Rideshare giants’ rough ride raising big questions about long-term sustainability
by Mike Beggs
Is the Uber ridesharing model sustainable?
More than a few market analysts and pundits are asking that $64,000 question, given its’ underwhelming Initial Public Offering (IPO) in May, the recent laying off of 1,000-plus marketing and operations staff, and continuing labour and safety challenges (most significantly the passing of Bill AB5 in California, designating ridesharing drivers as employees, entitled to all of the usual benefits).
Attracting almost $25-billion from investors, Uber was regarded as, “the most valuable startup in history”. But its’ initial market value turned out to be only two-thirds of its’ projected valuation of $120 billion, and the IPO stalled with shares selling at a cut-rate price of $45 each -- resulting in the biggest first-day IPO loss since 1975.
And while controlling a whopping 69 percent of the ridesharing market (compared to Lyft’s 29 percent), Uber’s stock prices ended the summer 40 per cent below its’ entry price (at $28.65 per share on October 1). While boasting 91 million U.S. subscribers, and net revenues of $11.3 billion in 2018, Uber remains unprofitable -- reporting a $5-billion loss for the second quarter of 2019.
All of this has experts wondering if this cash-bleeding multinational can keep it up?
Ever since its’ inception, Uber has been subsidizing its’ cheap fares to attract customers (providing services at just 74 percent of their cost in 2017). And, Intelligencer suggests this makes it, “a bad investment proposition.”
“Uber is now caught between a rock and a hard place, having to keep passengers and shareholders happy,” it states. “And they may have to raise their prices.”
In an article entitled, “How Uber Got Lost”, The New York Times wrote, “The issue, as a number of financial commentators have said is that their gains have been captured almost entirely pre-IPO, by investors in the private market. Anyone who bought shares of Uber on the day of its’ Wall Street debut is in the red.”
After the first round of layoffs, its’ CEO Dara Khosrowshahi told employees there’s a sense the company’s expansion is slowing down, and that it could lose money through 2021.
He said many of Uber’s teams have gotten too big, resulting in overlapping work, and mediocre results, and that, “we need to get back on track”.
“We need to ship more quickly, and operate more effectively and efficiently than we are today,” he told The Washington Post. “We are not doing this for Wall Street. We are doing this for Uber. It’s critical we get our edge back, and continually push ourselves to do better.”
While having consistently cut into Uber’s market share over the past several years, Lyft, similarly, has stalled coming out of its’ IPO, while facing its own safety issues (most recently being the subject of a class action suit filed by 14 women in San Francisco, alleging they were sexually assaulted by their Lyft drivers).
The price of Lyft stock nosedived after its $72 per share opening, and was down 40 percent by October 1.
With ridesharing drivers guaranteed minimum wage in New York City for the past six months, Bloomberg reports that the resulting rising prices are turning off customers. Uber completed 15.9 million trips in May (down 8 percent from March), while Lyft made 4.7 million trips (17,000 fewer than in March).
And in October, Splinter suggested with the passing of Bill AB5 out West, “the same political battle is coming to New York.”
While enjoying explosive international growth over the past decade, with their disruptive model Uber and Lyft have butted heads with regulators wherever they go.
And in London, England – regarded as one of its’ Top 5 markets – Uber recently had its’ private hire license renewed for just two months (for a second consecutive year!), when it could have been updated for as long as five years.
Its’ license was pulled by Transport for London in September of 2017 over, “public safety, and security implications”.
The company claims it has since made “wholesale” changes -- now reporting crimes directly to the police, and implementing additional safety measures for passengers and more checks on driver hours. But in July, Uber was fined 28,000 pounds for two counts of its’ drivers operating without insurance, and for failing to keep proper records.
And, Steve McNamara, a spokesman for London’s black cab drivers told The Guardian, “Granting Uber a two-month temporary license clearly shows that the firm has failed their probation and is still a huge threat to public safety.”
He said it’s time for Mayor Sadiq Khan to, “pull the plug on Uber’s immoral operations for good.”
BBC News warns that for Uber and Lyft the hype may be over, and, “reality is arriving soon.”
“Their fluctuations are being seen as a reckoning, not just for the so-called ‘gig economy’”, CNN agrees.
