Uber Board Members Kiss and Make Up (for Now), but Long-Term Problems Remain

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Uber founder and ousted CEO Travis Kalanick end-ran other major Uber shareholders late last week by exercising his right to appoint two board members to fill vacant seats. That took place mere days prior to a scheduled board meeting that was to vote in major governance changes seen as necessary to cinch a hoped-for large share purchase by SoftBank. The trigger for Kalanick’s move was apparently terms that would reduce his rights, including barring him from ever being CEO again.

As was widely reported, the warring factions in the board have come to a truce. Per the Financial Times:

Everyone felt they got part of what they wanted with the new deal, which was approved late on Tuesday. However, the agreement all hinges on the success of the SoftBank-led investment, and the governance changes will only take effect upon the close of that deal.

Over the next two weeks, a group of investors including the SoftBank Vision Fund, Dragoneer and General Atlantic, will be working to find the right price for a massive tender offer, through which they will buy billions of dollars worth of Uber’s shares from existing shareholders at a discounted valuation.

All shareholders will be allowed to sell into the tender offer, including early investors, as well as early employees who may have hundreds of millions of dollars in Uber shares that they have not been able to liquidate. Some employees took to Twitter late on Tuesday to express their relief at finally being able to sell their shares.

But the challenge will be to find a price that attracts enough sellers, and is also palatable to the buyers. The SoftBank consortium says it must buy at least 14 per cent of Uber’s shares for the deal to go through, and a price that implies a $50bn valuation has been under discussion.

The paperwork to kick off the process was set to be signed on Wednesday, with the tender offer expected to be launched two weeks later. About three-quarters of the funds will come from SoftBank, and about one-quarter from the Dragoneer consortium, said people close to the deal.

The investors will also buy $1bn to $1.25bn of new Uber shares at a higher valuation of about $68bn for the company, in a face-saving move that will allow it to maintain the same eye-popping valuation at which it raised money last year.

Mind you, all this does is solve Uber’s most pressing issue, which was a power struggle in the board that was so serious that it threatened to tear the company apart. Uber still has its overarching problem of a lack of a path to profit at anything remotely approaching its current scale, let alone a reason to believe it has any hope of recovering years of massive subsidies to riders. Uber is a rare case of venture capitalists handing out money to large swathes of the great unwashed public.

Hubert Horan gave his assessment: “The news does change the near-term outlook for Uber, although not the long-term outlook.” Specifically:

1. The unresolvable Board level conflicts had the potential to block any and all near-term company decisions. Those seem to have been papered over in ways that give everyone breathing room for a while. Until yesterday it would have been impossible to make any Board or executive appointments or for the Board to even talk about a possible SoftBank investment without interim steps indicating a clear victory of Kalanick over Benchmark or vice versa. By approving six more Board seats, you’ve kicked that can a bit further down the road.

2. The next critical issue is whether SoftBank actually makes an offer along the lines discussed in the press, and whether the Board can reach agreement on it.

Several stories this week have emphasized that even with the governance changes, this isn’t a done deal. It would obviously be a huge PR win for Uber; the problem is the underlying conflict between early and later investors who paid wildly different amounts for their shares.

Yesterday’s changes eliminated disproportionate votes-per-share, but not the disparity between the original cost per share. I’m guessing that the “discounts” SoftBank would offer existing shareholders would suggest a valuation less that later round investors paid. Benchmark would still make a fortune if it sold at this discount, but it might force Fidelity or the Saudis to take big write-downs.

Kalanick had fought the original SoftBank deal that Benchmark initiated arguing that early shareholders should not be allowed to cash out on hugely profitable terms unless all other shareholders had the same opportunity. This was undoubtedly motivated by his hatred of Benchmark, but it is a valid point. I presume yesterday’s deal includes some arrangement that Benchmark and Kalanick could live with, but the press has ignored this issue, and so its unclear whether these later investors end up getting screwed.

Benchmark has said they would drop their lawsuit over Kalanick’s right to control board seats if a SoftBank deal happens; as yet no indication of whether Pishevar will drop his separate lawsuit about the reduction in their voting rights.

As discussed previously, returns to SoftBank would require some combination of (a) screaming discounts (b) a deal that could directly lead to exercising effective control of the Board before long, and (c) deals that allow SoftBank to totally eliminate Uber as a competitor in major Asian markets.

