Uber's Dara Khosrowshahi is in a no-win situation

11 September 2017

Dara Khosrowshahi has been appointed Uber's new CEO with shareholders hoping he can steer the ride-hailing app away from a string of controversies. John Colley, Professor of Practice in the Strategy & International Business Group and a former MD of a FTSE 100 company, assesses the huge challenge ahead. 

Does new Uber CEO Dara Khosrowshahi really know the full extent of what he is taking on?

Uber is not going to be an effective monopoly such as Facebook, Google and Amazon. Investors have been keen to support Silicon Valley firms but are they being taken for a ride with Uber? It’s questionable they will ever see a return on their investments.

The investors’ bet is that Uber will become an effective monopoly through network effects such as enjoyed by Amazon, Facebook and Google. However, there are a number of reasons why that is unlikely to occur.

For a start Travis Kalanick has a tight grip on the business through his founder voting shares and control of three board seats, which is common in Silicon Valley, and is looking for his chance to reclaim his old job.

Indeed for Kalanick a new CEO could be ideal as he needs a fall guy for a number of underperforming investments. There are also significant doubts as to how effective the Uber model will be in creating profits once the investor funded subsidies to drivers and passengers ends.

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Kalanick has presided over a macho and sexist culture, and Uber faces litigation from all angles; for driverless car knowhow theft from Google-owned Waymo; from drivers’ legal attempts to make Uber an employer; and in the last year 48 allegations of driver sex attacks on passengers in London alone.

Poor publicity is losing Uber trade as plenty of competitive alternatives exist such as Lyft in California, Grab in South East Asia, and Ola in India. Plus in overseas markets many local competitors have now developed apps and also have low costs.

While researchers from Warwick Business School and New York University finding that Uber drivers are acting together to trigger automated surge pricing is scarcely a surprise.

As the fare uplift is major it forces customers to keep another taxi firm's app on their phones. The unintended consequence is it destroys the investors’ rationale that through network effects Uber will become an effective monopoly.

It keeps other taxi firms in business who have a ride-hailing app. Such ride-hailing apps are easy to copy as there is no intellectual property tied up in them and many taxi firms have them now.

Will Uber survive the increasing competition?

One contributory element driving this behaviour is that Uber drivers are generally paid less per trip than their competitor counterparts and the taxi firm takes a similar percentage cut.

Uber's pricing is normally below competitor levels attracting customers so the driver gets more work. In effect it is low pricing attracting more customers which gives taxi drivers higher overall pay, but they do have to work harder.

For example, on a route I use regularly my usual taxi firm, which has an app, charges £5, while Uber charges £3.50. According to the drivers both firms take 25 per cent, so respectively the taxi drivers get £3.75 and £2.62 for the same trip, but the Uber driver is likely to see more work.

Media, investors and business schools have tended to focus on Uber's disruption of the highly regulated black or yellow cab markets, which have high price fares. However, in many markets Uber has simply brought a ride hailing app plus tracking and fixed fares, which may well be investor subsidised, to a traditional mobile-phone hailing market.

The competitors have rapidly copied these new features. A consequence is that Uber is in a real dog fight in many overseas cities in which the local competition is better adapted to the market. They have already lost the battle in China and Russia and are in danger of losing in India against Ola and in South East Asia where Grab is well funded.

In many cities the original taxicab businesses have reduced their fares and improved their service. In more regulated markets such as France, Belgium and Spain Uber has been effectively banned. Once the investors tire of stumping up cash Uber may find life increasingly difficult. So far investors have found more than $12 billion.

Uber investors are also up against China's Didi Chuxing, which has raised $21.5 billion from investors against Uber's $12 billion. It has beaten Uber in China and now part funds Grab in South East Asia, Lyft in the US and Ola in India.

In view of the market dynamics only taxi customers and drivers are going to benefit from the enormous investor subsidies being thrown at the industry.

Certainly the chances of investors making any real return will depend on keeping belief going and exiting before either Uber or Didi have to produce profits to justify their valuations. Expect a stock market float very soon.

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Khosrowshahi will also have to contend with inevitably disappointed investors who are going to start asking about a return on their funds. The current valuation of $50 billion looks a tall order in such competitive markets where customers and drivers can switch firms so easily.

Many Silicon Valley firms have struggled to turn promise into cash, just take Twitter, Yahoo!, LinkedIn and now Snap. Kalanick cannot help himself as business founders will not normally let go unless forced out by investors. Frequently they would rather destroy the business than leave.

In the end, though, most founders do leave or are moved aside by investors, but in Silicon Valley founder shares change the rules. Unfortunately founder shares may also be changing the outcomes.

See this blog published at Fortune.

John Colley teaches Strategic Advantage on the Executive MBA and Mergers and Acquisitions on the Executive MBA (London). He also lectures on Managing in a New World and Strategic Thinking on the Full-time MBA.