Renaissance Capital market strategist Matt Kennedy told The Guardian, “Uber is an $80 billion company that is unproven, and investors are holding their breath.
“They’re spending heavily on driver incentives and new customer acquisition, so over time those should go down and profitability should improve. But a company coming out of an IPO should be firing on all cylinders,” he observed. “Investors may flee if the financials start to deteriorate at this stage.”
CNET reporter Dave Kerr argues that eventually Uber is going to have to raise its’ prices to be profitable.
“They’re also trying to make bets on other types of transportation, like scooters, bikes, and autonomous cars -- because all three of these don’t have the most costly ingredient, which is the drivers,” he writes.
While the successful delivery of driverless cars to market would be the big prize for Uber, experts agree these vehicles are still at least a decade out, and some wonder whether it can survive until then operating under the current business model.
What’s more, the progress of Uber’s autonomous program was slowed by the bad press after an Arizona woman was killed by one of these vehicles in March of 2018. The Insurance Journal reports that U.S. National Transportation Safety Board is looking into the cause of this crash, with a hearing scheduled for November 19. After conducting on-street tests, police in Tempe claim the accident was “entirely avoidable”, with the backup driver watching “The Voice” TV show at the time.
What’s more, Uber would have to own these high-technology cars, spiking its’ capital costs though the ceiling.
Add the continued fallout from any number of scandals and crises (the #Delete Uber campaign, the use of “Greyball” software technology to circumvent authorities, a worldwide data breach, and continuing questions about its’ driver background checks), and you have The Washington Post reporting that, “Inside the new Uber one finds weak coffee, vanishing perks, and fast-deflating morale.”
According to The Post, Uber appears to be losing investors’ confidence – and that the failure of several summer IPOS to fly high has raised speculation about a potential tech bubble.
Reuters reports both companies have recently absorbed further flak, after refusing to testify before U.S. Congress at a House of Representatives hearing on issues pertaining to their safety and labour practices.
Heading the panel, Democrat Peter DeFazio alleged their failure to attend is a “telling sign that the two firms would rather suffer a public lashing than answer questions about their operations.”
In a prepared statement, he claimed both have reported substantial losses, don’t make information about the process for deactivating dangerous drivers public, don’t share data on the prevalence of assaults on their platforms, and drive down wages, “to turn our transportation workforce from a skilled, trained pool of workers earning living wages into another casualty of the gig economy.”
“The hearing should also serve as a wake-up call to these companies that have flooded our roadways with disruptive technologies, and investor capital that their days of operating with little public policy and regulatory oversight in the transportation space are coming to an end,” he added.
Such developments could be regarded as a tiny glint of light for the cab industry, on which Uber, especially, has wrought untold havoc the world over.
When asked if Uber and Lyft could be on the skids, Toronto owner/operator Gerry Manley responds, “Even if it’s true -- and I think nothing lasts forever -- isn’t there always somebody else that comes along to replace them, that’s similar? Don’t they always reinvent themselves in another way.
“I can see them voluntarily closing down the (ridesharing) product, if they have to treat drivers as employees and the profitability isn’t there. But because they’re so diversified they will get enough, until they revisit the transportation part of their business.”
Mark Sexsmith, marketing manager with Mississauga’s All-Star Taxi feels, for the two ridesharing kingpins, “it’s a mess”.
“They’re fading. Their stocks are halfway to the junk bond category,” he offers.
“Anybody who bought shares are chumps, who don’t know anything about the taxi industry. If they had just checked with the taxi industry, everybody would have told them there’s no money in it.”
Sexsmith, likewise, “wouldn’t be surprised” if Uber decides to do a structural reset and get out of the taxi industry for the time being, instead concentrating on Uber Eats and bikes.
“They’re losing $1 billion a month on the Uber X (service),” he observes.
Toronto owner/operator John Dufort suggests Uber and Lyft’s major problems are all down there (in the U.S.), and that they will probably weather the storm.
“I don’t know about Lyft, but Uber, they’re into everything. It’s not just cabs,” he says.
Long-time Toronto taxi industry observer Rita Smith suggests, “(Maybe), Uber was never meant to make money.”
“Selling rides below cost. They’ve never made expenses on the rides they’ve sold, and they never will be able to. There’s no room to break even, or make a profit. Maybe it was meant to lose money, or be a tax write-off,” she suggests.