Uber turmoil could mark a turning point for the tech sector

Theglobeandmail.com
June 16, 2017
By Eric Reguly

I am happy that Uber is still around and expanding. A lot of businesses are net transfers of wealth from the unrich to the rich, such as banks and their endless fees, paid by you and me to keep bank shareholders happy. With Uber, it’s the reverse, a net transfer of wealth from the rich to the unrich.

Uber is owned by very wealthy private investors, the 0.01 per centers. Every ride booked on Uber’s ride-hailing app loses money, to the benefit of Uber passengers. What keeps the company alive is regular cash calls from investors who are apparently convinced Uber is to ride sharing as Amazon is to digital retailing - an unstoppable force, a competition-killing monopoly in the making.

Does their faith in Uber remain unshaken? It’s hard to say, since private investors don’t have to tell us their thoughts, but you might assume that some of them are getting twitchy. Uber is eight years old and burning through eye-watering amounts of cash. And now, its executive ranks are in a shambles.
A string of scandals, including frat-boy sexist behaviour and the slow response to the killing of several of its drivers in Brazil, has finally triggered a thinning of the executive ranks. Travis Kalanick, Uber’s chief executive, founder and driving force, this week announced he is taking a leave of absence. David Bonderman, a billionaire venture capitalist and Uber director, stepped off the board after making a sexist remark at a board meeting dedicated to eradicating sexist behaviour.

If the loss of Mr. Kalanick and Mr. Bonderman weren’t enough turmoil, the company ousted its head of business, Emil Michael. Others have hit the road, laying waste to Mr. Kalanick’s inner circle and raising questions about the company’s overall health and whether Uber’s initial public offering might get derailed.

The bigger question, though, is whether Uber’s investors will stump up when the underwriters come knocking again. If some or many of them say no, Uber might be in trouble. If they stay in and have to sell other tech investments to fund the cash call, the whole sector might come under pressure.
The biggest question of them all is whether Uber’s turmoil marks a turning point for the tech industry.

Based on its recent funding rounds, Uber is worth close to $68-billion (U.S.), making it the tech world’s most valuable private company. It also has the dubious distinction of being one of the biggest money-losers of any company, public or private, tech or non-tech.

According to a recent Bloomberg report, Uber disclosed an adjusted net loss of $2.8-billion on revenue of $6.5-billion in 2016. The figure does not include the loss of about $1-billion it took on its China business, which it sold last August. That means Uber went $3.8-billion in the hole last year and the amount might be higher under generally accepted accounting principles. Bloomberg said the enormous loss would put Uber, had it been listed on a stock exchange, among the top 10 biggest money-losers among public companies.

Given the losses, how can Uber’s valuation be justified?

The Uber model - lower pricing than regular taxis, the convenience of its app and deeming drivers to be self-employed - has put enormous pressure on licensed taxi services everywhere, slaughtering the value of taxi medallions in cities such as New York.

But Uber does not have the power to artificially limit supply. Uber is facing competition from rivals such as Lyft, Gett and Careem, a few of which are backed by some of the world’s biggest car companies. The medallion taxis are cutting prices and some fleets are building their own Uber look-alike apps.

In other words, there is no way that Uber is going to get a global monopoly – its costly retreat from China says as much. At the same time, some Uber drivers are taking the company to court to try to get employee-like protection, such as sick pay, paid holidays and minimum wages. Uber’s argument that its drivers are not employees may crumble in some countries, adding enormous costs to the business. Paying social-security taxes is not part of Uber’s business model.

If Uber’s valuation starts to crumble, watch out, because contagion could set in, infecting other private tech companies and perhaps spreading to the publicly traded tech players.

Netflix, with a market value of $65-billion, comes to mind. Is that valuation justified? Maybe but maybe not, if you consider that Netflix does not have a lock on its subscribers, who could migrate to Amazon Prime or Hulu, a subscription video service backed by Disney, Fox and other entertainment heavyweights. It’s hard to believe Time Warner, valued at $77-billion, is worth not much more than Netflix, and Time Warner includes mighty HBO, one of the world’s most successful programmers.

It’s premature, perhaps wildly so, to expect a tech-market crash. But the problems at Uber tell you all may not be well in the tech world. Uber is revered as the most successful private tech company. Market corrections sometimes start where you least expect them.