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Student essay: Will Uber ever be profitable?

Geoff Riley

23rd September 2019

Year 12 student Max Ghose has written this superb introductory micro essay on Uber.

Uber is a company best known for its platform that hails drivers for app-using riders, which has revolutionised the taxi industry. Uber also offers services such as food delivery and ridesharing, and is attempting to diversify into over ventures, such as the development of autonomous vehicles. Despite its fast-paced rise, since its first round of major funding back in late 2010, it has struggled with the profitability of its business model.

Having gone public in May 2019, Uber offered $45 dollar per share, but the share price has rapidly declined in recent months, now hovering just over $30. Furthermore, in the second financial quarter, Uber reported net losses exceeding $5 billion, somewhat more than the $3.3 billion net loss analysts were expecting. Uber is pitching itself as the ‘next Amazon’ to justify its heavy losses and continued depletion of its cash reserves for investments. But unlike Amazon, Uber has some major competition in its sector, competition that is unlikely to back down any time soon.

Uber has a competition problem. When Lyft emerged as a serious rival, it looked like a major threat to Uber’s success. Lyft was a cheaper alternative which forced Uber to create UberX, a low-fare option, in 2012. While Uber was able to remain competitive with Lyft, the financial consequences were undesirable. Uber lost on average 58 cents for each of the 5.2 billion trips riders took in 2018. This battle to undercut competitors is not only being fought against Lyft, but also the hundreds of publicly owned transport options and local start-ups Uber is competing against in emerging markets. Uber even had to sell their businesses in Russia, China & South East Asia, to Yandex, Didi Chuxing and Grab respectively. They took this course of action as they were being undercut significantly by rivals in areas they were expanding into. These local rivals, such as local taxi firms, public transport or even other tech-centred hailing of taxis often had strong ties to the local community and government, sometimes even being subsidised by the government itself. With such fierce competition for industry domination, Uber is forced to lower prices where it can, consequently causing an immense loss in revenue, to the point where their service is very much unprofitable and actively losing money.

Another factor for Uber’s unprofitability is the very costly process of expanding their business into foreign metropolitan areas. One noticeable flaw would be that when expanding to new urban centres, drivers need passengers before they’ll commit to driving; whereas passengers need drivers before they’ll want to ride. Uber has tried to fix this problem by initially lowering the cost for riders and increasing pay to drivers, to try and attract initial interest and cement their presence. The idea is that as Uber’s market share will increase in these locations due to Uber’s favourable subsidies.

However, under this theme of expansion, profit is non-existent and is depleting the reserves of the company at an unsustainable rate.

Uber is mirroring other big technology companies by making large investments into the diversification of the business. It is entering the race for autonomous vehicles, spending almost half a billion dollars last year alone on its various projects to develop autonomous technology. Uber has ambitious goals to be an important player in innovative technologies such as self-driving vehicles, which if implemented into Uber’s model would colossally reduce costs, and air transport. This culminates in Uber spending more than $1.5 billion on Research and Development in 2018 alone. While companies shouldn’t aim to lack ambition and foresight concerning the possible dominant technologies of the future, this heavy focus on Research and Development doesn’t yield immediate returns and further enforces the unprofitability, certainly short-term, of Uber.

Uber simply struggles retaining drivers. An astonishing 96% of Uber drivers stop driving for the company after less than a year. Considering the low costs associated with switching from Uber to a competitor, the turnover of drivers is noticeably high. The increasing dissatisfaction of drivers with the company over wage retention and other employment issues (although technically Uber is not their employer and the company eagerly refers to drivers as independent partners). Less Uber drivers on the streets decreases the number of rides Uber makes money from. It would not be in Uber’s interest, from a perspective of profitability, to have less ‘partner-drivers’, even if rides became more expensive from a shortage of drivers.

All these factors raise the question whether Uber will ever be profitable in the long run. There have been various solutions to turn Uber into a profitable company, or at least one that isn’t losing so much money at their current rate.

It has been suggested that it is time for Uber to finally raise their prices for services such as UberX and Uberblack. Although, this would probably cause a mass exodus of riders to cheaper rivals. Lyft and subsidised local transport are already cheaper than Uber, so increasing the difference in price will do nothing but further doom the company. Due to the accessibility of apps like Lyft, which only take a couple of minutes to switch over to, Uber would be foolish to hurt their users in such a way. Taking into account Uber’s infamously poor customer retention, in part due to a lacklustre loyalty program, this in not a route the company should take to increase income.

A slightly less obvious way for Uber to increase income would be to spend its cash reserves on acquisitions to establish a larger market share in the industry, certainly in newer markets. More market dominance allows Uber to have greater flexibility when it comes to pricing power. Although, this strategy would have to be a case-by-case basis, due to the vastly different laws and options in each jurisdiction where Uber operates. Anti-trust laws can often stand in the way of such acquisitions, certainly in Europe, while in other areas smaller competition is usually at least partially owned already by one of Uber’s big rivals, such as Lyft, making the possibility of a buyout unlikely.

Uber’s CEO, at the time of its IPO, said that Uber ‘may never be profitable’. Despite its fast and convenient services, such as UberX, it is not feasible Uber can carry on at the same rate. Their business model of sacrificing profit for growth, is attempting to replicate, as the Uber executives constantly say, Amazon’s business model of expansion and dominance without profitability. But companies like Amazon and Facebook did not have the type od fierce competition Uber does. In addition to all of Uber’s potential shortcomings and hazards, there is always the everpresent risk that politicians intervene in the technology sector, by breaking up companies such as Uber. If Uber is to make profit in the future, it will probably require a different approach to its continued expansions, because as previously mentioned, Uber has failed before trough costly expansion into Russia and Asia, depleting its cash reserves and further financially endangering the country.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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