“You ain’t got to wait on a cab no more; just call your Uber, and it pulls up.”
– Trip Lee
Uber: A Great Idea, a Bad Strategy, a Cheapskate Market
For as long as I can remember, taxi service in the Big Apple has been horrendous.
The taxis are generally filthy on the outside and dingy on the inside. Legroom is cramped because the drivers favor driving hood-style, with the seat pushed as far back as possible. Half of them speak very little English. And few of them have any idea about how best to get you where you are going.
I can put up with all that. But I don’t like feeling that my life is in peril because of the reckless way they drive.
I was in New York City several times in 2009 when Uber was launched. The cars were new and spotlessly clean. The drivers were nicely dressed, courteous, and helpful. They spoke fluent English and took you quickly and comfortably to your destination, relying on Google Maps and/or Ways. Plus, they offered limousine-styled amenities, such as tissues and chewing gum.
And there was more…
Using Uber, you didn’t have to deal with cash or credit cards or feel compelled to leave an undeserved tip. Arriving at your destination, you simply thanked the driver and hopped out. If you forgot something in the car, it could be quickly located and returned to you.
Another thing… you didn’t have to worry about your driver mugging you. You knew that he’d been through some sort of vetting process. And besides, there was accountability: Your ride was electronically recorded, and (afterwards) you could anonymously rate his service.
My early experiences made me a big fan and a loyal customer. I recommended Uber to everyone, and I stayed with them when other personal transportation services popped up.
I liked Uber for ideological reasons, as well. As a free-market believer, I loved the idea that Uber was opening up thousands of jobs for people that needed to make more money. I loved the fact that they were for the most part unregulated, supporting my view that regulation usually increases costs while simultaneously decreasing quality. And I felt certain that Uber’s high standard of service would, through competition, improve the quality of service throughout the entire taxi industry.
Such were my hopes…
Things have changed since those halcyon days.
If you use Uber Black, you will get limousine-quality service today. But you will be paying limousine prices, which is typically two or three times the cost of the basic Uber X service.
If you opt for Uber X, which competes price-wise with taxis, you may have a different experience.
Case in point: K and I were going from the Baccarat Hotel on West 53rdto LaGuardia at 8:30 in the morning. She called for an Uber X and we waited six minutes for it to arrive. Meanwhile, a dozen available taxicabs drove by. Okay, fine.
The car arrived – a small black Honda with dents along the passenger side doors. The driver pulled up in front of the hotel and idled there, while he seemed to be finishing some sort of video game on his iPhone. The hotel’s valet had to knock on the window to alert him of our presence.
The interior of the car was… not filthy, but miles from clean. The driver had a thick mustache and an equally thick accent. We exchanged pleasantries, and I, having the sniffles, asked for a tissue. He didn’t have one. K asked if he had a URL plug-in. He said it wasn’t working.
He drove maniacally, gunning the engine when traffic opened up and slamming on the brakes just before crashing into the car ahead. He cut right and left to gain a few feet, as if he were rushing us to a hospital.
“There’s no hurry,” I said at one point. But he wasn’t paying attention. He was busy screaming out his window at the other drivers with whom he was engaged in some insane life-and-death contest.
And then, to our astonishment, he missed the exit to the airport, even though his GPS was telling him to take it. I brought this to his attention, and he told me that the GPS was wrong. That it’s frequently wrong, and that he knew a faster way.
Five minutes later, he handed me his phone and asked me to locate the airport for him. I’m not kidding.
I did a little online research and found that I wasn’t alone in thinking that Uber’s “quality of service” was slipping. There were dozens of complaints.
What Went Wrong?
The decline could be linked to driver compensation.
Uber’s amazing early growth spawned lots of copycats that were competing on price. (Lyft, Zipcar, Getaround, Car2Go, Zimride, etc.) But rather than building a protective moat for itself around its initially good service, management apparently decided to enter into and dominate the competition by offering cheaper services and cheaper fares for Uber X, which was, by far, its primary service.
