Opinion | The Failing Economy of Austro-Uber

The sharing economy promises cheap and easy fixes in a time of limited resources. But if you peek behind the facade, many business models look unsustainable

Do you know why Uber is 25% cheaper than a traditional taxi? Your ride is being subsidized, but in this case by private venture capital instead of taxpayers.

Despite recent bans in neighboring Germany, Italy and Hungary, the ride-sharing company Uber has been quite well received in Austria, a flexible, inexpensive transportation alternative, an appealing new option for the digital age. But its popularity hides a fatal flaw – Uber is bleeding money.

While Uber’s valuation has zoomed to around $70 billion – greater than Volkswagen, BMW, Ford, GM or Tesla – the company lost nearly $3 billion in 2016 (plus another billion or two in China), and has already lost over $1.3 billion in the first half of 2017.

It’s the dirty little secret of Silicon Valley: Seven out of ten startups fail because they never become profitable. And Uber may soon be one of them. While claiming to be a “disrupter” of the traditional taxi industry, it has, in fact, never figured out how to offer the same service at a lower price and still earn a profit. Consequently, Uber has become stuck in a trap – it uses billions in venture capital to subsidize at least 50 percent of every ride to cut fares and to drive out the competition. In the ultimate irony, the more customers use Uber, the greater into debt it goes.

Uber users in Vienna like the fact that it is less expensive than a traditional taxi – about 25 percent cheaper, according to some estimates. Now you know why – your Uber ride is being subsidized, but in this case by private venture capital instead of taxpayers.

This works only for so long. At some point, investors expect a return, or they turn off the spigot. More than anything, that’s what led to the recent ousting of CEO Travis Kalanick. Uber’s board was willing to overlook scandal after scandal, as long as the business model seemed to be on track.

But Kalanick was never able to figure out how to change the basic economics of the taxi industry. Amazon, for example, was able to “disrupt” the book business by replacing brick-and-mortar shops with online sales, allowing it to cut costs and eventually reach profitability.

Confronted with his failure to find similar efficiencies in the taxi business, a desperate Kalanick set his sights on deleting drivers and their wages through the development of autonomous vehicles. But this is another massive gamble that Uber cannot win, at least not in time to save itself. Most experts, including those previously bullish on self-driving technology, such as The Economist, have recognized that autonomous vehicles are at least 20 years from fruition. We will continue to see various experiments on city streets, and autonomous service vehicles used in very limited settings, but the dream of a self-driving transportation grid of the future, dominated by Uber, is pure science fiction.

Uber’s only chance to survive at this point is to actually make its company pro table as a “taxi business for the digital age.” Here is what Uber must do to survive:

1) Parlay Uber’s popularity among its users into a significant increase in fares.

2) Find a way to hit “reset” on its poor relationship with its drivers-only four percent are still driving after a year – since it will need them for a good while longer. Uber burns through drivers as fast as its investors’ cash.

3) Drop foolhardy futurist ideas like self-driving or self-flying vehicles (the latter was Kalanick’s latest brainstorm) that have little future and are a waste of resources and attention span.

4) Head of the coming backlash over urban congestion by cooperating with local officials to use the company’s tracking technology to reduce congestion (aggravated by Uber itself) that is plaguing cities. That would mean sharing drivers’ data to track traffic flows and create congestion zones as in London and Stockholm. While ride-sharing may survive, it’s more likely that without some drastic changes, Uber will burn through its remaining $6.6 billion in cash and eventually go out of business.

But no worries, when Uber closed its business in Austin, TX after the local government required stronger background checks, four new local ride-sharing companies entered the field.

And in Vienna, traditional taxis, newer options like Car2go, and the public-private Wiener Linien continue to be the mainstays of a successful transportation matrix.

Steven Hill
Is a technology and economic journalist based in Silicon Valley, and the author of the recently published Die Start-up-Illusion: Wie die Internet-Ökonomie unseren Sozialstaat ruiniert (Droemer Knaur). He was recently a Holtzbrinck fellow at the American Academy in Berlin.

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