3. The other short term critical issue is the Waymo lawsuit, where Waymo finally got access to a major internal Uber study of the Otto acquisition, and won a delay in the case so they could amend their complaint based on that information.

Preliminary second/third had reports suggests that the new evidence adds lots of damning but circumstantial evidence supporting the claim that Uber and Kalanick actively conspired to “steal” the Otto team away from Waymo, but there are still no reports that evidence has emerged showing that Uber directly incorporated any Google IP into its driverless car program. If Waymo can’t produce that evidence, the legal risks to Uber become much smaller.

4. If Softbank happens and Waymo can’t produce the smoking gun, the press narrative will emerge that Uber has solved all its serious problems and is back on the path to glory. They won’t be – glory requires at an absolute minimum an IPO within the next 18 months at a valuation north of $50 billion. The numbers don’t add up today, and they won’t add up in 18 months, but it buys Uber an enormous amount of breathing room.

In a new story today, the Financial Times describes how Uber has had a hard time retaining drivers and is under pressure from competition with Lyft to improve its relations with them, which above all means improving their economic deal. Uber cut fares and thus payouts to drivers in early 2016. From Daily Beast:

A crowd of 600 drivers gathered outside the Uber office in Long Island City, Queens, to protest a 15 percent reduction in fares last month, which also means 15 percent lower wages. That pay cut is on top of Uber’s 20 percent slashing of fares in 2014. All things being equal, drivers who began less than two years ago have seen their pay tumble a whopping 35 percent….

Uber’s own statistics even back up the claim that drivers are getting screwed….

Uber also pointed out that any decrease in the overall fee paid by riders will affect their bottom line, too; the lower the total fare, the lower their commission, which is usually 20 percent to 25 percent.

Later stories revealed other ways in which drivers are cheated. For instance, Uber’s charges to riders are based on routing that is more costly than the one it tells drivers to take, which is also the one it uses to pay them.

The Financial Times article says that driver turnover is 50% a year. That is much lower than the figures reported by Naked Capitalism readers who have been Uber drivers. One said that only 4% of Uber drivers stick with it for more than a year. Of course, Uber and the drivers who’ve given us intel likely differ on how much driving is required to be considered to be a current Uber driver.

Needless to say, better treatment of Uber’s drivers means higher costs, which conflicts with the company’s pipe dream of a 2019 IPO.

From the Financial Times:

In the airport waiting lot in San Francisco, there’s one topic that always sets Uber drivers’ tongues wagging: where are the best spots to spend the night sleeping in the car.

There’s a McDonald’s just down the street that has a spacious parking lot, and drivers say they can stay there overnight, unbothered. For those doing bar runs, there’s a Safeway in the Castro district with room to park, although security guards there recently started cracking down on drivers sleeping in their vehicles. The parking lot of Planet Fitness, a gym, is also a popular spot, because drivers can easily take a shower in the morning….

But during Uber’s years of breakneck growth, the drivers were left behind. Lawsuit piled upon lawsuit, alleging that drivers were misclassified, or that their pay was not calculated correctly. Meanwhile lots of drivers voted with their feet: nearly half of Uber drivers in the US quit in less than a year, according to company statistics collected in 2013-2015. More and more have started driving for rival Lyft, which has been gaining market were sharing in the US, partly thanks to its pro-driver reputation…

Mr [Ronnie] Fernandez, who is looking for another job, says low pay is the drivers’ biggest problem. “If you compare all your costs, the gas you buy, the maintenance, the oil changes, you are not making money,” he says. Because Uber drivers are not employees, they are not entitled to San Francisco’s minimum wage of $14 an hour — and most say that, after costs, they are making less than that. Harry Campbell, who drives for Uber and Lyft and runs a consulting service, The Rideshare Guy, says: “The average driver doesn’t have a great sense of what their costs are.”

We’ve been saying for some time that Uber exploits drivers’ lack of understanding of their own economics, particularly the cost of wear and tear on their car. One Uber driver went through the math in comments and said the effective pay was below minimum wage unless your car was at least six years old, something Uber discourages.

