Uber is Not Price Competitive with Transit

Ride hailing’s low fares are only possible with unsustainable losses

It’s no secret that Uber has been eating into public transit ridership. The largest study to date on ride hailing confirmed that “between 49 and 61 percent of trips either wouldn’t have been made at all, or would have been accomplished via transit, bike, or foot” if there hadn’t been a ride-hailing option. It further acknowledged that counter to the claims of Uber, Lyft, and others in the sector, ride hailing is leading to more miles traveled in cities.

But why is this happening? It’s true that ride-hailing companies are offering rates that are somewhat competitive with transit, particularly on uberPOOL and Lyft Line, but this often leads people to assume that simply because that’s the case now, it will be the case forever. A recent piece in CityLab even went so far as to argue that “[t]ransit is failing to compete,” but such an argument can only be made if the economics of ride hailing are ignored; namely, the highly unsustainable nature of its low-fare business model.

Uber’s in a Fiscal Hole with No Way Out

Uber’s strategy of reporting large losses to develop a customer base is not unique; many tech companies have taken a similar path before it. The tech press has compared Uber favorably with Amazon — now the fourth largest company in the world by market cap — because the latter reported growing losses every year from 1994 to 2000, during which time investors worried it would ever turn a profit. But there’s an important detail left out of those stories: how the scale of Uber’s losses compare to Amazon’s.

In WTF? What’s the Future and Why It’s Up to Us, Tim O'Reilly writes that Amazon lost $2.9 billion over its first five years before turning a profit in 2001. That may seem like a lot, until Uber’s losses are placed beside it.

In 2016 alone, Uber lost $2.8 billion, almost as much as Amazon lost over five years; but the losses didn’t stop there. Over the first three quarters of the 2017 fiscal year, Uber has already lost $3.2 billion, with a loss of $1.5 billion in the most recent quarter. A chart of Uber’s financials shows its losses have gotten worse in each quarter of 2017, suggesting annual losses for the year will likely hit $5 billion, and the company has no realistic path to profitability.

Companies like Amazon and Facebook are able to turn early losses into profits because they can take advantage of economies of scale, essentially reducing the marginal cost of expanding their operations because so much of their company is digital. That is not the case with Uber. Transportation industry expert Hubert Horan has detailed how “[d]rivers, vehicles and fuel account for 85% of urban car service costs” — costs which cannot be reduced with scale — and how, despite its innovative app, Uber actually uses its resources less efficiently than a traditional taxi company.

Uber lost $2.8 billion in 2016, is on track to lose $5 billion in 2017, and has no path to profitability

With losses mounting, Uber’s only path to profitability is to reduce the amount that goes to drivers. The company has already significantly cut driver compensation, to the degree that “drivers are increasing unable to support themselves,” and is trying to put more riders in each car with its uberPOOL service, but that has not stopped the losses from mounting. It’s for this reason that Uber is so aggressively pursuing driverless vehicles, but they’re further off than the media has led people to believe.

Driverless Cars Won’t Save Uber

A March 2017 report by Recode detailed the troubled state of Uber’s driverless vehicle project, revealing a mass exodus of engineers and that the technology seemed to be stalled, if not going backward. While testing in autonomous mode, “drivers were still having to take back control an average of 10 times for every eight miles driven,” making Uber’s efforts by far the worst of the six major companies testing self-driving technologies. Uber even admitted in April that Alphabet’s Waymo had far superior driverless tech than its own.

But regardless of the sorry state of Uber’s driverless system, the mass rollout of such vehicles on city streets is still years away. A recent report in WIRED showed that major companies working on autonomous driving technologies have pushed back their expected launch dates by several years and are no longer promising full autonomous driving at the outset, but vehicles with only semi-autonomous features.

Companies told us driverless cars were on the horizon, but now they’re pushing their timelines years into the future

The new CEO of Ford, James Hackett, told SFChronicle that “the nature of the romanticism by everybody in the media about how this robot works is overextended right now” and that “ a vehicle that can drive anywhere, anytime, in any circumstance, cold, rain — that’s longer than 2021.”

