As has been well chronicled in the media, it’s been a tough month for Uber. The company’s CEO, Travis Kalanick was vilified in the press for the company’s tolerance for sexual harassment of its female employees, and derided for his participation in President Trump’s business advisory council (from which he resigned after an estimated 200,000 people cancelled their accounts with Uber). Finally, he was recorded in a shouting match with a San Francisco Uber driver, who claimed to have lost $7,000 because of Kalanick’s changes to Uber’s reimbursement policies.

Kalanick is shown telling the driver, Fawzi Kamel, to take responsibility for his own “s***”, and storming out of the car.  Kalanick has since apologized.

But tirade and tempers aside, the conversation between driver Kamel and CEO Kalanick, is actually very revealing about Uber’s financial predicament.  Kamel is complaining that while Uber started as a premium service and paid driver’s relatively high rates, that over time the company has been cutting back on the amount it pays drivers.

Kalanick bristles at this criticism (argung that Uber still pays higher rates for its premium “black” service), but also concedes that he’s been pushed to lower rates to meet the competition provided by Lyft and other transportation network companies.  Bloomberg Business Week has transcribed their conversation:

Then Kamel says what every driver has been dying to tell Kalanick: “You’re raising the standards, and you’re dropping the prices.”

Kalanick: “We’re not dropping the prices on black.”

Kamel: “But in general the whole price is—”

Kalanick: “We have to; we have competitors; otherwise, we’d go out of business.”

Kamel: “Competitors? Man, you had the business model in your hands. You could have the prices you want, but you choose to buy everybody a ride.”

Kalanick: “No, no no. You misunderstand me. We started high-end. We didn’t go low-end because we wanted to. We went low-end because we had to because we’d be out of business.”

This, in a nutshell, is Uber’s problem: It’s losing money, and its competition is forcing it to lose even more money, in order to stay in business. In an effort to stay afloat, Uber’s passing its pain on to drivers, inventing a raft of lower-priced services (UberX, UberPool) and offering lower reimbursements to their drivers.  Kalanick’s admission that competition is putting a cap on Uber’s prices–and profits–suggests that Uber’s $69 billion valuation may be excessive and that Uber’s critics may be right about the viability of its business model.  The most strident critics maintain that the company will likely implode from its growing losses. Jalopnik’s Ryan Felton has been unstinting in his criticism of the company. Leaked financial reports from the company, analyzed by Hubert Horan at Naked Capitalism  make a strong case that the company’s investors are subsidizing something like 59 percent of the cost of rides.

Two Questions for Uber

It remains to be seen whether the ride-sharing model is really economically viable, especially in face of competition. Our view at City Observatory has been that promoting competition among providers is a good thing, as a way of lowering prices and encouraging innovation: ‘Let a thousand Uber’s bloom‘ we said. And ultimately competition will help determine whether this business model actually makes any sense. To date, the companies have been propped up by the influx of money from venture capitalists, and, arguably, the willingness of driver/contractors to work for modest (and perhaps exploitative) wages. Ultimately, investors will have to have to ask themselves two questions:

Question 1:  What happens if you have dominant market share in a money-losing industry?

Answer:   You lose more money than your competitors.

Question 2:  What happens when demand for your product increases in a money-losing industry?

Answer:  You lose even more money, faster.

In theory, you can make the argument that paying independent contractor drivers is just a short-term strategy for Uber until it perfects self-driving cars, at which point it will be spared the expense of paying (and also arguing with) Mr. Kamel and several hundred thousand other drivers. The success of that strategy depends on Uber overcoming yet another group of competitors, including other technology companies and auto makers to build and operate fleets of self-driving cars. Of course, the latest bit of news is that Google has accused Uber of stealing intellectual property relating to autonomous vehicles.

There’s no question that ride-sharing and transportation network companies are “disruptive technologies.” But how disruptive they are depends directly on the prices they charge. The growth of Uber and Lyft is significantly due to the fact that their fares are lower than taxis and their service is better than taxis or transit. Earlier this week, a study of New York traffic trends attributed the rise in transportation network companies to the relatively low price of their service. The impact, and ultimately the success of these companies depends on what fares their customers are willing to pay.If Uber’s fares were say to double, its likely that its growth would decelerate significantly, and its mode share might actually decline.