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The real cost of Uber’s cheap rides

As smartphone taxi company Uber takes off in Bristol, we ask if low prices are part of a bigger picture that may threaten Bristol’s economy.

Edition 7

Illustration: Naomi Wilkinson

As smartphone taxi company Uber takes off in Bristol, we ask if low prices are part of a bigger picture that may threaten Bristol’s economy.

Like many cars on the streets of Bristol, Mike Harding’s Hyundai Accent now boasts a sleek black ‘Uber’ sticker mounted on the side. Mike has been working with the San Francisco-born taxi service for six weeks, clocking in for as many hours as he can fit around his new job as a surveyor. “If I can’t fit it in, then I won’t. It’s good. More people should try it”, says Harding, from Southville, as we pull away from Temple Meads station.

The taxi startup-turned-tech-giant is latest in the line of (mainly US) companies using new technology to revolutionise old businesses – think eBay, Amazon or Airbnb. But sometimes the unbelievably good deals these companies offer really are too good to be true.

07-uber-leftSince it launched in 2011, Uber’s winning combination of ultra-cheap fares, cashless payment and a convenient app-based ordering system has swept aside competition the world over. Uber employees enjoy the ultimate working flexibility – as Harding says, they are their own bosses. It has even presented itself as a gateway towards a more sustainable future, arguing that it is helping to decrease car ownership. Cheap for the customer, socially progressive and environmentally friendly – so far, so great.

Where’s the catch? In the first three quarters of 2015 Uber made a net loss of over half a billion US dollars, according to documents published by The Information. Could the company’s incredibly deep well of ready-to-burn investor cash explain why it’s seemingly content to operate at this unsustainable level? The Guardian has claimed, for instance, that in some North American cities, Uber has been charging fares so low that they don’t even cover the cost of fuel and vehicle maintenance. Why?

If the company is unprofitable despite its success, we have to ask ourselves what Uber plans to change. The answer is market share and, ultimately, prices. Time magazine has reported that, in Uber’s hometown of San Francisco, from 2012 to 2014 the number of average monthly trips per traditional city taxi dropped by 65%. As the competition goes under, unable to stay afloat in the face of such cheap fares, so does Uber’s motivation for keeping its prices low.

Back in 2000 similar moves were being used on the Bristol high street by Tesco and Asda, which slashed the prices of their white loaves to just 9p. At the time, the supermarkets’ policy was described as “predatory pricing of the worst kind” by David Smith, chief executive of the National Association of Master Bakers. The price-squeezing contributed to a sharp decline in the number of family-run bakeries in the UK, from 18,000 in 1946 to fewer than 3,500 in 2000. This is the same process that saw Joe’s Bakery of Bristol’s Gloucester Road shut down its wholesale business in 2012 – a closure blamed by owner Martin Hunt on the market monopolisation by chain stores.

07-uber-rightUber is not the first tech company to apply this tactic to the modern marketplace. Thanks in large part to Amazon’s ultra-cheap, super-convenient business model, between 2005 and 2012 the number of bookshops on UK high streets was halved. We’ve seen this process ourselves on Bristol’s Park Street in recent years, with the closures of Blackwell’s and Wesley Owen’s bookshops. That some businesses will eventually be replaced by others is unavoidable – but it could be worrying to many that Amazon has now opened its first physical bookshop in Seattle, and the Wall Street Journal reports that the company will follow this up with another 400 ‘bricks-and-mortar’ shops across the US.

Suddenly, the Amazon business model seems clear – kill off high street competition, then expand to fill the market share left vacant. Viewed in this light, Uber’s current unprofitability makes sense. Once those traditional cab services are forced to fold, it seems inevitable Uber will raise its prices to become profitable.

But it’s not just the imminent price hike that we need to be aware of. Even more worrying is the corrosive way in which companies like Uber are redefining the relationship between employer and employee – that is, by denying that relationship altogether. According to Uber, the company employs no drivers – those drivers are ‘partners’ that the company assists in connecting to paying passengers, and therefore enjoy no protection from employment laws around unfair dismissal or the guarantee of work.

After climbing out of Mike’s Hyundai across the road from my flat, I check the Uber app on my iPhone – £9.30 has been automatically debited from my account, a bargain for a journey that normally costs nearly double that. From pickup to drop-off, the whole transaction has been clean, easy and cheap. But while we pocket those savings, we must be aware of the human cost that may be waiting just round the corner.

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Comments

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  • I think you have misunderstood their strategy. Uber’s aim isn’t to replace traditional taxis, it’s to replace private car ownership. In San Francisco their revenue is twice the level of the pre-Uber taxi/cab market, ie half has come from replacement of other forms of transport. Private car utilisation (proportion of time a vehicle is actually used) in Bristol is about 7% so there is a massive environmental, traffic and land use (elimination of parking) benefit if their model works. They are also better placed to switch to electric and autonomous vehicles ahead of the private ownership crowd. So yes we need to be wary of their financial power and tactics, but their are strong potential social and environmental benefits in their strategy.

    Reply

    • Hi Al – I understand what you are saying, but I don’t find the argument overly convincing at this point. I don’t agree that Uber don’t want to replace traditional taxi companies, only private car usage – it seems to me that they are looking for all the market share they can take, wherever it is.

      Yes, the Uber model has potential for improving the utilisation of private car (which I agree is terribly low) but this benefit seems outweighed by other concerns I have about their model not touched on in this article. The fact that many of its drivers in America are ex-taxi drivers that have been put out of business by Uber, for example, now working without the protection of employment laws that the company has managed to sidestep.

      I would love to be proved wrong – if Uber turn out to be a genuine force for social and environmental progress then I would be delighted, but at the moment I am unconvinced. It seems too much like marketing fluff to me.

      Reply

  • Hi Jack – Sorry I did the kneejerk interweb thing of attacking the one bit of your very good article that I took issue with… I agree that Uber want to eat the taxi/cab market. The point I was trying to make is that this is a relatively small market relative to the capital they are raising. The investment they are attracting, and the resulting aggressive landgrab pricing that they are therefore able to implement, only makes sense because they are after that much bigger replacement market of private car owners. One (fairly old) article here http://ow.ly/4mQQnY . In some US cities Uber is accelerating what is a pretty dramatic decline in driving and car ownership by younger city dwellers, and improvements in urban land use as housing is built without parking allocations. So it’s a classic quandry; a voracious and aggressive capital monster which is sweeping through pretty much every global city with no regard for the disruption it causes, set against the urgent requirement for some of the structural effects it can potentially deliver (where traditional models have failed).

    Reply

    • That’s no problem Al. I see what you mean about the relative sizes of the taxi/private car markets. I expect you will probably be proved right! The potential benefits that Uber can bring to our cities are massive, as you point out. I am only slightly worried about what happens when Uber get the monopoly they are spending so much capital on obtaining!

      Reply

  • I would recommend reading this article ‘The socialist case for Uber’ http://www.businessinsider.sg/the-socialist-case-for-uber-2015-10/

    Reply

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