Scandals Won't Kill Uber, But This Could

SMITH BRAIN TRUST — Uber has amassed a string of negative headlines in recent months. But Brent Goldfarb, a management and entrepreneurship professor at the University of Maryland’s Robert H. Smith School of Business, says the future of the ride-sharing app will hinge on something else. “Scandal may cause them to lose some customers to Lyft, but that’s not what’s going to make or break them,” Goldfarb says.

The real test is whether Uber’s business model can produce a profit. “At present the public doesn't know when the business model actually works and makes money,” Goldfarb says. 

The privately held firm continues to spend big while suffering setbacks in China and elsewhere. “They burned through $3 billion in 2016,” Goldfarb says. “It’s possible that in certain markets the model is profitable, but we just have no way of knowing that since we are not privy to the internals of the firm.”

The San Francisco-based company continues to raise capital, which means investors, at least, believe Uber can make money. “But if it is hugely profitable, it’s a bit surprising that they haven't publicized this more,” Goldfarb says.

Looking from the outside, Goldfarb says, the challenge appears to be that Uber is only profitable when it charges higher prices — but too few consumers are willing to pay those prices to create sufficient density to make the model work. Waiting times for UberBLACK, the app’s luxury version, are always higher than for UberX, the low-cost option.

“How many customers will use the service if prices increase 50 percent?” Goldfarb says. “If the company dies or is devalued, it will be because it’s no longer possible to hide the fact that the basic economics don't work well.”

Driverless car technology will create additional risks. “Uber is certainly making investments in this,” Goldfarb says. “However, this is a hyper-competitive space at the moment.” Google, Tesla, BMW and other companies have invested heavily in the technology, while Intel bought Mobileye for more than $15 billion on March 13, 2017.

“I'm not sure that customer loyalty is high enough to keep people on the Uber platform if an alternative self-driving service comes along and works,” Goldfarb says. “It only matters if what they are learning about route optimization and consumer behavior leads to a competitive advantage in this new space. I haven't seen anybody making that argument, but it is possible.”

He says Uber’s other big risk comes from within, referring to the recent scandals. “All evidence suggests a very misogynistic, cut-throat culture,” he says. “They hired Eric Holder to investigate, but it will be exceptionally difficult to change this culture.”

Uber is also embroiled in a trade secrets lawsuit with Alphabet, the parent company of Google. A former Alphabet employee is accused of stealing designs and selling them to Uber. “Again, this is indicative of the culture at the company and of its leadership,” Goldfarb says.