Uber is making news again by cutting fares in over 100 cities. In New York, the cuts amount to 15%. The result is that consumers may benefit (for now), but drivers are getting screwed again. What is Uber up to? Why did Uber cut prices? What does it mean for investors in any possible Uber IPO?
The internal claim is that Uber cut prices because this time of year is seasonally slow, but the truth is far more insidious.
There are two primary reasons that Uber cut prices.
Lawsuit Troubles for Uber
Uber cut prices because it lost another round in the California class action case. It tried to freeze the case, which is due to begin trial proceedings on June 20, while the company appealed a Dec. 9 decision by Judge Edward Chen to add 100,000 more drivers to the class.
While this case remains outstanding, there is little possibility of an Uber IPO. If it loses the trial, it will be on the hook for billions of dollars in California alone.
It may also settle the case by accepting employer status, which still requires more cash reserves.
Either way, an Uber IPO prospect is dim at best. Any Uber IPO comes with significant enhanced risk for investors, as class-action attorneys in every state will have the go-ahead to file, as well.
Lower prices, in theory, drive higher volume. People tend to go for the cheaper alternative if they view the service as being equal or superior to others. As Bloomberg recently reported, Uber lost over $1.7 billion dollars in the first three quarters of 2015.
That’s hardly great news for an Uber IPO. This indicates the company’s lack of concern about losses, as long as institutional investors continue to plow in more funds.
It appears, however, that this gravy train has come to an end. After nearly five years, operating losses continue to exceed revenue gains. CNBC reports that the next raise is from private high-net-worth investors through Morgan Stanley at the retail level. Perhaps the institutions have gotten wise.
Predatory Pricing
The second reason why Uber cut prices tells the real story about the Uber business model. According to a recent Forbes article, they are trying to drive Lyft out of business and harm taxi cabs.
The goal is to constantly lower prices and engage in a price war they believe they can win. Then, once the competition is driven out, they can raise prices significantly.
Whereas taxi cabs have regulated pricing, licensing, insurance and safety regulations to protect the riding public, Uber would theoretically have no such regulation in place, letting them raise prices to rip off consumers. However, many larger cities such as New York, Boston and Chicago, are sending signals that they intend to correct this imbalance.
Consumers are thus in a Faustian bargain. Lower fares now may lead to extortive fares later.
There are other issues with price cuts for drivers, though. The less money they earn, the less likely they will be to properly maintain their cars, since they won’t have the revenue to do so. That could create increasingly unsafe conditions for these drivers and their passengers.
This aggressive price discounting structure also encourages Uber drivers to go “non app” (not signed in to Uber network) and illegally solicit street hails. That, in turn, means nobody is covered by Uber’s insurance.
The price war was predicted. This is what economists call a “race to the bottom.” As Uber pushes drivers to accept lower fares, their drivers not only fail to maintain vehicles, but the more responsible drivers under the new NYC universal license are able to return to driving yellow medallions. That leaves those largely part-time Uber drivers on the fringe, desperate for any pay.
Uber drivers did strike this week to protest what they believe will become a minimum-wage job. And investors should strike against any Uber IPO.
The headwinds are becoming increasingly strong, and the future looks cloudy.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
