Uber Is Playing a $16 Billion Game of Chicken
Uber is losing *so* much money, but it won't raise prices. What gives?
Image: Mike Poresky/Flickr
Your current Uber experience is unsustainable.
A Bloombergreport Thursday revealed that Uber continues to lose an astounding amount of money as it tries to figure out a business model that works internationally. Uber lost $1.27 billion globally in the first half of 2016, according to the report. But more concerning for domestic riders is the fact that, after a profitable quarter in the United States, Uber is now once again losing money in the US market as it tries to use the enormous amount of financing it's raised ($16 billion) to destroy competitors such as Lyft.
In its quest to corner the ridesharing market, that has meant steep price discounts and promotional fares for consumers that are subsidized by Uber's investors. Uber lost $100 million domestically in the second quarter. Lyft isn't faring any better—its goal is to lose less than $50 million per month, according to the Bloomberg report.
"Uber has been engaged in a fierce price war with Lyft Inc. this year, and that has also contributed to the enormous losses," Bloomberg reporter Eric Newcomer wrote. "Uber told investors on Friday's call that it's willing to spend to maintain its market share in the US. The company told investors that it believes Uber has between 84 percent and 87 percent of the market in the US, according to a person familiar with the matter. One investor said that he was expecting Uber to continue losing money in the US for the next quarter or two."
The path Uber has been pursuing is one of dominance: Get people addicted to its service, push Lyft and traditional taxis out of the market by undercutting their prices, then jack up the prices once the market has been safely monopolized. It's a strategy that Wal-Mart nailed, and it's a path that Jet—which sought to undercut Amazon, which itself lost tons of money at the outset—was on before it sold to Wal-Mart. Hell, it's kind of the business model that has led to big telecom monopolies in cities around the US.
Uber is cutting prices to consumers to make you forget about Lyft, and Lyft is cutting prices in an attempt to remain relevant. Both companies are losing massive amounts of money. It doesn't take an economics degree to figure out what this means. The rideshare battle is not sustainable long term, meaning that one or more of the following have to be true:
- Rideshare drivers will be replaced with reliable autonomous vehicles
- Rideshare prices will increase significantly
- One or more rideshare companies will go bankrupt, pivot, or otherwise stop competing at the scale they are now
The big gamble both companies are making is that result #1 happens before result #2 or #3 does.
But even if we do see the rise of robotaxis in the near-term, there are a host of questions that could ultimately affect how much you pay for a ride: Who will own the cars? If it's Uber, how does that affect its bottom line considering that it currently doesn't pay for its own cars? Who will pay to perfect the technology? Will lobbying be necessary to get them on the road? Will Tesla, or Google, or Ford beat them to the punch?
Will money-sucking human drivers bleed the company dry before robotic reinforcements safely free it of its reliance on human labor?
These are (more than) billion dollar questions, and Uber's corner-the-market-at-all-costs strategy is a gamble that will go down in the history blogs one way or another: Will money-sucking human drivers bleed the company dry before robotic reinforcements safely free it of its reliance on human labor?
There are too many unknowns to say with any certainty how this is all going to play out.
Uber could very well end up rolling out autonomous cars and opt to keep prices the same in hopes of steering people away from car ownership. Uber could roll out autonomous cars, kill Lyft, and jack up the prices anyway. An endless supply of upstart, venture-funded competitors could start trying to undercut Uber and force it to keep prices low. In a few years, Tesla could flip a switch and suddenly transform its fleet of cars into taxis. Uber could perfect autonomous cars, continue to lose money because the technology is expensive, but receive government subsidies because Ubers are now so convenient and ingrained in our society that they become critical infrastructure. Uber's initial investors might get pissed off that they're not seeing a return on their investment and demand that Uber implement permanent surge pricing like, tomorrow.
The bottom line is that the current ridesharing experience can't continue as-is, and the evolution of ridesharing will be both the future of our economy and the future of transportation.