How long Uber can keep this going is an open question. But even with a SoftBank investment, it is going to run out of road in the not-too-distant future.

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16 comments

  1. Colonel Smithers

    Thank you, Yves, for the coverage.

    Having been in France for the past two months, I was amazed to hear Macron’s cheerleaders, if not the great empty suit himself, witter on, often in that weird and, to many, oh so hip franglais that is destroying the language of Moliere and Leclezio, about l’uberisation de la France, une start-up nation etc. It’s as if the car crash that is Uber and what’s happening to AirBnB, e.g. in Barcelona, are passing them by or, more likely, being ignored by them as being too inconvenient.

    Uber and AirBnB are getting some alternative coverage away from the Macaroons and MSM, feeding the growing cynicism about Macron and his motley crew.

    The use of language says a lot. One gets the impression that these Americanisms (e.g. debriefer, bruncher and impacter) or their use in (neo-liberal) contexts are designed to hoodwink by giving an air of modernity. Speak franglais, get with the programme, embrace neo-liberalism and all that.

    One wonders what David, Expat and French Guy make of all that.

    Reply
    1. Frenchguy

      Usually I’m the first to mock any overuse of franglais but I haven’t been that shocked by its use by Macron. The thing is, Macron may have many defaults but I don’t think anyone doubts that he has a solid (and French) literary culture (if you want a speech in good French, see his speech in front of the Congress, be prepared to be bored to death though). Also, he’s a much better (though far from perfect) public speaker and debater than Hollande was. Relatively speaking, it’s an improvement… Have you seen its interview with mediapart during the campaign ? (link below) I still have my doubts about him but I have rarely heard a politician (from any country) with such a good command of facts and such clear reasoning. So when people use franglais I generally assume they are just trying to hide their ignorance behind buzzwords, I don’t think this is the case with Macron (really hate to sound like a cheerleader but there I am). Another way to say that is that Macron may not have the best policies but he doesn’t sound like he is trying to bullshit us about them (see Hollande for that).

      https://www.youtube.com/watch?v=9cJH0LlN6m4

      As for the all, “uberisation”/”start-up nation”, it was big in the campaign but the whole theme seemed to me to have faded recently and google seems to agree (see google trends data below).

      https://trends.google.fr/trends/explore?geo=FR&q=start-up
      https://trends.google.fr/trends/explore?geo=FR&q=ub%C3%A9risation

      Reply
  2. Louis Fyne

    If you’re an Uber user…..Uber rolled out a new fare system. Ironically, much like the pricing regime mentioned in one of today’s other articles*

    1. Traditional Taxi/old Uber: base + miles * X + time * Y.
    (Uber HQ’s cut = “safe rider fee” and cut 20% as commission)

    2. New Uber: You get quoted a price. as determined by Uber’s algorithm.
    Driver gets =[surge factor, if any * (base + miles * A + time * B)]
    Uber HQ keeps the rest.

    Notice the subtle change? Uber’s new pay structure pays drivers a flat variable rate. BUT Uber HQ charges passengers a price untethered to time and distance.

    End result, Uber can wind up taking 30% to 50% of your fare as commission. Ie, you pay a $10 fare. Your driver might only see $5 as her gross revenue. If this seems obfuscating, it’s meant to be.

    Or in real world terms, Ask your driver what her cut is when the ride ends. Show her your fare from the screen on your phone. Odds are Uer’s cut > 20%. Decent chance your driver will have no idea Uber’s commission was so high.

    *(https://www.nakedcapitalism.com/2017/10/will-retailers-switch-price-tag-system-screws-customers-every-opportunity.html)

    Reply
  3. Matthew G. Saroff

    This deal is a recognition by the current investors that it is time to, in the words of Jordan Peele, “Get out.”

    As folks at NC have noted repeatedly, Uber has no path to the sort of profitability that its market cap implies.

    Kalanick is delusional about this, but most of the early investors get this, and want to unload their shares before the house of cards collapses.

    Reply
  4. Ash

    Later stories revealed other ways in which drivers are cheated. For instance, Uber’s charges to riders are based on routing that is more costly than the one it tells drivers to take, which is also the one it uses to pay them.

