The great disruptor is now officially disrupted.
Regulators in London announced on Friday they would not renew Uber Technologies Inc.'s licence to operate in the British capital because the U.S. ride-hailing giant is not a "fit and proper" operator.
That curt dismissal amounts to a stinging slap in the face for Uber. The company used to revel in its bad-boy image but is now trying to glove its bare-knuckled ways since the departure in June of its former chief executive, the trash-talking Travis Kalanick.
All things considered, though, being given the bum's rush from London is far from the biggest challenge facing Uber.
The company's most fundamental issue is that it's bleeding money with no end in sight. By its own reckoning, in the second quarter of this year, it lost $645-million (U.S.) on revenue of $1.75-billion. This follows a year in which it lost $2.8-billion on sales of $6.5-billion.
In any other industry, the flood of red ink would signal catastrophe. But not in the technology sector.
The dominant theology in Silicon Valley canonizes disruptive companies that spend vast amounts of money to upend conventional industries. Think Amazon.com Inc. and its war on brick-and-mortar retailers. Or Netflix Inc.'s attack on conventional cable TV companies. Both tech superstars are held up as shining examples of how to get rich by rebelling against the status quo.
Here's where the theology gets a bit murky, though. The notion is that huge expenditures by tech upstarts will eventually turn into endless, lush profits. It's not clear, however, that this will ever be in the case, either with Uber or with many other tech superstars.
Amazon is now 23 years old; Netflix is 20 years old. They're no longer youthful rebels. Both have spent huge amounts on developing their businesses. Both are still spending huge amounts. And both are still producing only a couple of pennies in profit on each dollar they take in. The word for margins like that is not "lush." Cramped, maybe.
Investors love Amazon and Netflix because their sales are growing by double-digit percentages every year. At a time when other companies are struggling to expand their top lines, such heady levels of growth are intoxicating.
What many people ignore, however, are the risks involved. Both companies have massive debt loads. If growth ever falters, or borrowing rates climb, their already slender profit margins could disappear.
In Uber's case, the risk may be even more basic: There's a chance its fundamental business proposition is flawed.
On its surface, the taxi business seems ripe for disruption because most cities heavily regulate the industry. Techno-libertarians love the idea of using social media to vault over the regulatory barriers and transform the taxi business into a free market.
It's an alluring concept. But taxi-industry regulations – ranging from minimum training requirements to limits on the number of cabs allowed to operate – weren't simply imposed by malevolent cabbies and pliable regulators. The rules arguably serve a purpose, ensuring that cab owners are forced to have enough skin in the game to ensure minimum standards of service. Without such rules, cutthroat competition can force taxi owners' earnings so low they start scrimping on car repairs and even insurance, while looking for creative new ways to milk passengers for added cash.
Taxi charges shot up – that's right, up – in 21 cities in the U.S. sunbelt that deregulated their industries during the 1970s and 80s, according to a PriceWaterhouseCoopers study. With many more drivers competing for roughly the same number of fares, cabbies could attract fewer rides on average and responded by raising fares an average of 23 per cent.
"The experience with taxicab deregulation was so profoundly unsatisfactory that virtually every city that embraced it has since jettisoned it in favour of resumed economic regulation," Paul Stephen Dempsey, a professor of law at the University of Denver, wrote in a 1996 paper.
To be sure, Uber may have found clever technological ways to get around the problems that plagued an earlier generation of deregulators. But it's worth pondering the possibility that some of the same issues are beginning to crop up again. The London regulators pointed to Uber's "lack of corporate responsibility" in regards to public safety. Meanwhile, one online poll found that fewer than half of Uber drivers are satisfied with their work experience.
A business that can somehow contrive to vaporize oceans of money while simultaneously alienating both core contractors and key regulators is a business in serious trouble. Uber says it will fight the London decision, but a successful appeal would be only one small step toward answering the questions that now surround it and some of its fellow tech superstars.