March 9, 2017 / 7:35 PM / in 5 months

Cox: Kalanick gives future Uber investors a lift

89th Academy Awards - Oscars Vanity Fair Party - Beverly Hills, California, U.S. - 26/02/17 – Uber co-founder Travis Kalanick.Danny Moloshok - RTS10HMR

NEW YORK (Reuters Breakingviews) - Travis Kalanick is doing Uber investors of the future a potentially massive favor by remaining at the helm of the ride-sharing service. If Uber was a normal company, one exposed to a modicum of market discipline, it is hard to imagine a board of directors would let so impulsive an executive remain at the wheel.

There's a silver lining, though, to this flawed stewardship: every day that Kalanick sticks around reveals another flaw in Uber's business model, its corporate culture and its valuation. This may eventually save public shareholders from being sucker-punched someday.  

Though its $68 billion private price tag suggests otherwise, Uber is not a conventional company and Kalanick still calls the shots. That may be a problem for investors who have injected billions of dollars of cash into the firm Kalanick founded in 2009 after a frustrating evening in Paris trying to hail a cab. Most of them are experienced enough to go along for the bumpy ride.

Sophisticated investors like Goldman Sachs, Google and the Saudi Arabian kingdom can shoulder the burden of transforming Uber into a properly managed company from its current adolescent guise. Kalanick might be able to steer Uber in that direction, with guidance, patience and a seasoned deputy. But his antics to date suggest a low probability he will succeed. Either way, it is far better to give that a whirl before selling shares to widows and orphans as did Snap, an even more jejune startup, whose stock has tumbled 25 percent since peaking after its market debut last week.     

Uber's manifold teething issues have spilled in ungainly fashion into the public domain over the past few weeks, spurring a public apology by Kalanick, in which he acknowledged a need to "grow up." The firm also has launched a search for a chief operating officer to lend a hand. These internal problems are worth cataloguing as evidence of an immature and perhaps unethical corporate culture. They may be more easily fixed, however, than large and looming challenges facing Uber's business model.

The big idea was effectively to violate taxi and limousine laws all around the world and sort out the mess later, either by covering the cost of driver infractions or lobbying to change the rules. In many cases, they were antiquated and favored the holders of livery licenses and automobile fleets over consumers. By overstepping established order and offering a convenient service consumers loved, Uber nobly focused attention on a global patchwork of regulations worthy of disruption.

Kalanick's other clever conceit was the application of information technology – basically cellphone positioning, payments and communications systems – to create an enterprise dedicated to connecting drivers and passengers without any need to own and maintain expensive physical assets like automobiles or garages. Though the company has burned through billions of dollars, it has done so without making huge capital expenditures. Instead, those costs were largely borne by the freelancers who signed up to become drivers.

Both of these innovations, so central to the Uber model, are now well out of the bag. Many municipalities, airports and other authorities have changed the guiding principles – benefiting not just Uber, but all its competitors, including arch-rival Lyft. That is to be celebrated. Meantime, other governments have gotten wise to Uber's rules-flouting and cracked down, in some cases forcing it to retreat or operate in the shadows, but effectively reducing the scope for regulatory arbitrage.

Uber's asset-light and independent-contractor-heavy employment model is also facing limits. A testy exchange between Kalanick and Uber driver Fawzi Kamel, which was filmed and went viral after it was posted online by Bloomberg, highlighted the tension that exists between the company and the people it needs to carry its blue U torch.

Kamel's main gripe was that drivers offering the more upscale UberBLACK service have been undercut by the firm's other, cheaper offerings. In an interview with NBC News following the verbal altercation with Kalanick, Kamel argued that BLACK drivers have had to make substantial investments in their vehicles that they are unable to recoup as a result of falling prices.  

According to Uber's website, in New Jersey, the requirements include driving a vehicle no older than a 2010 model; black exteriors in "excellent condition" with pristine black leather or vinyl interiors and seats for at least four riders beyond the driver.

To comply with these high standards, Kamel says he lost $97,000 and filed for bankruptcy. To this assertion Kalanick responded: "Some people don't like to take responsibility for their own shit. They blame everything in their life on somebody else."

He may be right, but Kamel's complaint is nevertheless one that needs to be ironed out as Uber's business matures. It could require some combination of raising prices, compensating drivers and reconsidering its asset-light structure. 

Any of these options probably would exacerbate losses and delay Uber's profitability. So, too, might Uber coming to grips with allegations of sexual discrimination, poor treatment of workers and even accusations that it unfairly restricts employee stock sales, which could limit its ability to recruit and retain talented engineers, sales people and executives.

Each, on its own, is a challenge any company might face in its first decade. Confronting all of them, at once and at scale, is unique to Uber. In some ways, pushing Kalanick out the door might make it all easier to start fresh. His control of the company, however, makes that unlikely to happen. Uber will need to work out its kinks on its own, in private. Only then might it have something improved to offer public shareholders.

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