Max Whittaker/Reuters
Taxi drivers protest against transportation network companies such as Uber and Lyft.
- London just banned Uber from operating in the UK capital.
- The move could pose serious problems for Uber.
- Uber says it will appeal the decision, calling it "just wrong."
- It could be just the start. Uber faces other legal battles in key cities
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- Watch Uber trade live here.
London has stripped Uber of its license to operate in the UK capital, the city's transport authority confirmed today, in a move that not only caps a bitter end to a two-year struggle for legitimacy, but also opens up fresh fears about the sustainability of the business model.
While the company has said it will appeal the move, it does not look in a good position to overturn the ruling. Following a series of scandals in 2017, Uber has tried to clean up its act - but not enough to placate TfL and the very powerful taxi lobby of black-cab drivers who have lost market share to the upstart.
The strength of this lobby may have a lot to do with the decision, but the failings in London could just easily be seen elsewhere.
Shares printed -5.9% in pre-market trading at $27.82, although the stock opened down about 4% at $28.46, barely a couple of dollars above its all-time low. Following the initial selloff the shares rallied to within 0.7% of Friday's closing price.
Largest market in Europe
Uber has clearly suffered a big blow with this ruling. There is an immediate top-line hit: London, with about 3.5 million users, is the largest market in Europe for the ride-hailing app.
London is also one of the group's "fab five" cities - along with New York, San Francisco, Los Angeles and Sau Paulo - that account for around a quarter of global revenues. In that sense, there is likely to be a clear and obvious hit to earnings growth, if the ruling is upheld, which looks likely.
As Uber says itself: "Any inability to operate in London, as well as the publicity concerning any such termination or non-renewal, would adversely affect our business, revenue, and operating results."
In London, competition in the shape of Bolt and Ola are ready and willing to step in at the drop of a hat; Uber could be forgotten pretty quickly once gone. Local competition is a problem wherever Uber extends its reach.
More broadly, the decision today betrays the scope and depth of the legal and regulatory problems faced by Uber. The list of legal issues either historic or ongoing is long and broad both in scope and geography.
Cities and local lawmakers have leverage
These present ongoing overhang for the stock. Whilst there have been problems with corporate culture and the vetting of drivers, by-and-large the run-ins with the regulators and policymakers pertain to the very structure of the business itself. Taxation, labour laws, and consumer safety are the three legs on the milking stool of regulatory instability.
Cities and local lawmakers have considerable leverage should they wish to use it. Uber will continue to face elevated competition from local rivals and a high degree of regulatory scrutiny that threatens to undermine how it does business.
From Chicago to Los Angeles, New York to San Francisco, there have been all kinds of legal roadblocks. City authorities have been alarmed at the rise of Uber and have pursued a range of legal and regulatory avenues to stymie the company. An outright ban though has not been considered in other major cities, but how long before some follow?
Already in a number of key markets, including Argentina, Germany, Italy, Japan, South Korea, and Spain, the company's ridesharing business model has been blocked, capped, or suspended, or Uber has been required to change its business model.
Whilst Uber investors have been able to accept some degree of regulatory overhang, London's example could point the way to cities taking an even tougher stance.
Quite simply, if Uber is barred from a couple more big cities there is a risk it won't be able to maintain the kind of critical mass required to attract the capital needed to sustain a loss-making enterprise of this scale. Uber remains good at attracting investors, but a couple more cases like this and it may not be.
Uber's cash pile is a small mercy
Uber has about $12.7 billion in cash on hand, and could sustain its burn-rate for perhaps two or three years. That's a small mercy, if long-term sentiment crumbles.
At least the London decision does do one thing in Uber's favour - it will help it reduce the cash burn, a strategy that management has tentatively started to favour as it contends with greater investor scrutiny after going public. Uber has burned through $7 billion in cash this year alone as it pursues a growth-at-all-costs model.
London is a timely reminder that you can't count on growth to cover up the cracks of a business model that is fundamentally flawed.
Neil Wilson is chief market analyst at Markets.com in London.