    Drivers talk about this, but I don’t think this is accurate for the simple reason the “upfront pricing” change to the driver’s terms of service of about April or May take away any reason for Uber to play that sort of game. The Upfront Pricing agreement simply forces the driver to accept that Uber can literally charge riders any amount they wish and drivers will be paid a different amount having literally zero to do with the charge to the riders.

    The lawsuit is over the claim that prior to the explicit change in terms that Uber was manipulating fees in the manner you suggest, charging the rider based on a long route but directing the driver along a short route, but I don’t think that happened either in that way for the simple reason 1) that nav at that time on Android was provided by Google Maps or Google Waze, and 2) again, there was no need for it, if Uber was going to cheat the driver, and they were cheating the driver, why establish some elaborate, but still cheating cheat by determining how Maps would route someone, and not just stick in the software and polices some trivial cheat, like it’s 4pm and this person is heading to a rich zipcode, whack them 20% more?

    I think the change in terms in April/May was exactly what Uber was doing prior to then, which was, and they told this to the press but no one listened, using Machine Learning to price each and every ride differently according to a pricing function specific to each rider’s demographics, routes, and any information they had about the rider (how badly in need of a charge the rider’s phone was) and in the meantime paying the driver based on time and mileage. That in itself was contrary to the contract between drivers and Uber which said that Uber was a payment processor only that took 25% of the fare. (And then later added more and more fees).

    As Yves wrote about last night, Uber is now dynamic pricing for each rider at any moment at any ride.

    Yves and I can Hubert can stand on the same corner at the same time and hail an Uber to the same destination and we will likely get three completely different rates. That’s what Uber told the press they could do, and would do, so why bother with map shenanigans?

    For what it’s worth, this change, which is also described by Louis Fyne eliminates ANY rationale Uber offers for surge pricing. Uber STEALS the surge, which mostly no longer goes to the driver. Uber HAS to steal the surge for reasons Hubert Horan has explained, to stop losing money.

    But if Uber IS stealing the surge (and they are), it kills the claim that Uber needs surge to bring out drivers during rush hour, at bar close, during bad weather, etc.

    Uber’s flat rate/upfront pricing means there is ZERO reason regulators should allow Uber to charge surge pricing, they should be metered exactly as taxis are.

    Reply
    1. Louis Fyne

      ty for explaining better than my stab.

      my other point lost in my rant…the average rider is thinking `my airport fare cost $50. must be nice to be a driver.”

      with Uber`s new fare system only Uber HQ knows its cut, unless passenger and driver physically compare their screenshots as the driver is blind to the actual fare paid by rider

      Reply
  5. Denis Drew

    EMAILED (SPAMMED) THIS TO CHICAGO CITY COUNCIL

    If you want Uber to survive, you don’t want taxicabs to survive. Those are the only options. Uber is burning through billions of new investor dollars (betting is against it) — subsidizing rides up to 40%; outlasting cab companies its only chance.
    http://www.vanityfair.com/news/2017/04/uber-is-losing-an-insane-amount-of-money

    I’m a cabdriver, not a lawyer, but doesn’t what Uber is trying to do sound a lot like a classic anti-trust violation — in intent at least?

    When I started with Flash cab in 1981 the meter was .90 a mile — $2.54 in today’s money. Today’s meter is $2.25 a mile. But US per capita income increased 50% since 1981.
    https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=.90&year1=198101&year2=201708

    One thing that could be done immediately to help taxicabs survive Uber’s burn would be to raise the meter $1 a mile (to only 75 cents above 1981). Talk of people leaving Chicago aside — our college educated crowd grows 1% a year.

    Which may be the only thing helping cabs survive this far; “yuppiedom” seems to have doubled or tripled from what I can see on the ground since I moved here in 1980. Their incomes have kept up with growth — and do you really want to live in a world class city without a taxi industry. Can you imagine?

    Reply
  6. Di Modica's Dumb Steer

    I don’t get SoftBank’s motivation here. There HAS to be something going on behind the scenes, or some kind of preferential deal in the works, because otherwise, this would be one of the dumbest moves they could possibly make. They don’t have to be NC readers, but Uber’s financial trouble is no secret, and before dumping a dime into Uber, you’d think they would have come across Mr. Horan’s excellent series.

