Uber remains a darling of the tech world. It is regarded as a disruptive upstart that recognized the unused capacity of privately-owned automobiles and their owners. It unleashed that capacity on cities worldwide using cellphone technology to provide discount rides to customers, ones who might otherwise have taken traditional taxis or public transportation.
It’s a truism that startups burn through money like bonfires burn through tinder. But nine years in after becoming a worldwide company, Uber is still burning cash—$1 billion in the most recent quarter and $4.5 billion altogether in 2017.
To understand how Uber continues to enchant the investment and tech worlds despite its miserable financial record requires a little background. The dominant metaphor in the tech world is Moore’s Law. Moore’s Law is named for Gordon Moore, a semiconductor pioneer, who noted the doubling of transistors on an integrated circuit about every two years. This rapid progress led to rapid increases in the capabilities of computers in terms of speed, memory and computational power even while prices were coming down dramatically. That progress is also seen in the capabilities of practically everything containing circuits including cellphones, cameras and other digital devices.
As Wikipedia will tell you, Moore’s Law is not a law of physics; it is simply an observation about an historical trend in the semiconductor industry. But so pervasive has been the effect of Moore’s Law on the digitization of our daily lives—for instance, our cellphones have become powerful, portable miniature networked computers with cameras—that we are inclined to believe that Moore’s Law is a kind of mystical force unleashed by the tech industry on modern society.
Otherwise intelligent people have come to believe impossible things by applying something like Moore’s Law to areas of our lives that simply don’t operate the way the semiconductor industry does. Tech entrepreneur and futurist Ray Kurzweil predicted in 2016 that solar energy would dominate world energy production in 12 years by doubling its share of the energy market each year through 2028. That’s when solar would supposedly provide 100 percent of all energy worldwide.
Setting aside for the moment that Kurzweil seems to be quoting a figure for solar’s 2016 share of the electricity market only and NOT the liquid fuels market, it is highly unlikely that his prediction will be borne out even for electricity. As I have explained previously, energy transitions take time, lots of time. They have historically moved along at an achingly slow pace for reasons that include long-lived energy infrastructure, entrenched economic interests combined with political muscle, and logistical and financial limits on the building of new infrastructure.
Another example of the misapplication of Moore’s Law-type thinking occurred when I was a graduate student at Michigan State University in the mid-1990s. MSU’s arch rival, the University of Michigan, announced that it would become a million-person institution by deploying so-called “distance learning” combined with internet technology. I was skeptical.
As it turns out, total enrollment at the University of Michigan in fall 2018 was 46,716. The university now has what it calls Massive Open Online Courses. But these courses do not seem to have moved enrollment anywhere near the million mark.
And now we return to Uber. First, let me point out that slapping a clever app together and grafting it onto a ride-hailing service does not create a technology company. Cars are not semiconductors, roads are not electronic circuits, and Uber drivers are not electrical engineers (at least not many of them).
The physical world that we all live in has actual speed limits considerably lower than the speed of light. Uber drivers face the same traffic that everyone on America’s car-infested roads face. Those drivers may have a slight edge with software that predicts the best route given traffic conditions. But that edge is not improving in a way that is ever going to cut average travel times, say, in half. You simply cannot move that fast safely on city streets (or without violating the current speed limits).
Even though Uber owns few of the cars that transport its customers, its ride-hailing business is actually capital intensive. It’s just that the capital in this case is owned almost completely by the drivers. Uber then is not an information-based company any more than any other ride service. Uber has not figured out some new, revolutionary way to transport people across cities. It is a car-based company just like all its direct competitors. (Obviously, it competes with public buses and subways as do its rivals.)
Obviously, the typical automobile can only hold so many people, usually five, with three in the back seat and two in the front. So, expanding service requires more cars and more drivers. There are few economies of scale. (For an excellent analysis of the problems Uber faces, read Yves Smith’s recent analysis in New York magazine.)
Here I’ll mention briefly Baumol’s cost disease. William Baumol was an economist who noticed that workers in low or no productivity growth occupations still saw their wages rise along with those in high productivity growth fields such as manufacturing. Those low productivity growth fields include the arts, education, health care and public services; in fact, practically any area that requires significant personal services is probably subject to Baumol’s cost disease.
If we as a society want people to work in these areas, Baumol concluded, we will have to pay them well enough so that they do not flee to higher productivity jobs with higher pay. A professional string quartet will not provide a live performance at a price adjusted for its zero productivity growth over the last 100 years. The players require payment that allows them to live in what is considered reasonable comfort today or they will simply do something else for a living.
We have come to accept that an opera company, for example, cannot subsist on ticket sales alone. It requires a subsidy, either in the form of private donations or public money. But we continue to harbor the illusion that other people-laden occupations can somehow be made to conform at least in part to Moore’s Law. And, while some occupations have been affected greatly by automation, it turns out that for most of those occupations, tasks have only been partially automated. The automation assists people without replacing the need for them.
Think about automated tellers. They can perform many routine transactions. But after some 40 years of deployment, there are still plenty of bank tellers around to assist us.
I conclude then that Uber is not a tech company. It is simply a taxi company masquerading as a tech company, one that pays its contractors by the ride. For reasons outlined by Yves Smith in her New York magazine piece, Uber is unlikely to survive far into the future.
Right now about the nicest thing you can say about Uber is that it subsidizes the rides of it users by spending the money of investors and by exploiting its drivers who don’t seem to understand that they are not being paid enough to cover the wear and tear on their cars (which will have to be replaced sooner, of course, as a result of their extra duty ferrying Uber riders).
Uber riders are likely to continue to reap the benefits of cheap rides until Uber investors offload their shares on unsuspecting “greater fool” investors during the company’s planned initial public offering. However, it’s hard to see the company continuing to attract investment once the flaws of its business model are revealed under the scrutiny required by the Securities and Exchange Commission. And, once additional investment dries up, Uber riders will probably be forced in short order to look for rides elsewhere as the company disappears along with all the remaining capital of its investors.
Photo: Uber float in the Amsterdam Canal Parade, The Netherlands (2017). Alf van Beem via Wikimedia Commons. https://commons.wikimedia.org/wiki/File:Boat_70_Uber,_Canal_Parade_Amsterdam_2017_foto_3.JPG