of spare capacity, none of it would be possible without access to cheap financing.
In this way, investors preoccupied with FOMO (the fear of missing out) seem to have missed that for a personalized chauffeur driven service to be readily available to anyone 24/7 at a price that is competitive in price to other similar services, the ratio of spare drivers to potential riders at peak times must be 1:1. Extend that logic to off-peak times and you realize that for every potential user there must be a score of drivers or more sitting idly in standby mode to accommodate that luxury. Unless every single one of those Uber drivers has a secondary job that does not require any real commitment, that’s tantamount to the re-establishment of a server-master model, afforded by the low wages earned by their drivers
In a conventional taxi model, of course, prices are smoothed throughout the day to ensure off-peak rates pay for peak services at affordable rates — hence why there are never any taxis around when you need them. You could also say, we all pay a little more at off-peak time to ensure desperate users don’t get gouged at peak time and that as a whole we’re all incentivized to make more responsible and efficient travel arrangements for our day-to-day travel.
In Uber’s model, however, it’s the exact opposite. Overcharging at peak time funds idle capacity at off-peak time, ensuring that whilst there’s always a taxi when you need one, there’s also a substantially larger amount of spare capacity when you don’t.
That’s an incentive model which might make sense for wooing unconscious or inanimate spare capacity back into marginal operation, but not necessarily one for the conscious sort, whose long-term security and welfare is supposed to be the actual objective of technological innovation.
So how has this happened? Unlike many other unicorns, Uber’s business model is frighteningly simple and highly replicable. Their hyper-valuation can’t consequently be a reflection of that. Perhaps then it’s about something altogether different? Regulatory arbitrage perhaps?
That may be the case, but there are consequences to regulatory arbitrage. For one thing, regulation affects all players in the long run equally, so even though Uber has done the bulk of the heavy lifting on the legal cost side, the overall effect is still one that has seen the value of a taxi medallion in New York City drop by 50 per cent. There is also absolutely nothing preventing other companies from replicating its model or stealing market share with the use of even more egregious promotional tactics funded by profligate investors.
So perhaps it’s about brand? By using Uber in an unfamiliar city, customers can be sure they know what they’re getting at a price that’s not exploiting their lack of local knowledge. Butthat doesn’t really cut it either. Most cab rides are made by local people, and a local version of Uber is sufficient. It would not take much for a company to set up shop as a sort of clearing house of taxi apps, a la Expedia.
So perhaps autonomous cars will be the ultimate moat building exercise for Uber? Again here, there are issues. Uber has literally zero experience managing an asset-heavy business with large capital and maintenance costs, and significant liability exposure. Nor is Uber the one doing the innovation, so they will always have to rent someone else’s technology. It is highly unlikely a non-car company such as Uber will become a leader in future technology, despite their partnership with Volvo. Even though Uber has been able to raise an unprecedented amount of money for a private company, they do not have the financial resources to directly compete with Google in developing technology while losing money on their main business.
It is surely not about the profitability of the underlying sector? The provision of taxi services is not an intrinsically profitable undertaking. Most adults have a driver’s license, many own cars, and modern GPS systems mean drivers do not even have to acquire an encyclopedic knowledge of streets, routes and points of interest. To the extent the taxi business was profitable, it was mainly profitable for wealthy permit holders who leased out their permits to drivers who earned modest incomes. If those permits disappear the artificial barrier to entry disappears and the returns on the business will plummet – as can be expected.
To all extents and purposes Uber’s technology is ordinary, barriers to entry are negligible and unionization/legal risk is substantial. The valuations being ascribed by venture capital funds are fantastical, and predicated mostly on what the shares might sell for if the company were sold or taken public. But, as they note, few companies have $60 Plus billion dollars to spend and fewer still would spend it on a car service. What’s more, given that the enterprise value of Southwest Airlines, one of the best run airlines in the world, is about $23 Billion, it seems unlikely to them that Uber is worth any more than a small fraction of that figure in an IPO.
Ultimately Uber’s success comes down to convincing the world that it has made a progressive leap by allocating cheap human resources towards the job of waiting around at the beck and call of an increasingly powerful elite. From an aggregate economic allocation and welfare point of view that’s a crazy proposition. What it amounts to is a transfer of labor from high productivity sectors to ultra-low productivity sectors on the assumption that if this workforce is given autonomy over their non-productive time they can deploy it more efficiently in the market than if it was being allocated by a scaled-up specialist operator.
Since that, by definition, inhibits specialization or skill acquisition in labor markets, all it really encourages is the purposeful unscaling of the economy and thus the entrenchment of a suppressed, underpaid, servant class with no prospect to ever benefit from a consumer surplus. In other words, drivers are being exploited and would be better of doing anything that had a future because drivers have no future with Uber.