Uber can't be ethical - its business model won't allow it

Following TfL’s decision to withdraw Uber’s license to operate in London, there has been a widespread picking over of the ride-hailing app’s recent history – and speculation about its future. A fairly common conclusion is that Uber needs to become more ethical if it is to survive.

I want to suggest that this may not be possible. After the calamitous year Uber has had, it should not be difficult for the company to improve its reputation – simply by avoiding many of the unnecessary embarrassments heaped upon itself in 2017. However, merely improving its PR will not get Uber out of the hole it has now dug for itself. It is looking as though, in many territories such as London, Uber’s survival will rely on concrete measures to better care for both its drivers and customers.

Herein lies the problem. It is not that Uber is incapable of such ethical measures. But for this company specifically, the additional cost that is required to look after drivers and customers is likely to be too great. It all comes down to the economic model on which Uber is built.

There is a great tendency among commentators to focus on the capabilities of Uber’s app, when making sense of its explosive growth across the world. This is a mistake. Figuring that Uber’s app explains its growth is like putting the birthday cake’s appeal down to the candle on top. The engine of Uber’s growth to date has been the US$11.5 billion it has raised from banks and investors. The company has never made a profit, and in 2016 alone lost nearly US$3 billion.

These are staggering amounts, and to make sense of them we need to understand that Uber’s business model is the same as Amazon’s. Amazon became the largest online retailer on the planet by burning through huge sums of investment on the way to becoming dominant in an ever-increasing number of sectors, and a de facto monopoly in some such as books.

Now Amazon is able to use its position to generate the vast profits expected by those that funded its expansion. Effectively, what both companies surely rely on is investors subsidising the prices customers pay in the short term, in return for a long-term monopoly with higher prices.

Trump card

In reaching this point, Amazon has itself received plenty of criticism, particularly around its tax arrangements and working conditions in its Orwellian “fulfilment centres” (warehouse to you and me). But Amazon has benefited, throughout its growth, from a trump card: its use of a virtual shopfront makes its overheads significantly lower than bricks-and-mortar rivals.

Uber’s fundamental problem is that it does not have this advantage. In his comprehensive critique of Uber, transport expert Hubert Horan made a key observation about the taxi business, which separates it from retail. While shops have used economies of scale to operate first nationally, then internationally, for over a century, taxi companies have remained highly localised. The reason for this, argued Horan, is that the economies of scale are not there for the taking in this market. Some 85% of taxi company costs are drivers, cars and fuel, and this applies whether you cover one city or a dozen.

Not only does Uber not avoid these costs, its model actually introduces new ones. Most dramatically, the costs of becoming established in new markets is vast. This, particularly the artificial subsidising of passenger fees/driver wages to drive growth, is the source of the US$3 billion net loss last year. Ultimately – whether in the form of debt or equity – these sums will have to be paid back, and then some.

Eventually, this additional cost will be felt. Either the driver has to bear it, and so is motivated to look to rival employers, or the customer does, with the same outcome. Uber’s hope must be that when it gets to this stage there will be no alternatives left to chose from.

Elusive goal

So can Uber afford to become ethical? Its growth to date has been so costly that even after the raft of regulations it has managed to sidestep, and measures forcing down the income of its drivers, it is losing billions every year. In a properly regulated market, in which Uber has to give its drivers appropriate employment protections, and passengers the safeguards they need, its goal of apparently aping Amazon becomes even harder.

If Uber can achieve market dominance before it runs out of funding, the inefficiencies in its model cease to matter. Society will simply have to carry the cost of higher fares and lower driver wages.

If it fails to achieve near monopoly status and has to continue to compete against local firms, in my view it has little hope of ever repaying its investors. For customers that travel to different cities frequently, Uber’s scale gives them a clear edge. For everyone else, is an app slightly shinier than its competitors’ clones enough to outweigh the higher fares that should come with Uber’s model?

Should Uber ultimately fail, it would open up the possibility of a taxi company fit for the 21st century. One that harnesses the possibilities of digital technologies not to enrich venture capital, but drivers themselves, in the form of cooperatives like the one currently developing in the absence of Uber in Austin, Texas.

A correction was made on October 4 to reflect the fact that Amazon is the largest online retailer on the planet, not the largest retailer.

Murray Goulden, Senior Research Fellow, University of Nottingham

This article was originally published on The Conversation. Read the original article.