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Is Uber About to Stall?

11 October 2015 |

Uber has become a transportation giant in an astonishingly short time, but is the music about to stop...

Founded just over 6 years ago in San Francisco, Uber, the transportation network company, now provides taxis in over 60 countries, earned revenues over £1.2 billion this year, and is valued at around £32 billion, a greater valuation than 80% of the S&P 500 (an index listing 500 of the largest companies in the US). Yet while competition and free market advocates hail Uber's proliferating success as a hallmark of innovation and entrepreneurialism, there has been a decidedly unwelcome response from unions around the world, as well as a growing number of unsatisfied Uber drivers threatening to flatten its tyres. This begs two questions. Why is this happening? And what impact will it have on one of the most impressive start-ups of recent times?

Why have they been so successful?

Part of the ingenuity of its business model is that customers can find Uber taxis a few minutes away using an application on their phone. After accepting a highlighted driver, 'the Uber' comes straight to wherever you are. This immediately obviates the need to look out for or hail a cab, let alone having to walk to an area where taxis are likely to frequent. The app also takes payment via a credit or debit card instantly, leaving out the worry of having insufficient cash. Perhaps more saliently, Uber's ability to keep its costs low means it can afford to charge cheaper fares than those charged by traditional taxis. This has made its service far more attractive than its competitors. Ubers come straight to you, they don't require cash, and are cheaper. Simple, efficient, and brilliant.

Will growth continue at this pace?

There are three issues poised to hurt Uber's meteoric rise. First, as many observers have predicted, Uber's rate of growth is not sustainable regardless of external threats. Its drivers work the hours they choose. This flexibility is what seduced many potential cabbies to Uber rather than other taxi services. The more Uber drivers on the streets to accumulate income for the company, the more it can afford to lower its fares and remain cheap. The problem is that drivers are paid on commission, but Uber sets the fares. This means when Uber lowers its fares with the arrival of new drivers, it is the drivers that have to work many more tiring hours to make up for what they lose in pay because of the cheaper fare. This means at some point the supply of drivers will come to a halt and possibly decrease, resulting in Uber's fare price going up, causing demand for its service to slow down.

Legal disputes about the company's inherent model

The second issue threatens the very fabric of Uber's infrastructure. A week ago, a judge in California heard a legal action formed by Uber drivers to dispute whether they are employees or contractors. Currently, Uber considers its drivers to be contractors. The main benefit to drivers of this is they can work when and for how long they like. In addition, they retain autonomy because they do not have a boss dictating anything (other than the price of the fare, which Uber sets). This also cuts costs for Uber. For instance, they do not have to pay fixed wages or pensions. Uber could not just lower a fixed wage when revenues fall without breaking contracts, if they were employees. Therefore the cost of wages would stay the same against falling revenues, meaning profits would be squeezed. Commissions, on the other hand, decrease in unison with revenues, seamlessly maintaining profits.

So why would drivers want to be employees rather than contractors?

As Uber increases hiring and fares lower, its drivers are under increasing pressure to work longer hours to maintain a standard of pay that affords them their cost of living. On occasion, these exhausting hours may not even pay out because there are simply more Ubers than customers on the street, so they can't find a passenger. For instance, one driver bemoaned of a 17 hour day with little to show for it. The autonomy of Uber drivers as contractors means they also have to pay for their car and its costs (fuel, repair etc.), which only drains their wallets further.

What impact will this dispute have on Uber?

If the final decision of the dispute declares that Uber's drivers are its employees, it could be hugely detrimental to the company, especially since many thousands of its drivers have been predicted as beneficiaries of the decision (able to sue to become employees), contrary to Uber's claims that it would apply to far fewer. As more of its drivers become employees to shake off the financial instability of working on commission, Uber's costs will boom. It will have to pay fixed wages, requiring compliance with minimum wage and other employee-related laws such as paid leave. Uber does not currently pay its drivers when they take days off. It will have to pay huge sums by way of social security contributions too, such as pensions and insurance. The tax sums required of Uber will also increase. To accommodate for these costs, Uber will almost certainly have to increase its prices. As a result, it will lose its critical appeal - a cheaper fare.

Social and political pressure on Uber is mounting

The final issue is that Uber is under social and political attack. The company is already banned in Madrid and Berlin, and anti-Uber protests in Paris, Rio de Janeiro and London have also taken place. The anger results from Uber's ability to undercut much of its competition. Some of the mud may stick, some may not. They claim Uber does not comply with taxes or with proper regulation of its drivers. For instance, in London, traditional taxi drivers must attend two to four years of expensive training and assessment so that they become experts of the London map, known as the 'Knowledge' course. Uber drivers get a GPS and get on with it. Naturally, this infuriates traditional cabbies who feel their Uber counterparts are not properly trained or licensed. In addition, Uber's practice of raising prices when competition on the streets is scarce has fuelled the case that the company is not acting fairly, or possibly legally.

Scandal from other parts of the world has stoked the fire too. In Delhi, for instance, the alleged rape of a 26 year-old woman by an Uber driver inflamed the case that Uber does not properly check its drivers. Although the company was banned in Delhi in December last year for related reasons, it returned saying it would introduce upgrades to improve safety, such as an emergency button on its app. Uber claims it does initiate background checks on its drivers and that the feedback system on its application, which rates them from 1 to 5 stars based on courtesy, effectiveness and general behaviour, acts as a check on safety.

In London, congestion and pollution concerns have served as a lever for anti-Uberists too. Over 20,000 new private-hire cars have arrived in London in the last year, many a result of Uber business. Uber's contribution to these concerns is significant because its drivers move about more than most. Rather than parking in taxi stands, they are constantly driving around the streets, emitting pollution and compounding congestion, as they try to be in catching distance of their next customer. Boris Johnson, the Mayor of London, responded by backing a plan to cap the number of minicab licenses in London, a move which would stem Uber's growth by allowing fewer of its taxis on the streets.?These political pressures have already shunned Uber's business from big cities and may force it to revise its practices. If it does not respond, Uber's reputation will surely be damaged and it will lose more business.

What of the future?

The conflicts Uber faces, including the impending legal and political pressure, are likely to put the company in a real bind. But the car is not going to crash, so to speak. Even if its growth stagnates and it loses its competitive-pricing edge, its inherent model of a quick and convenient taxi service is still far better placed in the market to retain customers than any. The real question is whether Uber will be able to fend off these threats and continue its domination of the taxi market around the world. I'm not so sure.