    I’m not entirely sure if SB has finally started turning a profit as far as Sprint is concerned, but Sprint is still a distant 4th in the US, and SB paid a pretty penny for their share. I really hope their other lines of business are making money hand over fist, because it looks crazy from over here. Throw Uber into the mix and it only gets worse.

    Reply
    1. Yves Smith Post author

      Thanks for saying this. We’ve been very skeptical of the idea that SoftBank is really interested due to the fact that it appears not to make any sense, and that all the reports of interest have come from the US press, meaning the Japanese press has signaled that they don’t take it seriously either.

      Now have said that, Son has made some deals that look like displays of ego and too much enthusiasm for tech fads, so he could just be dumb. But this deal would be stupidity on a bigger scale than he has ever undertaken before.

      This may prove to be real despite the apparent illogic. Son has said he wants to be in the forefront of driverless cars, so he may believe this is way more imminent than it really is (you think he would have done enough research to know better). Other possible theories are:

      1. He is playing along because why not? He gets to do due diligence on at least some of their financials and ops, which is useful intelligence for his investments in Asian ride sharing companies.

      2. He is making himself the preferred funder, so that if/when things get worse, he can swoop in as a quasi-vulture, being way further along in due diligence per 1 than anyone else would be. Hubert has said repeatedly that it would make more sense if Son were to buy the Asian ops on the cheap. Maybe he cuts a deal for that latter with an itty bitty purchase of new shares of Uber the parent at a BS price to defend their ludicrous valuation.

      Reply
  7. Meher Baba

    Tim Ferriss – well known author, podcaster, investor- is an early investor of Uber ( as is Edward Norton incidentally) and is constantly going on about how great they are, how they’ll change the world, raise employment etc. He wants his extremely large audience to be as involved in Uber as possible.From all reports Ferriss is a very very knowledgable and very successful investor.All the Uber pushing is yet another reason i find it extremely difficult to believe he has any integrity or that money isnt his sole, prime passion and god in life

    Reply
  8. 19battlehill

    Uber is a scam, alway was – math does not make sense and without having a monopoloy on the taxi business it will ultimately fail. It’s success was based on paying off city councils and politicians to relax regulations – soon Uber will not have anymore suckers to drive for them. I have always found Tim Ferriss to be a bit of a snake oil saleman, very smart guy – but there is something from squirmy about him that has always put me off.

    Reply
  9. Meher Baba

    Col. Smithers , what is ‘ happening to Air BnB , eg in Barcelona’ that you refer to alongside Uber ( admittedly in the context of Macrons hooplah) genuine question. are you referring to how landlords siezed a grassroots sharing movement and made it into a racket?

    Reply
  10. Meher Baba

    19battlehill – but yes, T. Ferriss is very smart and his books are very good. thus I feel frustrated because I feel he doesnt take responsibilty for the extraordinary influence he has – on top of certain of his naieve & extremely irresponsible behaviour- with his audience attempting to clone themselves in his image he is literally creating an army of zombie yuppies. i suppose ihis schtick just doesnt translate to anyone outside of us-north american culture. or dare i say, San Francisco

    Reply
    1. Kevin Carhart

      I think your frustration stems from the credence that you are granting Ferriss. Start viewing Ferriss adversarially from the outset and you won’t feel frustrated anymore. Yes- Ferriss does not have integrity and he’s doing a schtick. There’s a certain role in the startup press and related worlds for someone who will draw a frame around just solely the early days of scams. He doesn’t have to talk about the late, stagnant days of the scam because they haven’t happened yet. Even a stopped clock is right twice a day. The person doing the pumping in a pump-and-dump appears very optimistic and knowledgeable. When the bezzle sets in and the late, stagnant days of the scam set in (subsidized rides are not sustainable) he may leap to the early days of a new scam and leave it for someone else to clean up the mess of the first thing. When you grant him a residual ethos that is vaguely positive, ambivalent, mixed (“From all reports Ferriss is a very very knowledgable and very successful investor. … i find it extremely difficult to believe he has any integrity…”), you bump up the likelihood that he will be able to go on doing the schtick based around something else in its early phase. Go with the bads.

      Reply
  11. Harold

    Uber will within a couple of months demonstrate its ability to run an autonomous taxi fleet thereby proving the long term viability of its business.

    Reply

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