Uber and Lyft’s Business Model Is Not a Business Model

Nobody should be thinking they’re necessary for the future

Photo by Achim Pock on Unsplash

𝙴xploiting a bad business model with a fancier, bad, and complicated one doesn’t make you an innovator. In fact, with the advent of technology, most applications have allowed their makers to play Houdini in the face of controversy. Application teflon has become the norm going forward.

The appification of the taxi service has brought along advocates — mostly through its simplicity and cost-effectiveness. But these things haven’t come without major caveats — and those caveats are the detriment to their drivers.

Cheap rides and hefty fees.

Both Uber and Lyft have had an inverse relationship between their commission they charge drivers and the total cost of their rides for customers. This makes sense for a business that wants to grow a base of users, but it kills the livelihood of the drivers in the process.

There is no historic data on what Uber’s commission used to be on driver fare, but there have been estimates that they used to be as low as 5–10%. In California, that partner commission, today, is now 25%.

This is happening in conjunction with rides becoming cheaper than ever. Uber and Lyft’s business model has come at the expense of the driver’s ongoing misery. According to Rani Molla on VOX, the wages for Uber drivers justify this history:

“The median hourly pay with tip for Uber drivers in the U.S. is $14.73, according to a new study conducted by Ridester, a publication that focuses on the ride-hail industry. That figure includes tips but doesn’t account for expenses like insurance, gas and car depreciation incurred while working. Using Ridester’s low-end estimate of $5 per hour in vehicle costs, drivers would bring in $9.73 per hour and potentially much less.”

In the past, Uber has claimed that its drivers were making anything from $70,000 to $90,000 in major markets. However, the evidence doesn’t seem to add up.

But what’s worse than that is the fact that Uber could have a decent business model if they wanted.

Where the hell is all of Uber and Lyft’s money going?

In Uber’s recent financial filings, their Q2 2020 gross bookings were $10.2 billion. This is a pretty big drop from their year-ago gross bookings that clocked in at $15.7 billion.

Obviously, Uber doesn’t keep all of this money. Most of that money goes to the drivers, and the rest goes toward incentives, refunds, and taxes. In this recent filing, their revenue figure stood at $2.241 billion. The total cost of those revenues, which includes salaries, operations, support, sales, marketing, research/development, etc, sum to a grand total of $3.848 billion.

In this recent quarter, that left Uber with a $1.775 billion loss. In fact, for both Uber and Lyft, the trend of growing its user base is literally coming at the cost of not only its own business but the business of their drivers, too.

Uber’s earnings per share on the left and Lyft’s net income on the right. Source: Investor relations; Uber and Lyft.

Both of these companies are not unfamiliar with burning through cash (at accelerating rates). In both of their cases, there is a simple addendum: Their graphs are deceiving, since 2020 is only half-way done, it’s likely that they’ll both curve downward to reach a figure far below the trough of 2019. That data is yet to be determined.

Even including Uber’s latest purchase of Postmates, its cash and cash equivalents have dwindled from $10.87 billion at the end of 2019 to $6.754 billion at the end of June 30, 2020. In a trajectory that suggests management is happy to burn through so much money, why don’t the drivers get a normal wage or basic benefits such as healthcare? Why are the drivers taking larger cuts off their fare while also getting cheaper rides over time? For Uber and Lyft, it feels like the drivers are disposable numbers designed to exist solely for the purpose of growing some ghostly company that has no real affiliation with them at all.

In other words, why aren’t they employees instead of independent contractors?

The art of the app and the exit of the insiders.

Well, they’re innovators, you might say. They’ve revolutionized the way the taxi industry works. When you are too slow to adapt, you get left behind. Innovation should award the capitalist.

Except, this isn’t capitalism. This isn’t the story about how a new technology is transforming the taxi industry from the ground-up.

Uber is marred with issues, from thousands of rape allegations, to a sexist “bro” culture, to a mess of all sorts of lawsuits. In 2018, the company’s founder and CEO, Travis Kalanick, was ousted from the company. In 2019, he sold all of his stock, amounting to more than $2.5 billion.

Uber hasn’t seen stock prices as high as 2019’s. In fact, the way its trajectory has shaped out, it’s likely to not see those prices for a long time — if ever. Uber’s go-to defense in battling allegations is that the application is just a tool that drivers use. Uber is the servicer of that application, and it has no control over the controversies that drivers find themselves in. In almost every case that has occurred involving Uber and Lyft, they’ve found that twisted defense to be sufficient in absolving themselves of guilt.

Uber has claimed that it has ‘zero’ drivers in the past. This is for the exact intention of sheltering it from liability in lawsuits. When our favorite application-based taxi service is distancing itself from any responsibility of wrongdoing, we should begin to question the true intention of the business model altogether.

It begins to look like an exit-scheme for the people at the top. It looks like a Ponzi-scheme designed for those like an ousted CEO who can sell off his entire stake for just a bit under $3 billion in cash and walk away. All while a company attempts to calm investors by telling them that they’re

  1. growing at a fast pace.
  2. innovating.
  3. lowering driver pay.

Technology is a good thing, but Uber and Lyft are not technology in this form.

Innovation on its own, independent of human evil and greed, is a beautiful thing. But, in their current form, neither Uber nor Lyft have a sound business model to service everyone involved.

The fares for the rides are far too low. This hurts the drivers who need to take home something for the work they’ve done. Uber and Lyft are content with this because they know that, with the current plan, they can eventually weather that storm. Drivers can’t, unfortunately. But they don’t seem to care about that reality.

The partner commission is insane. Taking as much as 25% is quite an abnormal figure. Maybe if the fares were higher, the company could justify this percentage. If you are compounding lower fares with rising partner commission, the person you are squeezing is the one keeping your business pseudo-functional.

In other words, if you are simply using an application as a way to pull users and kill your ‘partner’ base, I don’t see how the business is meant to survive long-term. Investors will surely get tired of funneling more money into a sinking ship. But the ship probably won’t sink for the people with the largest holdings. Those people, much like Travis Kalanick, will jump ship far before. The masses holding onto the belief that Uber is the future will lose. Much like the masses lost during the craze of the dot-com bubble.

Uber and Lyft seem like disgusting ways to transfer wealth from the have-nots to those that have massive quantities. And it does so by claiming its stake in the stage of technological development. Even when there is very little technology involved and even when there is no end in sight to its happy cash-burning spree. All that seems to matter is that there is glitter and a semblance of application magic.

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Anthony Andranik Moumjian

Written by

UC Berkeley, mathematics. Los Angeles. Long-time runner. Top writer on Quora, 100M+ total content views. New to Medium. Inquiries: Moumj@berkeley.edu

The Startup

Get smarter at building your thing. Follow to join The Startup’s +8 million monthly readers & +724K followers.

Anthony Andranik Moumjian

Written by

UC Berkeley, mathematics. Los Angeles. Long-time runner. Top writer on Quora, 100M+ total content views. New to Medium. Inquiries: Moumj@berkeley.edu

The Startup

Get smarter at building your thing. Follow to join The Startup’s +8 million monthly readers & +724K followers.

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