‘Why I believe Uber cannot be ethical’

Following TfL’s decision to withdraw Uber’s license to operate in London, a fairly common conclusion is that Uber needs to become more ethical if it is to survive.

This may not be possible. After the calamitous year Uber had in 2017, it should not be difficult for the company to improve its reputation — simply by avoiding many of the unnecessary embarrassments heaped upon itself.

However, merely improving its PR will not get Uber out of the hole it has now dug for itself. Uber’s survival will rely on concrete measures to better care for both its drivers and customers.

“Some 85% of taxi company costs are drivers, cars and fuel, whether you cover one city or a dozen.”

Herein lies the problem. For this company, the additional cost that is required to look after drivers and customers is likely to be too great. It all comes down to the economic model on which Uber is built.

There is a great tendency among commentators to focus on Uber’s app when making sense of its explosive growth across the world. This is a mistake. The engine of Uber’s growth to date has been the $21.7 billion it has raised from banks and investors. The company has never made a profit, and in 2017 alone lost $4.5 billion.

These are staggering amounts, and to make sense of them we need to understand that Uber’s business model is the same as Amazon’s. Amazon became the largest online retailer on the planet by burning through huge sums of investment on the way to becoming dominant in an ever-increasing number of sectors.

Now Amazon is able to use its position to generate vast profits. Effectively, what both companies surely rely on is investors subsidising the prices customers pay in the short term, in return for a long-term monopoly with higher prices.

In reaching this point, Amazon has itself received plenty of criticism. But Amazon has benefited, throughout its growth, from a trump card: its use of a virtual shopfront makes its overheads significantly lower than bricks-and-mortar rivals.

Uber’s fundamental problem is that it does not have this advantage. Some 85% of taxi company costs are drivers, cars and fuel, and this applies whether you cover one city or a dozen.

Not only does Uber not avoid these costs, its model actually introduces new ones. Ultimately these sums will have to be paid back, and then some.

Eventually, this additional cost will be felt. Either the driver has to bear it, and so is motivated to look to rival employers, or the customer does, with the same outcome.

So can Uber afford to become ethical? Its growth to date has been so costly that even after the raft of regulations it has managed to sidestep, and measures forcing down the income of its drivers, it is losing billions every year. In a properly regulated market, in which Uber has to give its drivers appropriate employment protections, and passengers the safeguards they need, its goal of aping Amazon becomes even harder.

If Uber can achieve market dominance before it runs out of funding, the inefficiencies in its model cease to matter. Society will simply have to carry the cost of higher fares and lower driver wages.

If it fails to achieve near monopoly status and has to continue to compete against local firms, in my view it has little hope of ever repaying its investors.

Should Uber fail, it would open up the possibility of a taxi company fit for the 21st century. One that harnesses the possibilities of digital technologies not to enrich venture capital, but drivers themselves.

This is an extract from an article published in The Conversation in October 2017. You can find the full version in Become An Expert.