The companies are already unprofitable, and facing strict regulation.
One of my favorite things to ask rideshare drivers is whether and how they calculate their earnings: Do they keep track of hourly wages, how important are incentive bonuses, how do they maximize fuel efficiency and minimize expensive wear on their car, etc. The answers vary wildly, as do the reasons that people drive. Some do only infrequently, as a way to make extra money; some drive as a placeholder in between jobs; some drive more or less full-time (setting their own hours, of course).
Unsurprisingly, those who drive the least tend to worry the least about their “wage.” On the other end of the spectrum, I once had a fascinating hour-long discussion with a driver — the type of guy who trades stocks at home and is actually good at it — who told me about the second Prius he bought for driving, his elaborate balance sheets, and, most interestingly, how he refused to share his trade secrets with other drivers.
The upshot of all of this is that it’s remarkably difficult for rideshare drivers to make minimum wage, which has led to the recent push in the California assembly to reclassify them as employees, rather than independent contractors. This would mandate minimum wages, health benefits, and sick leave — and could cost Uber and Lyft hundreds of millions of dollars.
Which would be fine if these companies were enjoying healthy profit margins off of unregulated labor. But, as Josh Barro asked of Uber in a New York magazine article, “does this company not like money?” It doesn’t seem to. Uber lost about $3 billion last year (Lyft, a much smaller company, didn’t do any better, losing $911 million.
In its S-1 filing, or prospectus for investors, before its disastrous IPO, Uber outlined exactly how it expects to continue losing money. In essence, Uber sells its product below cost in an effort to crowd out other market competitors, who are also selling their products below cost. And even if competitors start selling at cost or are driven out of the market, Uber still must sell below cost, to compete with public transit and private cars.
The other factor driving Uber’s losses in that its vaunted “surge pricing” mechanism has been partially rolled back. This practice — matching driver supply with rider demand by decreasing pay when demand is low and increasing it during peak hours — created a double backlash. Drivers would be deterred from coming back to work after a low-paying day, and riders had an even more negative reaction to large price spikes. Without this at the center of Uber’s strategy, it’s left selling consistently below cost in an effort to maintain a workforce and ridership.
So Uber is effectively a middleman for a money transfer from venture-capital (VC) firms to consumers. It takes a loss on every ride, subsidized by a massive valuation that looks increasingly like a fairy tale.
Some reply that Uber will be fine; it just needs to hold out until the coming introduction of self-driving cars. But that just makes this a race against time: Mandates on disability compensation, minimum wage, and overtime could drive up labor costs 30 percent, making it difficult for Uber to survive until technology renders drivers unnecessary — whenever that ends up being.
Uber and Lyft may be able to absorb these costs for a short time if investors still think there is hope for the company. But the IPO debacle — in which it significantly underperformed its private valuation — shows that confidence may be waning.
California’s bill is expected to be heavily modified and of course would apply only in one state. But California accounts for a sixth of Uber’s and a quarter of Lyft’s business, containing the critical Bay Area and Los Angeles regions, which are dense and car-centric enough for ridesharing to make a tolerable profit margin.
And if the bill is a model for the nation, especially the urban and progressive areas where ridesharing is most common, Uber and Lyft could be bubbles on the verge of popping. They both have flawed business models. They expanded far too quickly due to massive valuations. And they face an increasingly hostile regulatory environment, from London to New York to San Francisco.
The “gig economy” was hailed or reviled as the future of employment: flexible, bare-bones, crowdsourced. But the “side hustle” (in Uber’s words) dream has faded, as drivers discover that expenses such as maintenance and gas severely eat into their earnings and realize they’d prefer a traditional job with benefits.
The struggles of gig apps are emblematic of a larger weakness in the tech sector. Armed with ever-increasing amounts of capital, VC firms have embraced the “blitzscaling” approach — rapid expansion in an effort to capture an overwhelming market share. Last year, 81 percent of the ventures that went public had been unprofitable the year before. The last year this happened? 2000, the year before the dotcom bubble burst. Blitzscaling can lead to large-scale success, but also to the replication of fundamental flaws at scale.
It’s somewhat startling to think that these companies, which transformed how urbanites got around (and how drunk teenagers got home safely) could someday go away. I use Uber frequently along with public transit; its disappearance might force me to take a long-overdue trip to the DMV to get my license.
In the end, the changes to the urban landscape will probably be for the good. The congestion problems plaguing so many cities may be alleviated, and public transit, less obtrusive to pedestrians and environmentally preferable to cars, could finally have its day in the sun. Car ownership is down among young adults, and a less car-centric environment would favor the pedestrian and the neighborhood over the car and the suburb. And I could stop worrying about the ratings drivers give me.