Uber has had more than its share of problems, most of them self-imposed. The removal of former-CEO Travis Kalanick was one step toward addressing the company's many issues.

But even with the bad PR, the flight of employees and management, and the success rival Lyft has seen of late, Uber is hardly down and out. There are signs that Uber's long-range plans are starting to fall into place -- including a new report about the bleak times the cab industry in New York City faces. That could mean great news for the company's profits but ultimately could pose a shock to customers.

The telltale sign comes from Crain's New York Business, in a story about a big quakes in the city's taxi industry. There are multiple interlocking factors:

  • Uber's flood of drivers in New York has had a big impact. An additional 50,000 cars on the road, particularly at peak times, has meant, according to some anecdotal evidence, a significant drop in what traditional taxi drivers can make. The drivers interviewed by Crain's have seen 40% to 50% decreases in their gross revenues, despite working long hours.
  • Falling revenues mean that the taxi business is less attractive to workers. Companies that lease cabs with medallions out to drivers find it's harder to recruit people. That means lower revenues and profits.
  • Lower revenues and shrinking demand for taxi medallions, the physical licenses attached to cars that make it legal for them to act as taxis, has cut the value of medallions by as much as three-quarters since 2014.
  • Lower revenues for medallion owners makes it more difficult for them to pay the bank loans on the medallions, causing an increase in delinquencies. One bank that holds the loans on nearly a third of the medallions in the city has faced financial trouble and has been aggressive in repossessing the licenses. Increasing supply could drop medallion prices even lower.
  • With falling prices, medallion owners who bought at higher prices are under water in their loans. Like home owners in similar positions, they can't sell off to someone else, putting them into a vicious circle. They keep working, values fall, and they get further behind.

It's bad news for everyone in the taxi industry because the same problems could begin to happen anywhere. But it's great news for Uber.

As I've noted before, the company has been seeing multi-billion dollar losses one year after the next. As the analysis by someone at the Naked Capitalism blog has shown, Uber's economic realities are bleak. Disruptive technology usually implies finding a better way -- including more economical -- to do something.

Uber has created a ride experience that is more pleasant to many millions of consumers. But its insistence on treating drivers as contractors, so it doesn't deal with all the tax and regulatory implications employee status, means that there are no major economies of scale that can help. Fuel is purchased separately, as is regular vehicle maintenance. Uber has car financing for drivers that critics say is expensive (as it's targeted at people with poor credit), so there are no advantages there. Although Uber provides extended insurance coverage, drivers must provide their own and that probably means getting special commercial coverage.

So drivers can make enough to pay their business expenses and make something, Uber has subsidized ride costs to make them more attractive to consumers. That can't last forever. Any investor eventually wants a positive payoff. But should the company suddenly start raising rates, people might go right back to taxis or to competitors like Lyft, putting Uber into danger.

The only long-term strategy that works is a cold one: to wait for taxi companies to go belly up and leave the field open to Uber, Lyft, and others to raise their prices. It's a reality in business that sometimes a new idea succeeds only at someone else's cost. That seems to be Uber's ultimate aim -- well, that and focusing on self-driving cars so they eventually no longer need drivers at all. (I've asked Uber to comment on this and will post something if and when I hear back.)

It seems to be working in New York. Los Angeles has seen sharp declines in taxi business. One of San Francisco's largest cab company reportedly filed for bankruptcy last year.

So, with all the problems, it may be that Uber will ultimately win. Whether consumers' wallets will is yet to be seen.

Published on: Jul 10, 2017