The real problem is that drivers cannot make money selling on-demand transportation services without imposing some artificial limit on the number of drivers. If anyone could simply take out their horse and buggy or automobile and make money by giving people rides, then the price per ride would fall below the maintenance cost of the transportation assets and a reasonable return for the driver. That’s why the taxi business is heavily regulated and often involves an artificial limit on the number of operators.
Uber and Lyft can only offer their service at the current low prices thanks to subsidies from venture capitalists and people who haven’t figured out how little money they are likely to make per hour or don’t care all that much, as long as they are making some money. If Uber and Lyft were actually making money, they’d have to charge more for each ride.
From riding around Seattle I got the impression that Uber and Lyft drivers have caught on, and that the companies have to offer a variety of incentives to get drivers and have their dispatch preferences line up with the companies. Most drivers just have a basic sense of the rules, but they all know that Uber has more complicated rules than Lyft, so most drivers prefer driving for Lyft. There are bonuses for taking rides quickly, for being on call for a certain percentage of time, for taking a certain number of rides per day during specific periods and so on. Some drivers have made a science of understanding this. Gaming the bonuses determines whether driving for Lyft or Uber makes sense or not.
When Uber and Lyft first started, there were a lot of amateur drivers. Then, the professionals moved in. Over half the drivers I rode with also drove shifts for taxi companies. Uber and Lyft let them drive without having to buy a shift. Most taxi services don’t sell rides. They sell twelve hour shifts to drivers. The driver pays a flat rate, then gets to keep any money earned, less a credit card fee. I notice more semi-amateur drivers lately, amateurs with extensive knowledge of the bonus systems, and fewer professionals. I’m guessing that professionals can make more money buying a shift. If nothing else, they don’t have to buy a car, and they get to keep all the upside.
When Uber and Lyft started, they had a relatively simple set of rules. The system was extremely transparent. Now, it is surprisingly complex, and the bonuses to both the drivers and the passengers have to cost the companies money. If Uber and Lyft simply sold shifts or hired employees, they could avoid this complexity and the associated costs.
Can Uber and Lyft make money while paying the necessary incentives and raising prices to cover the actual costs of operating? That’s really hard to say. I’m guessing the answer is no.
The cost of entering the dispatch business are low. Look at Austin. Uber and Lyft pulled out, and several local competitors took over quite quickly. They lacked the system effect of having out of town users with their apps pre-loaded and accounts set up, but one could imagine a network of local companies adopting a set of data standards and allowing “roaming”. This is what happened with ATMs and cell phones, for example. This indicates that the actual profit margin, assuming there is a profit to be made, is relatively small.
Uber and Lyft depend on drivers wanting an increased marginal value from their car ownership. This does let them produce rides for less than the cost of a dedicated service. If someone is happy with their car, but wouldn’t mind driving a bit more for a few extra coins, then Uber and Lyft are perfect. Unfortunately, this marginal value has to be combined with a complexity of incentives to turn marginal value drivers into something resembling a fleet.
Then comes the transportation issue. If Uber and Lyft simply were a work-around the artificial taxi count limit, then the overall system would not be able to make money. Even marginal value drivers would find themselves making smaller and smaller sums. If you make $20 an hour at your day job, $10-$15 an hour with Lyft might be worth your while, but not $5-$8. Sure, more people will take rides, but the system will collapse economically before the traffic problem comes in.
The problem with disruption is that tends to be temporary. The artificial limits on the number of taxis were imposed in the 1930s and politically impossible to change, even as demand soared and new technologies enabled more efficient dispatch. Unlike the pirate shuttles that were shut down when they started to cannibalize existing bus services, more efficient transportation dispatch services aren’t going away. If nothing else, the existing fleet operators are installing them, and if they can ever come up with a compromise on who “owns” a ride, they could take over the business, and using their dominant position to punish interlopers, could then artificially limit the fleets to maintain pricing, at least until a new competitor rolls into town.