Initially, Uber X cars were smaller, less expensive vehicles – but they were clean and the service was great. And they were cheap. Significantly cheaper than taxis. I remember thinking that the fares were barely enough to cover gas and maintenance. I estimated that if the driver was making minimum wage he would be lucky.
I expected Uber X fares to rise as Uber’s popularity spread and the company enjoyed its market dominance. They didn’t. In fact, they seemed to be getting cheaper.
And then there’s this…
Uber has done an amazing job of growing its business and its revenues. As of 2019, it was operating in 785 cosmopolitan areas and servicing 110 million users worldwide. In the USA alone, it has a 69.0% market share in the personal transportation industry.And that’s to say nothing of its ventures into other industries – such as food delivery, where it has gobbled up a 25% market share.
Revenues are impressive – moving up to the billions in recent years. But as for profits… there aren’t any.
Uber isn’t profitable. It never was. Its business strategy was always about gaining market share (which it did) and then going public and getting a huge market valuation. The idea is to use all those billions not only to build the business but also to pay off the founders and the early employees that were promised stock shares in lieu of large salaries.
This is the strategy of “Unicorn” companies – businesses that aim to transform the world with “destructive” (i.e., radically innovative) technologies, using investor funds to keep getting bigger until one day they can figure out how to make a profit.
Before Uber’s IPO (initial public offering), market pundits were projecting a valuation of $120 billion. Does that seem crazy? A business whose revenues are $3 billion a year being worth 40 times sales?
Well, that’s what the experts were saying.
But after the IPO, prices dropped pretty quickly – by 15% within days. This happened at the heels of Uber’s most recent quarterly report, where the company posted losses of $5.2.billion.
You read that right. $5.2 billion!
And here’s the kicker: Almost $4 billion of that went to “stock-based compensation expenses” – stock option payoffs to founders and early employees. Another $400 million to $500 million will be shelled out in the third quarter.
Facing continued losses, Uber’s COO and CMO stepped down and its marketing department headcount was reduced by a third.
How Did It Happen?
My early admiration and hope for Uber has been dimmed if not dashed.
I blame what’s happened on three things:
First, Uber was launched as a gain-market-share-now, make-profits-later enterprise. It was a strategy that worked very well for Google and Apple and even Amazon, but failed to work for countless, now nameless, dot.com start-ups. A strategy that ate up billions of hard-earned investment dollars, making millions of foolish investors poorer.
Second, Uber’s decision to enter into a price war with other unprofitable companies was not, in retrospect, a wise one. In maintaining its market dominance, profitability – and perhaps even the hope of profitability – went down the drain.
And the third reason, which I suspect is what forced Uber to get into the price war, was that it discovered there was no significant market for the kind of high-quality service they had been offering: reliable transportation in clean cars driven by courteous drivers.
I blame that on the American consumer. I don’t know why, but when it comes to transport Americans (and maybe the rest of the world) have only one criterion: cost. Nothing else – comfort, ease, courtesy, or even safety – seems to matter. The company that offers the cheapest fares gets the lion’s share of the market.
We saw this happen in the aviation industry decades ago. When carriers came along and started offering fares that were sometimes half or a third of what conventional carriers were charging, the big players jumped into the fray and began offering discounts of their own. These discounts were irregular and often deceptive, but they were sufficient to keep the planes full, at least for a while.
Then some of the big guys dropped out, unable to stay profitable. And the rest of them started cutting back on amenities and then services and then legroom. The luxury service that was de rigueurin the early 1980s when I started flying no longer exists except in first-class international travel. Passengers may gripe about how the quality has deteriorated – but when it comes time to book that flight from LaGuardia to Fort Lauderdale, they are going to take the one with the cheapest fare.
I’m all for cheaper fares and crappier service for those that want it. But why can’t we have quality for those that are willing to pay more?
We have it with hotels. We have it with restaurants. We have it in just about every retail and consumer business I can think of. But with airlines and personal transportation services, it’s bad and getting worse.