The spotlight has been on rideshare companies Lyft and Uber this year as both went public on large U.S. stock exchanges. Going public, of course, changes the dynamics on formerly private companies for myriad reasons, not least of which, they become accountable to public shareholders.
Recently, both companies reported their first quarterly earnings since the initial public offerings (IPOs). Both continued the pattern of losing money established when they were private companies, and Lyft said it was raising prices.
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Since the companies became successful as a result of offering lower prices than existing public ride options such as taxis, the news that one may have to raise prices to be successful may call into question the overall economic sustainability of online platforms and the disruption-of-industry model that has been among Lyft and Uber’s calling cards.
As the New York Times reporter Mike Isaac explained: “The thesis put forth by [former CEO Travis Kalanick] was once you get to the tipping point in any given city that Uber is part of your daily life, then eventually, they get to a point where maybe they can hike the rates. Maybe they can lower the payment for drivers. But it doesn’t matter because people are hooked, and people are going to keep using it, because it’s part of their daily lives.”
Isaac explained the process: “Uber might pay $2 or $3 out of that ride just to make it cheaper for a rider. So you or I might pay, like, seven bucks to get somewhere, where in reality it costs $10. Thirty percent of that goes to the driver. So at the end of the day, Uber ends up making, like, $2 or $3 on the ride. But count all their overhead, and maybe they lose $1 or $2 on the ride….Now, multiply that by millions of rides per day in each city across the United States. And then move out of the United States, and then there’s millions more in other cities outwards. So in theory, they might be losing millions of dollars in each city every single day.”
Significant Losses for Both Companies
Market leader Uber lost a record amount in the second quarter of 2019, at $5.2 billion. Its reported growth rate was 14 percent year over year, the slowest growth rate in the company’s history.
Uber management noted that part of the lost was $3.9 billion offered to its employees as equity compensation after the IPO, according to Slate. Still, the remaining $1.3 billion loss was nearly double the losses over the prior year’s same quarter.
The company did forecast that losses would be reduced over the next two years. Still, it is notable that the company is thinking in terms of losses; successful companies require profits.
Lyft lost less money than Uber, but its quarter report still indicated that profits were running at a loss of $644.2 million, versus $178.9 million in 2018’s second quarter.
Lyft did have an impressive growth rate; the 72 percent growth was higher than analysts had been forecasting. However, last year revenue doubled; it didn’t this year.
Will the Attempt to Achieve Profits Work?
Both companies do have a plan to achieve profitability. In Uber’s case, it is focusing on other areas than ride-sharing, such as food delivery. Its Uber Eats division is notably successful, but it remains to be seen whether the success will be enough to put overall earnings in the black.
Lyft announced that it would likely be increasing the amounts riders are charged, in its attempt to achieve profitability.
Fares have long been priced at levels that don’t make the companies profitable. In part, this was to attract customers in the initial period of start-up and to compete with each other in markets where the two companies go head-to-head.
The idea was, low prices would attract market share, and significant market share would make the companies successful.
The two companies did disrupt the industry, becoming favorites over taxis and in some cities severely injuring the then-dominant industry of taxis. Both attained high customer recognition as well.
Both say they are no longer competing with each other. Their trajectories may offer insights into the sustainability of online platforms. Like Airbnb, they firmly established an online platform model of services. Because neither has yet attained profitability — and they may have to raise the very prices that made them disruptors in the first place – online platforms may be the only part that is truly new. A higher-priced Uber or Lyft may not be that different from the disrupted model.
The Daily Podcast for the New York Times summed up Uber’s path this way:
Michael Barbaro: “So in the end, Mike, Uber accomplishes something pretty extraordinary. It creates a new industry. It changes how millions of Americans travel, how cities, as you just said, think about transportation. It challenges and undermines this iconic American industry of taxi cabs. In many ways, it creates the gig economy. It does all of that. But it just never builds a profitable business. And that may mean it doesn’t operate as that business.”
Mike Isaac: “Whether you think that’s a tragedy or a comedy or whatever, I think that’s just pretty emblematic of how businesses work out here. In Silicon Valley, there have been more startups that have been more transformative on how the world operates in the past 10 years than I can really even think to remember.”