How do Uber and Lyft become profitable? By getting rid of drivers.
The top of this year signaled yet another race between ridesharing giants Lyft and Uber, this time a competition to IPO. As Lyft looks to edge out its rival, this presents an opportunity to understand the company’s direction moving forward, this time as a larger, more mature, and public company.
Lyft’s S-1 shed light on a trend important for consideration. Even though revenues multiplied between 2016–2018 ($343.3MM — $2.16B), the overall net loss grew proportionally ($682.8MM — $911.3MM) in this duration, and Lyft is yet to reach profitability
At the same time, a second trend to take note of is the number of active riders using Lyft in this time frame.
This begs the question, what are the drivers of Lyft’s losses? It’s evident that, like any company in the process of scaling, Lyft is clearly experiencing growing pains. But the consistent uptick in active riders and the exponential growth in revenue suggests that the root isn’t a lack of sales, but expenses that it cannot overcome through its current model and offerings.
Of these expenses, the most obvious is payment for drivers that shuttle Lyft passengers from point A to point B. Given that drivers are provided a base compensation with additional pay based on time and mileage of trip (with any relevant bonuses), this can often lead to a net loss on shorter trips after subtracting all of payments to drivers.
This is often the case in big market cities such as New York, SF, and Boston, where a significant portion of ridesharing usage is for travel within the city and last mile travel.
Drivers on ridesharing forums have reported average trip distances within similar cities of:
“2.71 miles (n=301)”
“3.3 miles based on 150 trips”
“8kms (~5miles) is my average distance, based on past 600 trips”
While short distance trips aren’t the only usage for ridesharing, they undoubtedly account for a sizable portion of the usage. It seems that Lyft and Uber have taken similar strategies to address this issue:
Investing in driverless modes of transportation
1.Lyft and Uber both recently acquired bike sharing services — Lyft acquired Motivate in July, and Uber acquired Jump in April
2. Lyft and Uber are heavily investing in autonomous vehicles. Uber’s Advanced Technologies Group is on a mission to bring self-driving vehicles through advancements in hardware, perception, maps, and simulation. Uber’s recent acquisitions of Geometric Intelligence and deCarta seem to fall perfectly in line with furthering those efforts.
As of March 14th, Uber is in talks with Softbank and Toyota to potentially raise $1Billion for its self driving unit.
Lyft has a dedicated group to the same mission as well, citing reduction in traffic and accidents as motivations behind this venture. In October, Lyft unveiled its fleet of autonomous vehicle developed by Aptiv, and followed up by acquiring Blue Vision Labs, a London based company centered around developing machine perception technology.
Furthermore, the threat of Waymo being poised and primed to unveil its own autonomous ride hailing service has kept both Uber and Lyft on their heels in this space.
3. Lyft and Uber maintain that their drivers are independent contractors, not employees. This prevents them from being subject to minimum wage increases and requirements, thus mitigating any further spikes in expenses.
While this transition will not happen overnight, both are hopeful that the next two decades will prove to be sufficient timeframe for the technology to mature and the the system to roll out.
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