Uber’s Death by A Thousand Cuts

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Posted: Jul 02, 2015 12:01 AM
Uber’s Death by A Thousand Cuts

The ultimate free-market solution for big city transportation, Uber Technologies, seems certain to succumb by a death of a thousand regulatory cuts. That’s probably why it will race its IPO to market, before it bleeds out.

One ongoing challenge is whether drivers are classified as employees or independent contractors. As I wrote earlier, there’s a pending case in California that could result in Uber being on the hook for tens of millions of dollars, if not more.

Now that same case has been filed in Boston, by the same aggressive lawyer, Shannon Liss-Riordan. She has an impressive track record in cases exactly like this, and has nailed companies like Starbuck and FedEx.

This will occur in all fifty states. Uber will lose at least some of these cases, and investors better realize it will cost a lot of money. How much? Breitbart News reports as much $1.2 billion in California alone. If Uber lost this battle in every state, the potential bill could be almost $11 billion.

This begs the question, “just how stupid are investors?”

Well, pretty stupid, apparently. Bloomberg News reported that Uber’s bond offering may come with little actual detail about revenue and losses to investors. Uber apparently lost $415 million on $470 million in revenue, but refused to disclose to Bloomberg the period over which these losses occurred, except to say that they are “substantially old numbers”. Why would any investor put money into a bond offering without current information, or with insane losses like this?

Look, I’m all for Uber and its free market solution, but I’m also opposed to being stupid with money. There’s substance and there’s hype, there’s reward and there’s risk. What I see right now with Uber is nothing but risk. This is the same kind of dumb IPO that Shake Shack did, where investors are valuing stores at fifteen times the value of a McDonald’s franchise. One day that stock will crash. If Uber even gets its IPO out the door, it will crash one day as well, because of the headwinds it faces.

So that’s why I think they are rushing to go to the IPO market and get financing in any other way they can before things get really messy.

How messy? Very. It’s only a matter of time before someone sues under the Americans with Disabilities Act, since virtually no Uber cars service the disabled. Whether or not such a case has merit, the point is that it’s another hundred cuts to Uber that will cost it money either in legal fees, or in a settlement. In the worst case scenario, Uber is forced to have a certain number of disabled-ready vehicles in its fleet. Say goodbye to the entire model in that case. Thank you, Big Government.

In cities where the taxi medallion financial industry is well-entrenched, like New York, Uber has already lost the battle. Data from the Taxi & License Commission shows only moderate declines in taxi medallion financial industry revenue, which declined less in 2014 than it did in 2013, showing Uber’s weakening impact on taxi medallion industry revenues. In fact, for the period of January through April, revenue only declined 6.3% from 2013 to 2015.

Any hope that taxi medallion owner-operators or passive investors would fail to make loan payments on their medallions has been laughed aside. Owner-operators net 5-6 times the income they need to pay their low-cost loans.

Sources tell me a NY City Council bill to limit For-Hire Vehicle growth is likely to pass, which would limit Uber’s growth there to 1% over the next year. Given that UberX increased the number of drivers from 4,000 in 2013 to about 20,000 today, and it has had virtually no effect on the taxi medallion financial industry, this will stop it dead in its tracks.

Another likely move from the city council will be to either cap surge pricing, or permit taxis to charge surge pricing, as well. Another pending lawsuit is challenging the notion that an electronic hail from the Uber app is equivalent to a street hail, to which only yellow taxi may respond. It sounds silly, but the definition of “hail” is such that this could easily fall against Uber.

Actual income is another issue. Uber’s claim of making $90,000 a year has been largely debunked. Its own internal study showed a 50% attrition rate for drivers after one year, and I believe it is because drivers didn’t realize the hidden costs. In my recent white paper, “Towards a Cost Estimate of a NYC UberX Driver”, I was astonished to find costs were 37 cents-per-mile, or 68% of their revenue on the first dollar per mile they earn…before taxes.

I think Uber’s labor pool is going to dry up sooner than anyone expects, and will dry up further if employment improves, since most drive because they are underemployed.

All of these are reasons why I think Uber is going to rush its IPO to market. Sad to say, there are so many problems with the business model alone, as well as all the regulatory nonsense. Uber is red-hot, and the public’s zeal to support it is blinding Wall Street.

When that IPO does hit the market, I wouldn’t be surprised if it shows huge losses.

So while we cheer on the free market, be wary of visions of gold-plated Uber cars. The government has a lot at stake in protecting the taxi medallion financial industry in every city and state, and will not go quietly.