In our view, Uber have looked like a company marked for death for some time but with the recent court decision in California which turns Uber drivers into employees, it looks like Uber now face a real existential threat that could kill the company if other regulators, courts and authorities take notice and do the same.
Since then Uber has threatened to exit the California but its strained relationship with regulators in its own backyard and beyond reveals another reason why Uber are in deep trouble, it has little to no leverage over the cities it operates in. Uber has made a lot of powerful enemies in its highly aggressive rise to prominence, none more powerful than local regulators that can deny the san Francisco based company entry into markets and as California’s ruling proved, place costly regulations that could potentially cripple the company beyond repair.
Uber is now paying the price for flouting rules Taxicabs and private hire firms have adhered to for decades with cities in some of its biggest markets such as London where Uber currently cannot operate after getting its license revoked. Uber has responded with the acquisition of a local competitor but how long before local regulators target firm associated to them?
Competitors are already taking advantage by upping driver recruitment with rival Ola entering the London market with aims to be market leader in the city in 12 months. The same is most likely to happen in California as local competitors seek to pick up trade Uber leaves on the table if it chooses to exit its home state.
All this leaves Uber in a horrible bind that it can’t easily fix because should more local regulators play hardball with the ridesharing giant, especially when it comes employment status of their drivers, it could fatally dent the viability of Uber’s business model. We've already written much about Uber’s crummy unit economics, but why they’re crummy in the first place is why Uber could crumble. It wasn’t that long ago that Uber path to profitability was to become the only game in town and leverage its monopoly power but after a string of humbling defeats in Asia, Founder Travis Kalanick's departure, and the growing influence of Softbank (who still backs some of former far east rivals), Uber’s monopoly ambitions blew up in smoke.
Since then, Uber’s story regarding its long-term ambitions and even its path to profitability has been unconvincing to say the least. With the increasingly failing promise of self-driving cars to eliminate the cost of subsidizing rides and having to settle for market leadership, Uber that had to come up with a second pitch and fast. That second pitch was Uber Eats and on the face of it, it has been a successful one as it has become its biggest business. However, upon closer inspection, Uber Eats isn’t that much better than Uber ridesharing business.
While its growing quickly and has considerably lower regulatory risk than ridesharing, Uber Eats suffers from bad unit economics as it subsidizes orders presumably to capture market share. However, this play for market share could prove to be erroneous as it’s competing with well-funded and highly competitive players who are effectively running the same game plan. There also isn’t much differentiation between them and its competitors so it's really going to going to come down who can grind who into dust over time.
What all this means is that Uber is substituting one bad business model for one that’s slightly better and that’s because Uber, despite all its rapid (now slowing) growth, hasn’t learned the simple basics of value creation. It’s amazing how far Uber has come in just over a decade but what makes Uber journey so amazing is that it has been able to escape the basics of creating value. From the get go, Uber has bought is way to prominence backed by cheap capital and the most patient and tolerant investors on earth. its bought users and revenue growth but neither right now are valuable beyond the story Uber can tell to draw in investors willing to buy into it.
In sum, Uber have been on the radar of regulators since its early years and will be for years to come but what may bury it isn’t local regulators playing hardball but failure to understand that market domination isn’t always valuable.
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