The Biggest Threat Facing Uber

Uber, on its surface, seems like a company that has very few issues.

First off, it has a great business model. Just one benefit, Uber is responsible for almost no inventory, as drivers provide their own cars, which vastly reduces its risk.

There is plenty of demand for Uber. The taxi market in the United States alone is estimated at $11 billion a year (it is even larger in other countries, particularly Japan), and it has the potential to hit more rural, previously-untapped markets.

And margins do not have to be that high for them to make a lot of money, as roughly 20 percent of a few million rides a day equals a huge stack of cash. That could even be lowered to 10 percent and the company would still do very well.

The app also works well, the algorithms to determine pricing are smart and the no-cash payment makes perfect sense. And yet, there is a very real threat facing Uber, which could easily undermine all of its other qualities:

Labor.

If Uber cannot recruit enough reliable people to work as drivers, it will fail. Equally important, if Uber recruits the wrong people – drivers with criminal motives, bad drivers or even just enough rude/strange/don’t-want-to-spend-a-10-minute-car-ride-with drivers - they’ll fail even faster.

How Will Uber Get The Right People?

Here’s Uber’s worst fear: one of their drivers picks up a person, they disappear. That creates a flurry of headlines like “The Uber Kidnapper” and “Is Uber Really Safe?”.

Obviously, I hope that never happens. But it is a real possibility. And it would have a dramatically-negative effect on the company.

Less damaging but more likely would be just a string of rude drivers or bad drivers who get into a lot of accidents. If there are headlines each day of Uber drivers and their passengers getting into car crashes, the brand is going to really suffer.

So what is Uber doing now to resolve that problem? They run background checks on each driver, including a look into their driving history, and require their car to get inspected.

All of that is smart, but it certainly isn’t foolproof. After all, people with clean records could easily fall on hard times, become addicted to drugs while working at Uber and then start consistently driving while under the influence; as just one of many plausible outcomes.

I’m not sure if Uber is doing this or not, but it would be wise for them to invest in the absolute best background screening system, which both predicts the probability of a criminal act and determines how good of a driver a person is. In fact, Uber’s goal should be to become the absolute best in the world at predicting the likelihood of someone committing a crime or getting into an accident.

How is Uber doing at this now? Well, there has been no Uber kidnapper, which is good. Although there have been some terrible incidents, most notably one driver who allegedly attacked a rider with a hammer.

That being said, they have given millions of rides and 99.9 percent have been safe. So they've avoided the major bullet so far, but it would be foolish to think the threat doesn't exist.

Bigger Question: How Will Uber Get A Lot Of Those People?

Okay, so if Uber gets really good at figuring out whom to hire – and they have to – then the question becomes how they attract those people in bunches. Their selling point right now is pretty straightforward: make decent money and make your own hours, which is pretty appealing.

The question is how much do these people really make? Uber claims that its New York drivers make $90,000 a year, a claim they have since backed off somewhat, and the average driver period makes about $25 an hour.

That’s not bad - $25 an hour is $50,000 a year if you work 40 hours a week for 50 weeks – but that figure is just gross revenue. And there are a significant amount of costs associated with working as an Uber driver, including gas, mileage on the car, a higher tax rate (drivers are independent contracts so they have to pay their full Social Security and Medicare taxes) and any repairs the car might need.

Think about it this way: how many hours will it take to replace a broken transmission incurred from the extra miles working as an Uber driver? It can easily run over $1,200, which means 48 hours of working as a driver.

Right now, Uber is doing a decent job of recruiting, as the idea of making a little extra money on the side – or even as a full-time job, for the unemployed – is appealing. They further incentivize drivers by giving them $100 payouts for signing up, just as one example.

But here’s the thing: ultimately, all of the people working as Uber drivers will serve as their recruiters, because there are just so many of them. What they blog, what they tell their friends will either encourage more people to drive for Uber or dissuade people from working at Uber.

So Uber’s other goal should be ensure its workers are happy (something they are not necessarily doing a great job of). That might even mean taking a smaller cut of the fares, with the theory that a smaller chunk of something is better than a bigger chunk of nothing.

But the more they can do to make their workers happy, the more drivers they’ll get, and the better the system will work. If it goes the other way though and drivers realize that expensive repairs and quickly-aging cars aren’t worth the time, all that infrastructure Uber has in place will be for naught.

How’s Uber doing at this? Frankly, not so well.

Their CEO Travis Kalanick – who was described by Vanity Fair as having a “face like a fist,” whatever that means – is known for being brash, outspoken and perceived by some as, quite frankly, a jerk. And Senior Vice President Emil Michael suggested digging up dirt on journalists who dare to write bad about things about the company.

Uber has also fought dirty, particularly against rival Lyft. Company employees allegedly made more than 5,000 calls for rides from Lyft, only to cancel them, so their drivers would be tied up. While the plan was to take down a rival company, what the move really accomplished was it took money out of the pockets of blue-collar Lyft drivers.

In another move of questionable ethics, Uber recruiters would call for Lyft rides, only to use the opportunity to try to recruit them to Uber. And, to top it all off, Uber drivers across the nation protested late last year, demanding higher wages and better driver safeguards from the company.

All of this equates to a company with a poor reputation, which further equates to a company with a bad employer brand (no one wants to work for a company they perceive as ruthless). It would be very wise for Uber to put some time and energy into improving that reputation, if for no other reason but to help their employer brand.

So, yes, as for now, Uber doesn't appear to face a labor shortage. But if the economy improves, leaving fewer people who want/need to work as an Uber driver, and their reputation doesn't improve, it could become a real problem.

Takeaway

What does Uber sell, at the end of the day?

It isn’t really a taxi service. It is little more than a conduit – a conduit that anyone with a computer science degree could easily replicate – that connects people who are willing to drive for pay to people who are willing to pay for rides.

But even that really isn’t want it sells.

Fundamentally, Uber is like a bank: it sells trust. It sells that if you use Uber, you’ll be able to quickly, safely and cheaply get from point A to point B.

If that trust is broken, either because rides aren’t available because there are no drivers or the drivers are perceived as dangerous, the company fails. So its trust is really dependent on the people it has working as drivers.

It’s that simple.

So the biggest threat facing Uber is not competition or lack of demand or branding, it’s hiring. And the better they can get at that – and they need to get better at it, particularly when it comes to improving their employer brand - the more successful Uber will become.

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