Why Uber is Expanding Its Ad Business
Examining the digital economy and the push for revenue diversification through advertising
On Wednesday, Uber announced it is launching a global advertising unit, which will manage its expanding ad business, which to date has mostly been limited to ads and sponsored placements in UberEats. The expanded ad products will be coming to the flagship Uber app, allowing advertisers to reach riders during their journeys and target them based on their destinations. Per Wall Street Journal’s report:
The new ad-targeting product will let brands place ads using data drawn from both riders’ recent travel history and their precise geographic destinations, according to the company. If a user books an Uber to a specific retailer, cinema or airport, for example, a company could buy ads centered on that location.
Besides the targeting capability, Uber will also enable direct-purchase units that allow riders to make an online purchase without leaving the Uber app. Separate pilot programs in the U.S. and India reportedly will include ads on in-car tablets with face-tracking capability as well.
Uber reportedly aims to generate over $1 billion in ad bookings within the next two years, which, if they manage to hit that goal, would be double the total ad revenue of the New York Times last year.
Uber is not the only ride-sharing company expanding into the ad market either. In August, Lyft also created a media division to grow its in-vehicle digital ad business. Outside the U.S., ride-hailing apps like Grab and Didi have long explored advertising, both in-app and in-vehicle, to expand their revenue streams, as early as 2018. So, why did Uber and Lyft suddenly decide to expand their ad business? The short answer is simple: ads can bring in additional revenue streams that they need. The long answer, however, requires taking the larger picture of the digital economy today into account.
The Need for Revenue Diversification
Hailing an Uber or Lyft used to be cheaper than getting a taxi, thanks to the aggressive growth strategy of the ride-hailing companies subsidized by the ample VC funding they receive. That was true not just for ride-hailing, but also for things like Airbnb, meal-kits, gym-pass, and, yes, the infamous MoviePass — they were all part of the VC-funded “Millennial Lifestyle Subsidy” startups that aimed to disrupt legacy industries with a mobile-first interface, on-demand availability, and Millennial-friendly savings. Like any subsidies, they were quickly embraced by people who needed them the most, aka Millennials. After all, we’re the generation that has to “kill off” so many industries, running the full gamut from the wedding rings to funerals, simply because we can’t afford them.
Then, the pandemic happened, and all those sweet, sweet subsidies for these urban lifestyle amenities quickly disappeared with any sense of “before-time” normalcy. Shifted consumer spending, coupled with rising interest rates and labor costs, alarmed the VCs to turn off the faucet for money-losing startups, leading to a widespread price increase in these on-demand services. Ride-hailing services like Uber and Lyft, in particular, also had to contend with rising energy costs, as well as public health concerns that led to decreased ridership and the suspension of the affordable carpooling options. Suddenly, but not unexpectedly, revenue diversification became a top priority.
Take Uber for example. The company quickly pivoted to food delivery and other logistics services after the pandemic greatly suppressed the on-demand ridership in 2020, acquiring food delivery service Postmates in July 2020 and booze delivery service Drizly in February 2021 to boost the market reach and competitiveness of UberEats in the local delivery space. It also became the sole owner of Cornershop in June 2021, one year after acquiring a majority stake in the Latin American grocery delivery startup, and expanded its own grocery delivery service to many more markets. In March 2022, it even launched a new “Explore” tab that allows users to book dinner reservations, concert tickets, and other events directly through the Uber app. This month, UberEats even started delivering cannabis products in Canada.
Despite all these diversifying efforts, Uber is still barely profitable, thanks to the thin margins of food and grocery delivery services, as well as strong competitions in the local discovery space. In this context, it should come as no surprise that Uber is expanding its ad business to further diversify its revenue streams and enhance its profitability.
To date, Uber’s ad business has been limited to sponsored listings on UberEats, which, per Uber, already brings in $350 million in annualized revenue from 170,000 advertisers in 30 countries globally. Reaching 122 million monthly active users, Uber certainly holds a significant amount of attention, which it has decided to start monetizing now. That’s why Uber has set the aforementioned billion-dollar goal for its ad business.
The Attention Economy Swings Back to Ads
Looking at the larger context, it is clear that advertising is in vogue again. For much of the 2010s, the attention economy was ruled by a bifurcation of premium, ad-free subscriptions and free, ad-supported services. That line in the sand has been quickly eroded, with ads coming to many previously ad-free digital services, such as premium streaming services like Netflix and HBO MAX, as well as MMO games like Roblox. Add in all the retail media networks launched by retailers like Target, Home Depot, and CVS in the past few years, it would seem that everyone realized there is money to be made in digital advertising, and not doing so is essentially leaving money on the table, considering all the consumer attention all these services and retailers command.
Gone are the worries about the increasing popularity of ad-free subscriptions and ad-blockers killing off the ad business — in 2022, U.S. ad spend is set to hit $323 billion, exceeding the $300 billion threshold for the first time, per Magna’s latest estimates. Yet, for the first time in over a decade, the duopoly of digital advertising both look vulnerable. Meta is dealing with an existential pivot that has proven rather unpopular so far, as Instagram losing ground to TikTok and alternative social platforms, whereas Google is facing potential challenges in an ongoing shift’s young people’s search habits that favors social search rather than keyword-based search. Both companies lost significant tracking abilities thanks to the impact of Apple’s ATT features, and saw a small, but not insignificant, amount of ad revenue lost as a result.
Therefore, it should not be a surprise that everyone now wants a piece of the digital ad business. This week, somewhat overshadowed by Uber’s big announcement was DoorDash expanding its self-service ad tools, especially for CPG brands to target its users. Just like offline grocery stores have end-caps and in-store displays, our digital grocery aisles (or in the case of Uber, digital transportation hub) will now also have ads. The only difference is that the ads they serve up will be far more tailored to your interests than their offline counterparts. Thanks to all the user data they collected through their services, DoorDash and Uber know what groceries you bought and which locations you frequent better than any none-digital native business ever will — privacy concerns be damned. The great irony of the 21st-century digital economy is everyone gradually figuring out that, yes, the ad-supported business model is indeed the best one to scale a service business.
For ride-hailing companies like Uber and Lyft, there’s also the looming disruption of self-driving cars that would completely upend their current business model. That future may be closer than you think, as both Lyft and Uber have already started to blend third-party robotaxis into their ride-hailing fleets in multiple cities. If the MaaS (mobility-as-a-service) model, which many mobility experts have predicted, becomes a reality with the arrival of self-driving cars, then logically Uber and Lyft would have to make their services as widely accessible as financially feasible to scale their business. If what has happened with Netflix in the past year is any indication, it would seem that building a profitable ad business may just be a great way for Uber to future-proof its business.