This view is supported by Argo AI CEO Bryan Salesky, who wrote a post in October honestly describing the state of the core driverless technologies. His assessment shows that while great progress has been made over the past decade, there are a number of challenges which still need to be tackled, including the quantity and cost of vehicle sensors; and the ability of algorithms to both understand what is really happening on the road and predict what may happen while driving. Salesky closes with a wake-up call to those who believe ubiquitous driverless tech is just around the corner.

Those who think fully self-driving vehicles will be ubiquitous on city streets months from now or even in a few years are not well connected to the state of the art or committed to the safe deployment of the technology.

That last sentence seems pointed particularly at Elon Musk and Uber, who have been accused of dismissing safety concerns and covering up driving infractions to get driverless vehicles on the road.

Even though other companies seem to have recognized that self-driving cars are further away than initially predicted, it’s unclear whether Uber has accepted this reality. The company placed an order for 24,000 Volvo SUVs equipped with autonomous technologies to be delivered between 2019 and 2021, to which it plans to add its own self-driving system. That’s a short timeline for a company whose tech was recently judged to be the worst of all major companies, and it’s also worth nothing that, according to Wired, Volvo recently pushed back its own plans to distribute 100 self-driving SUVs for local use in Gothenburg, Sweden from 2017 to 2021.

Driverless vehicles were supposed to save Uber, but its system is the worst in the industry

While it’s hard to tell whether Uber has adjusted its timetable for a more realistic rollout of driverless vehicles, its executives have a clear incentive to be overly optimistic for when they might get them on the road. As of June 2017, Uber had $6.6 billion in cash, which isn’t very much for a company on track for a $5 billion loss for 2017. And even with the recent cash injection from SoftBank, which came with a new $48 billion valuation — 30% below its former $69 billion valuation — there’s no debating that Uber is quickly running out of cash, hence its push for an IPO.

Why it’s Unfair to Compare Uber to Transit

Understanding the economics of ride hailing is essential to realizing that Uber is not competitive with public transit. Since its founding in 2009, Uber has consistently expanded its focus from competing with limousines to disrupting the existing state of affairs in the taxi industry, delivery services, trucking, and even public transit. Its goal is not to be a competitor, but to achieve a dominant market position in the transportation sector by offering lower prices to drive its competitors out of business.

After examining Uber’s financials, Horan estimates that “passengers [are] paying only 41% of the actual cost of their trips,” which is only possible by spending huge amounts of venture capital money to subsidize the trip cost. It’s this massive subsidy, with the goal of driving out competition, that is causing Uber’s unsustainable financial situation; and given that the company is swiftly running out of money, it will not achieve the market dominance its business model requires before being forced to raise prices or be pushed out of business altogether.

Uber’s passengers are only paying 41% of the real cost of their ride — and that’s costing the company billions

Were Uber required to operate at a profit, its fares would be much higher than they are at the moment — far more than public transit and likely more than most taxis — but it can’t raise its prices before eliminating its competition because most of its riders will simply switch to another transit mode or not take their trip at all — remember that 49–61 percent figure from earlier? — and it can’t rely on driverless cars to save it.

Even with massive fare subsidization, only uberPOOL is able to offer fares competitive with transit, but moving away from economics for a moment, what about ethics? Yes, fares may be similar, but whereas transit workers are unionized, well-paid, have good benefits, and dependable hours; drivers for ride-hailing companies have no benefits, few rights, and they have to pay for their own vehicles and expenses from wages which Uber has consistently cut over the past few years. Further, while transit provides a more efficient way to move around the city which reduces traffic congestion, ride hailing is putting more cars on the road and making congestion worse.

The argument that ride hailing is competitive with transit can only be made by ignoring Uber’s dire financial situation and its exploitative business model, but these things should not be ignored by anyone making a serious comparison. The company is using temporarily low pricing to draw riders away from transit, increasing congestion and potentially reducing transit investment where it’s most needed in the process. Uber’s prices will have to rise at some point in the future, and the more it transforms our transportation systems before that occurs, the greater the shock will be to riders and to cities.