The one move that might put Uber in the fast laneDecember 5, 2013: 9:02 AM ET
The on-demand, mobile app-based transportation service has enjoyed tremendous growth. Its new financing platform promises to press the pedal even closer to the metal.
FORTUNE -- Uber, the company behind the eponymous mobile application that promises to hail a personal driver with a tap of one's finger, announced last week a new program intended to help would-be Uber drivers afford vehicles. It might just kick the startup company's growth into high gear.
Uber says it wants to help 100,000 drivers -- well, "transportation entrepreneurs," as it dubs them -- in select cities purchase cars by lowering their monthly payment by about $100 per month. The company is partnering with General Motors (GM), Toyota (TM), and several unnamed financial institutions to reduce a driver's upfront cost to begin driving for the service, with the hope that it can "get cars on the road faster," it says.
"We're making the economics better for the drivers we work with," Uber CEO Travis Kalanick told Fortune. "It's pretty much a game changer for a lot of folks who couldn't buy cars and for a lot folks who are able to put $100 more into their pockets every month ... or invest back in their business."
Uber essentially subcontracts its drivers. Drivers purchase their own vehicles, and in exchange for access to Uber's dispatch service, they give Uber a cut of whatever they make. At first, the company attracted drivers that used to work for taxi and limousine companies. Now, Kalanick says that Uber is attracting people with no prior history in the personal transportation industry.
The problem? Many of those people don't have vehicles suitable for service (Uber must approve them), and aren't prepared for the upfront cost of purchasing a new one. Even if a driver is qualified and ready to roll, the economics may prohibit him or her from signing up, hindering the young company's ability to keep growing. Currently, the company generates more than $100 million in fares per year in each city in which it operates.
"We really want to empower these guys to start building businesses as entrepreneurs on top of our platform," Kalanick says.
(It's important to note that Uber isn't taking on the risk of financing drivers itself. It will instead use its success to demonstrate to loan providers that its drivers are desirable loan candidates.)
The question is whether the company is doing enough to keep its existing drivers happy. This reporter requested an Uber car in San Francisco recently and asked the driver, a former taxi cab operator, how the service's rapid growth affected him. He admitted that the job had become less attractive than when he first signed up.
"When we initially started, the minimum was $10 just to start the meter, so that's why most of us left the taxis and thought we would be making a little bit more, which we did," said the driver, who spoke on the condition of anonymity to avoid jeopardizing his relationship with Uber. "And then they dropped the price from above the taxis to below taxis." He admitted that after four hours of driving that day, he had only served five passengers, not yet clearing $50 in profit.
He was first drawn to Uber when it advertised $50 per hour in earnings and charged passengers more per trip than a traditional taxi, he said. But as time wore on, Uber dropped its prices and increased the number of drivers on the street. After expenses, earnings per hour fell to about $12 to $13, he said.
On top of that, Uber began charging $40 per month for the mobile phones they use in-car to track customers and mileage, a device they used to supply to drivers gratis, he said. And in the San Francisco market, Uber gave notice that it would up its take from 15% to 20%. Combined, the changes have eroded his initial enthusiasm for the service.
"I used to work six or seven hours to make that much money," he said. "Now I work 12 hours. So it's just like a taxi now."
On Uber's blog, Kalanick wrote that "the earning potential of a driver on the Uber platform is unmatched across the industry" and that increased growth will help the company further reduce the price of service for customers. Is it headed in the right direction? It's unclear. But it will get there faster than ever before.