Uber’s books still top secret, but its biggest weakness isn’t

Uber has raised $12.5 billion at an implied valuation of $66 billion, all without having to show the world its books. But without intending to, Uber may have revealed a major weakness that may bring it back down to Earth: wider adoption of its business model.

The creation of Uber in the wake of the 2008 financial crisis can be compared to an earlier disruptive innovation: the supermarket.

In 1930, in the early months of the Great Depression, Michael J. Cullen leased a vacant garage in Queens, New York, and built King Kullen, what is widely considered the first-ever supermarket and example of the “resource integration” model that has created the Uber ecosystem.

In the case of King Kullen, “the resource integration included the use of the customer to self select, pay cash and carry the groceries home. Previously, the merchant selected, gave store credit and often delivered the groceries,” explained Bob Lusch, entrepreneurship chair at the University of Arizona and a member of the CNBC Disruptor 50 advisory council. The new model also led to much-needed cost savings for consumers and created much-needed new jobs.

Sound familiar?

Like King Kullen, Uber is the result of “clever resource integration” on the part of its founders, serial entrepreneurs Travis Kalanick and Garret Camp. “They integrated a mostly unused stockpile of personal automobiles, a large pool of potential drivers … [and] the resources of a digital ecosystem that can be accessed on a smartphone,” Lusch said.

At the time of Cullen’s innovation, none of the existing big dry grocery chains, including two of Cullen’s former employers, Kroger and A&P, had thought to do what he did. But its merits were clear, and the idea caught on quickly, the textbook definition of a disruptive innovation. And here is where Uber should hope the comparison ends. The King Kullen business model proved easy to replicate, and eventually the big chains did. Today, Kroger is America’s largest supermarket chain, with a 16.1 percent share of the national market; King Kullen remains a small local chain.

Uber’s fundamental flaw

Erkko Autio of Imperial College Business School in London and also a member of the Disruptor 50 advisory council, said, “Uber’s business model is fundamentally flawed.” What is fiercely guarded as one of its biggest strengths — the controversial model of making all drivers operate as independent contractors — also means Uber allows drivers to work for its competitors. “Uber does not remove drivers from the driver pool. The platform is novel and revolutionary even, but not difficult to replicate. It will get replicated,” Autio said.

Speaking to CNBC from last week’s Code Conference, Jean Liu, the president of Chinese ride-sharing company Didi Chuxing, pulled out a smartphone to show that the Uber app is directly referencing Didi Chuxing in aggressive discount offers: “I find it quite cute because I’ve never seen a company put their competitor’s brand on their own homepage. … This is very strong proof to show that we have better service.” Didi Chuxing recently received a $1 billion investment from Apple.

Uber’s patent protection is not in the top tier among CNBC Disruptor 50 companies, according to MCAM International, which provided CNBC with a database of patent, trademark and other intellectual property information and analysis. Uber receives a lower-tier score on defensibility of technology, MCAM found.

Uber did not respond to a request for comment by press time.

Nevertheless, it should come as no surprise to see Uber atop the CNBC Disruptor 50 list in 2016. To anyone who follows Silicon Valley, it’s an obvious choice as the first company that comes to mind when you think of a disruptor. Uber is in more than 450 cities across Asia, Europe, the Middle East, Africa, Australia/New Zealand and the Americas. In the United States alone, more than 450,000 drivers use the Uber app daily, according to the company.

Some innovation experts contend the independent contractor model remains worth much more than it could ever cost Uber. “I have no trouble believing they’re here for the long term,” said Andrew McAfee, a scientist with the MIT Initiative on the Digital Economy. “It’s brilliant that [Uber] didn’t try to lock down drivers into an employment situation,” he said. “A huge part of their success and growth is, all you have to do is turn on an app and you can start making money with your car — on a schedule that you the individual choose.”

The question, then, is what will Uber be in the long term?

Uber, Lyft? Never heard of them

A Pew Research study last month found that despite all the attention, 51 percent of the U.S. population has heard of ride-hailing apps like Uber and its closest rival, Lyft (No. 27 on this year’s Disruptor 50 List) but never used them; one-third of the county hasn’t even heard of them; and only 15 percent of adults told Pew they have used a ride-sharing service. (The popularity does go up as the age of adult goes down: Roughly one-quarter of 18- to 29-year-olds (28 percent) and 1-in-5 30- to 49-year-olds (19 percent) have used ride-hailing.

Is Uber destined to be just another app in a sea of sharing-economy choices used by a fraction of the population? Or will it instead retain its competitive edge and become the next company like Amazon or Xerox or GE — a company that starts with a core business model and through innovation, clever resource consolidation and smart execution becomes something much bigger and more important?

The key to Uber’s long-term success may lie in how the company deploys its mountain of cash. Last week Saudi Arabia’s investment fund revealed a $3.5 billion investment. “Free venture money is like doping,” Autio said. “They have so much money, they can do anything. But that will not last.”

Recently, Uber has watched cash flow to its competitors, as big public incumbents take aim at both its core business and its potential paths to future growth. In addition to Apple deploying $1 billion of its cash stockpile to invest in Didi Chuxing, which already had the upper hand on Uber in China, Lyft got a $500 million investment from General Motors last year, as well as $100 million from famed investor Carl Icahn. Lyft and GM recently announced a short-term car-rental program together that would bring more drivers into the driver pool and at the same time keep those new drivers from using Uber.

“Execution really matters,” said Matt Glickman, a serial entrepreneur and guest lecturer at the Stanford Graduate School of Business (and member of the Disruptor 50 advisory council). “It’s the sustained, continued push to adapt and to improve that leads to long-term success.”

We’ve heard this before: “Innovate or die.” Or become just another supermarket … from the 1930s.