One of Uber’s biggest selling points is price. That may not be true for much longer.
As it is, the world’s most valuable startup is going through a rough patch, with resignations of top executives, allegations of sexual harassment, and a widespread public backlash. But aside from all that, Uber may not be able to sustain the dirt-cheap fares that made it the leader in ride-hailing.
Losing the tax game
In many countries outside of its US home base, Uber has kept rides cheap in part by skirting local taxes on goods and services. But regulators are starting to crack down on the company’s laissez-faire approach.
In February, an Australian court ruled that Uber drivers, like other taxi drivers, will have to pay the nation’s 10% goods and services tax (GST). Earlier this week, a London lawyer took the first step to sue Uber and demand that the company pay the UK’s 20% value added tax (VAT) on every ride. And most recently, on March 22, Canada unveiled plans to end Uber’s tax advantage by making it pay the GST, which ranges from 5% to 15%.
These three incidents, separated by three oceans, represent a serious threat to Uber’s business model. Most of the 81 countries in which Uber operates—with the exception of the US—have some form of value-added tax. Some call it GST, others VAT. Uber seems to have so far managed to avoid paying these taxes. (Uber didn’t respond to our request for a list of countries where it pays these taxes and where it doesn’t.) Thus, any change in policy could mean that Uber will owe hundreds of millions of additional dollars to governments around the world.
In the UK, Uber claims it doesn’t need to pay VAT because it’s a technology platform that only connects passengers to drivers. But tax experts say that’s a weak defense. “There is an added value to what Uber is doing when it connects drivers to passengers,” Rita de la Feria, professor of tax law at the University of Leeds and a leading expert on VAT, told Quartz. “So Uber is indeed providing a service, otherwise it wouldn’t exist.”
In Canada, Uber argues that all drivers, whether Uber’s contractors or traditional taxi drivers, should be exempt from paying sales tax, like other small business owners. “Federal tax laws already offers small business owners a break on collecting sales tax, but unfairly exclude taxi drivers,” said Ian Black, Uber’s general manager in Canada, in a statement. ”The best way to support taxi drivers and level the playing field is to extend the same exemption to them.”
These disputes do not exist in isolation. A legal principle known as the “influence of foreign decisions on national courts” allows courts to look beyond their own borders for precedence when laws are sufficiently similar. That means that if Australia or Canada forced Uber to pay more in tax, it could strengthen the case in UK courts to do the same.
No more free rides
Another reason why cheap rides are synonymous with Uber is because the company has historically won riders in new markets by showering them with coupons and discounts. Don’t expect it to last.
The first problem with this strategy is that it gets expensive fast. Uber spent heavily to establish itself in China, sinking $1 billion a year into the market before it gave up last August and sold the operations to local rival Didi Chuxing. Uber made a similar investment in India, and also burned through $100 million in its most established market, the US, in the second quarter of 2016 to fend off competitor Lyft. Even for a company that’s raised more than $14 billion and is valued at $68 billion, that sort of spending can’t be ignored. Last year, Uber probably lost about $3 billion (paywall).
Another problem with subsidies is that they’re hard to take away. Customers who get used to cheap fares don’t like being told one day that they need to pay more for a similar service. Just look at India. In late 2016, both Uber and its competitor Ola attempted to wean riders off discounts. First, they showered them with new features, like in-trip entertainment. Then, this January, Uber hiked rates in Delhi and neighboring cities by as much as 50%. ”A double whammy,” one regular Uber commuter complained to the Times of India.
One of Uber’s five objectives for 2017 is to reduce the amount of money it loses on each ride, tech news site The Information reported earlier this week (paywall). Uber CEO Travis Kalanick nicknamed the goal, “efficiency over subsidy.”
Stemming losses
Losing $3 billion a year isn’t sustainable for anyone, even Uber. The company had $7 billion in the bank at the end of 2016, plus another $2 billion in credit, according to The Information (paywall). At its 2016 burn rate, it would exhaust its current financing in a little more than two years.
Uber could continue to raise money from private investors. Stemming losses by selling some businesses, like it did in China last summer, is another tactic. But, with potential tax liabilities adding up and demand falling in some key markets, Uber will have to do much more to bring its spending under control and hit break-even in the US by the end of 2017, another goal reported by The Information.
In its core business, Uber has two options for improving its margins: raising fares for riders, or increasing its take from drivers.
At this point, the second option is a non-starter. Uber’s brand is badly damaged with drivers. The company has alienated many by cutting fares while increasing its own commission. It’s also fought in court to keep drivers classified as independent contractors; misled them about earnings on the Uber platform; signed them into shady auto-financing arrangements; and repeatedly refused to create a tipping option for customers.
Late last month, Kalanick was caught on tape berating an Uber driver who complained about the price cuts. Jeff Jones, the executive Uber hired from Target to improve its brand and driver experience, resigned in apparent protest this past weekend. Uber can hardly afford to make its drivers angrier than many of them already are.
That leaves raising prices for riders as the best—or least-worst—option. Uber has put the pieces in place. The company decided against sweeping fare cuts this January for the first time in three years. In some markets in 2016, Uber also switched to an “upfront” pricing system where customers see and agree to a final fare before booking.
Upfront pricing didn’t eliminate surge, Uber’s notorious practice of increasing rates when demand is high. But it did get rid of the pop-up multipliers that used to tell customers how many times more they would pay. In practice, this means a fare that has spiked by 1.2x is now largely indistinguishable from one boosted by 1.9x. That positions Uber to increase fares by routinely employing low-level surge pricing.
Riders might not notice if a trip that used to cost $10 now tallies to $11 or $12. Given Uber’s enormous volume, any increase, however small, will quickly add up.
Facing a range of cost pressures and reputation issues, Uber has every reason to ratchet up prices. If nothing else, don’t expect rides to ever get any cheaper.