A recent Wall Street Journal article about two once-hyped tech companies reads almost like an entire investor class suddenly took an Econ 101 course. Two companies that went public with market capitalizations in the tens of billions of dollars despite never coming close to making money are jacking up prices and therefore cratering customer demand in a vain attempt to turn its service into one with huge markups to pay off a bloated corporate overhead structure, even though they offer services with several meaningful alternatives. Turns out, that’s a really shitty business proposition.
I am talking, of course, about Uber and Lyft. Fares are at record highs, according to the WSJ, which is itself reporting data from a third party service (Uber and Lyft don’t report such data). Ridehailing is a very price-sensitive business, because much of the time people have alternatives, either in the form of walking, biking, public transit, or their own private cars. So, as a result of the price hike, rides are tanking. “The situation has analysts and investors asking how big the ride-hailing market is and whether Uber and Lyft can operate without losing money,” the WSJ notes.
This is a question many of us have been asking for a very long time. Uber and Lyft have been a crude proposition all along: Subsidize unprofitable taxi rides with venture capital money, claw for market share, and eventually figure something out that will make such taxi rides profitable despite the huge corporate structure of well-paid executives and engineers, a thing traditional taxi companies with already razor-thin margins didn’t have.
At the time, it seemed as if both Uber and Lyft were banking this entire plan on autonomous vehicles panning out. In hindsight, it still seems like that was the basket all the eggs were in. Turns out, AV development was no more than a several billion dollar money pit that got one person killed. Both companies sold off their AV development arms for a fraction of what they put into them, no closer to replacing human contractor drivers with robots (I was also skeptical that would have actually saved the companies all that much money, since the current business model passes off nearly all of the costs of actually running a taxi company onto drivers who pay for their own cars, fuel, and insurance, whereas AVs would have meant both companies would be paying for those things, but that’s a moot point now).
After the AV debacle, Uber and Lyft went back to the drawing board on how to make the supply and demand lines on the ol’ Econ 101 chart somehow meet at a price that makes them profitable. Uber made noises about becoming the “Amazon of transportation,” involving several disastrous sideshows such as a brief foray into electric bikeshare that amounted to little more than purchasing and then destroying thousands of bicycles. Lyft has made a more concerted but seemingly little more effective effort at diversifying to bikeshare while continuing to chip away at those pesky quarterly losses to little avail.
Since their foundings in 2009 and 2012, Uber and Lyft have raised more than $30 billion in private funding, according to Crunchbase. Even with that pile of cash, neither company has ever posted a real and consistent profit, only “adjusted” profits that exclude dozens of real expenses every company has like taxes and interest payments. And that was when broader economic and labor conditions made it easier to make a profit on taxis than it is now.
The fundamental problem Uber and Lyft keep running into is that most people are not willing to pay the fares it would cost to run a profitable taxi service with the overhead Uber and Lyft require, to say nothing of paying drivers a decent wage. And alternatives both companies are pegging their hopes to like shared rides are not new ideas but recycled old ones that have proven even more costly because it turns out if people in urban areas are price-sensitive and willing to share a vehicle with strangers they will take a bus. The end result is an algorithm that offers you a discount to ride in a car it expects to have multiple passengers but more often than not is just another single-occupant taxi ride and just another loss leader for companies struggling to come up with ideas that make money.
There are two basic paths forward for these companies. One, which Uber is currently pursuing, is to become the app you use for the taxis you used to hail before Uber.
The other is a managed retreat to the urban-focused upper classes that could and would pay high prices for the extra convenience and luxury of black cars on demand. It won’t revolutionize the transportation industry and it won’t serve any equity goals both companies have long given lip service to. But it is a sensible business with an obvious if limited market and profit potential. It is also an idea that has already existed, once run by a plucky startup that focused exclusively on Black Car services from experienced, fully licensed and insured drivers paid a living wage. You may have heard of it. It was called Uber.
This post has been read 17 times!