Zero profitability prospects, regulatory troubles and growing driver anger could spoil its dreams

Ride-hailing service Uber is set to launch its initial public offering (IPO) and hopes to list its shares on the New York Stock Exchange on 10 May. If it succeeds in raising its targeted $10 billion (around 69,400 crore today), it would be the third largest tech IPO ever, after Alibaba ($21.8 billion) and Facebook ($16 billion). The company hopes that the IPO would value it at least $100 billion. But…

One, Uber loses tonnes of money. It has piled up operating losses of more than $12 billion since 2014. Of course, loss-making tech companies having an IPO is nothing unusual (Amazon had never made a profit when it went public in 1997 and reported its first tiny profit only in the last quarter of 2001). The problem is that, in its IPO prospectus, Uber makes it clear that it does not see itself turning profitable soon, maybe ever: “We expect our operating expenses to increase significantly in the foreseeable future and we may not achieve profitability.”

Two, risk factors like the company’s reputation and serious legal troubles. During co-founder and former chief executive officer Travis Kalanick’s regime, Uber became notorious for a work culture marked by sexual harassment and gender discrimination. After hackers stole personal information of 57 million riders and drivers from its database, the company did not report the incident till it was exposed a year later. Autonomous vehicle technology firm Waymo sued for intellectual property theft. All this led to a “#DeleteUber” campaign on social media in 2017 that, Uber admits now, “prompted hundreds of thousands of consumers to stop using our platform within days”. Kalanick had to resign and Dara Khosrowshahi was brought in from Expedia to head the company.

He has been trying to settle and pay up, wherever possible. He settled with Waymo last year for $245 million in Uber stock. In Holland last month, Uber paid €2.3 million (around 18 crore today) to settle charges that it violated local taxi laws. It has paid $10 million to settle pay discrimination claims from hundreds of current and former employees. In December, it settled, for an undisclosed sum, a complaint brought by women who said they were raped or assaulted by Uber drivers. However, it admits in its IPOprospectus, “We expect to continue to receive complaints from riders and other consumers, as well as actual or threatened legal action against us related to driver conduct.”

Uber is reported to be the subject of several US government investigations. These include violations of the Foreign Corrupt Practices Act by employees (improper payments made in several countries, including India), its Greyball software that allowed the company to evade regulators, spying on competitors, and price transparency.

But the company’s biggest problem is its drivers. Uber has paid $20 million to settle a class-action lawsuit brought by drivers in California and Massachusetts, who argued that they were employees. The California Supreme Court issued a decision last year that narrowed companies’ ability to classify workers as independent contractors rather than employees. This will soon be California law, and it is not yet clear what impact it will have on Uber. In the UK, the company has lost its appeal against a ruling that its drivers should be considered employees with rights to a minimum wage and other benefits. Uber plans to appeal to the Supreme Court. But drivers’ disgruntlement across the world is not going to go away. In fact, it is going to keep rising. If Uber has to one day treat its drivers as employees (it currently uses 3.9 million drivers in 69 countries), its entire business model will implode.

Indeed, the prospectus states that the company will make drivers angrier—it is investing in autonomous vehicles to reduce the number of drivers and plans to pay them less to increase its chances of turning a profit: “As we aim to reduce driver incentives to improve our financial performance, we expect driver dissatisfaction will generally increase.”

Revenues from the company’s core business—ride-hailing—have plateaued over the last two quarters of 2018. It remains the market leader by a distance, but has been losing market share in the US—from 83% at the beginning of 2017 to 69% today, while rival Lyft’s share has risen from 15% to 29%. However, one bright spot is Uber Eats, its food delivery service. Only five years old, it is already among the top three such services in the US, is profitable in 40 cities and accounts for 13% of Uber’s total revenue. Uber Freight, which helps truck drivers connect with shipping companies, now plans to expand to Europe. However, Uber is still in major investment mode in both these services to grow market share rather than bother about profit.

Of course, Uber’s ambitions are stratospheric. The company sees $12 trillion of market opportunity—yes, you read that right. In brief, that’s the total amount spent on all passenger vehicle miles and public transportation miles in all countries globally; the amount consumers spend at restaurants; the market for freight trucking (all 2017 figures). Says Dara Khosrowshahi: “We are not even 1% done with our work.” Well, all the best, Dara.

~source