54 Business The EconomistJuly 22nd 2017
I
T IS said that Travis Kalanick, who resigned as Uber’sboss last
month, has been reading Shakespeare’s “Henry V”. Prince Hal’s
transformation, from wastrel prince to sober monarch, is doubt-
less one he would like to emulate. But as a guide to the ride-hail-
ing firm’s financial dilemma, “Macbeth” is the best play. This line
especially resonates: “I am in blood stepp’d in so far that, should I
wade no more, returning were as tedious as go o’er.”
Uber has bled money for years in an attempt to become the
absolute ruler ofits industry. Once Mr Kalanick’sreplacement is
found, voices will whisper that the firm, like Macbeth himself, is
in too deep to alter course. Butthe new bossmust change Uber
from a company that sacrifices anything for its ambitions, to one
which has a realistic valuation and uses resources efficiently.
Its product is elegantly simple. Uber makes a market between
drivers and passengers and takes a cut of about a fifth of the fare.
The more people use its service, the better it functions, with lower
waiting periods for passengers, and better use of drivers’ time.
Some 55m people in 574 cities use it every month. Underlying
sales were $4bn in 2016, over double what they were the year be-
fore (all figures exclude Uber’s Chinese arm, which it sold to a lo-
cal rival, Didi Chuxing, last year). Uber’s main trouble is high ex-
pectations. Its supporters think it will become the next Alphabet
or Facebook. At itslast funding round in 2016 (it is private), inves-
tors valued it at a whopping $68bn.
But the next boss will have to deal with an income statement
that is scarier than the Thane of Cawdor. Underlying pre-tax
losses were $3bn-3.5bn last yearand about $800m in the most re-
cent quarter. Some $1bn-2bn of last year’s red ink was because of
subsidies thatUber paid to drivers and passengers to draw them
to its platform. At leastanother $1bn went on overheads and on
developing driverless cars; money is also beingsplashed on a
new food-delivery venture and a plan to build flying cars.
To put its 2016 loss in perspective, that number was larger than
the cumulative loss made by Silicon Valley’s least profit-con-
scious big company—Amazon—in 1995-2002. Measured by sales,
Uber is the world’s 1,158th-biggestfirm. Judged bycash losses, it
ranks in the top 20. It is now eight years old, but still probably
years away from being stable enough to make an initial public of-
fering ofshares. In contrast, Amazon wentpublic at the age ofthree, Alphabet at six and Facebook at eight.
Investors rationalise its valuation by assuming that in the long
run it will be highly profitable, with a dominant share of a large
market. In 2014 Bill Gurley, a well-known tech investor who was
then an Uber director, estimated that the pool of consumer
spending that it could try and capture might be over $1trn, with
ride-hailing and ride-sharing replacing car ownership. Today
many Silicon Valley typesthink thatestimate is too conservative.
But a discounted cashflow model gives a sense of the leap of
faith thatUber’s valuation requires. After adjusting for its net cash
of $5bn and for its stake in Didi, worth $6bn, you have to believe
that its sales will increase tenfold by 2026. Operating margins
would have to rise to 25%, from about -80% today.
That is a huge stretch. Admittedly, Amazon and Alphabet, two
of history’s most successful firms, both grew their sales at least
that quickly in the decade after they reached Uber’s level, and Fa-
cebook is likely to as well. But over the same periods these firms’
operating margins show an total average rise of only one percent-
age point. Put simply, Uber finds it desperately hard to make mon-
ey. It is not clear that it breaks even reliably across the group of cit-
ies where it has been active for longest.
So the new chief executive will have to deliver a bleak mes-
sage; that ride-hailing is locked in a vicious circle. Low prices and
high subsidies lead to losses, so firms must raise capital contin-
ually, requiring them to exhibit risingvaluations. To justify these
they must frequently enter newcities and dream up new pro-
ducts. Even more speculative capital is then drawn in by the pa-
per gains seemingly on offer. In the past year, ten of Uber’s com-
petitors, such asLyft in America and Grab in South-East Asia,
have together raised or are raising, roughly $11bn. That will be
used to finance still more price wars to win market share.Double, double toil and trouble
Uber is on course to use up its existing cash and credit lines in
three years. Its next boss must break the cycle before then by cut-
tingsubsidies and talking down its valuation. It could lose market
share and may need to exit scores of cities. On July 13th it said that
it will merge its operations in Russia with a competitor. Similar
deals need to follow. Although Uber should continue to invest in
driverless cars, some of its more experimental “moon shot” pro-
jects will probably be for the chop. Its investors, including Gold-
man Sachs, Saudi Arabia’s government and Jay-Z, a rapper, could
face paper losses. Staff paid in stock will be furious.
Yet over time the aim should be a firm with a lower market
share ofa more stable industry. Successful, dominant firms, such
as Google and AT&T, don’t seekabsolute monopolies by killing
off weaker rivals. They allow them enough space to plod on. That
lowers the risk of antitrust problems and deters new entrants. By
signalling that Uber’s valuation is too high its new boss would
knock valuations across the ride-hailing industryand slow the
flood of speculative capital—in the end, a good thing.
Once the losses abate, the priority should be to create a more
“capital light” model. Perhaps Uber could license its brand and
technology to local partners in some markets. It could concen-
trate subsidies on customers who sign up to long-term contracts.
The biggestimpediment may be Mr Kalanick. With allies, he still
controls a significant share, probably a majority, of the com-
pany’s voting rights. Anyone taking on tech’s toughest job must
have the inner steel to confront him. They should remember an-
other quote from the bard; “I must be cruel only to be kind.” 7Reinventing Uber
An action plan for the ride-sharing firm’s next chief executiveSchumpeter