If you're curious and want to read more, here are the business model posts so far:
Now, moving onto #6 in the series...
Uber and Lyft, two of the world's most notorious "start-ups" are now publicly traded. "Start-ups" is in air-quotes because cumulatively, the pair lost nearly $4 billion last year. Uber's allocation is 3/4th's of those losses as the ridesharing behemoth cements its reputation around the world.
This will be an exploration of the two companies and the ridesharing space as a whole.
First, let's get a lay of the land. We know Uber and Lyft are big but how do they compare?
Uber stats:
# of countries: 63
# of cities: 700
Annual sales: $11.3 billion
Annual losses: $3 billion
Gross bookings: $49.8 billion
Drivers: 3.9 million
Monthly riders: 91 million
Lyft stats:
# of countries: 2
# of cities: 300
Annual sales: $2.2 billion
Annual losses: $1 billion
Gross bookings: $8.1 billion
Drivers: 1.1 million
Monthly riders: 18.6 million
Off the bat, you can see that Uber has a much bigger presence internationally. The company recently added 14 countries by acquiring the "Uber of the Middle East" Careem for $3.1 billion. On the other hand, Lyft only started expanding outside of the US into Canada in 2017.
But let's start off with what we're here for: the business model.
I'm fairly certain most of you have ridden in either an Uber or a Lyft. You downloaded the app, added your credit card, typed in where you wanted to go, waited a few minutes and soon you were having an awkward conversation with a stranger.
Fair Breakdown?
Pretend your ride to the airport was $30. Uber would take its cut and then the driver would retain most of the fareTo be clear, Uber drivers are not employees but rather independent contractors. This means Uber can take advan- oops I mean, this way Uber can manage such a huge fleet of drivers. Imagine paying health insurance for 3.9 million people. At a rock-bottom price of $100 per year, that would be $390 million in additional expenses.
Since Uber drivers are independent contractors, they don't get paid hourly or by salary (I'm a poet and I know it). They are paid on a commission basis and all of the lead generation is done through Uber's app. Therefore, the drivers don't have much leverage.
There are really only a few things an Uber driver can do to increase her earnings: get a fancier car, become a professional driver, or driver faster. The vast majority of people driving for Uber aren't looking for a career; they are looking for extra cash. So options #1 and #2 probably aren't feasible. And option #3 is just dangerous and won't make for very good customer reviews.
Let's break it down and see how much an average Uber driver can make in an hour.
This is the fare breakdown in LA. For instance, from where I live, a trip to the airport takes about 27 minutes and is a distance of 8.5 miles. This means I would pay: $2.30 + $5.80 + (27 * $0.28) + (8.5 * $.0.80) + 15% tip = $25.8
And then Uber would take its piece of the pie. Judging from its IPO prospectus, it takes about 21% of the total price. You can calculate that by taking the adjusted ridesharing revenue and dividing it by the gross bookings. In 2018, Uber did $41.5 billion in gross bookings and about $9 billion in adjusted ridesharing revenues. So it comes out to about 21%.
So on that $25.8, the driver will take home $20.4. But that's not all; deductions need to be made for gas, car insurance, registration, maintenance, and any car payments.
If the car gets 20 mpg and gas is $4 per gallon (typical California), then the driver has $3.4 in gas expenses for that trip (if she came from the airport to pick me up (8.5 miles * 2)).
So maybe we round up the total expenses to $6 for that trip. Therefore, the driver really brought in $14.4 in 27 minutes. Pretty solid depending on Uber's algorithm. If the driver had to come from the airport alone, then that would be almost $15/hour but if she already had a trip with someone in the car, then the earnings could be nearly $30/hour. Definitely a big difference.
My guess is that the truth lies somewhere in the middle. Another consideration is how long Uber drivers have to wait. This varies a lot by the time of day but Uber drivers probably aren't getting ride after ride. My guess is that, all things considered, Uber drivers in LA make about $18-20 per hour.
Not bad. No wonder 3.9 million people have signed up to driver for Uber. Considering that 1 billion people own a car worldwide, Uber isn't even at .4% penetration. But the problem down-the-line isn't getting people to sign up to driver for Uber. The problem is that, in this industry, economies of scale don't go beyond local geographies.
For example, if there are 100,000 Uber drivers in LA and the average wait-time for a rider is 5 minutes, what is the incremental benefit of signing up 30,000 more drivers to get the wait-time down to 3 minutes? Does it really matter or is 5 minutes of wait-time pretty painless?
Plus, that extra 30,000 of supply, will probably drive prices lower which will result in more Uber drivers leaving because they aren't making enough per hour. The problem here for Uber is that it typically costs them a lot of money to on-board drivers because they offer referrals and incentives. But at a certain point, it becomes a bad investment.
Price vs. Experience
Then layer in Lyft as a fierce competitor and it becomes a tough ballgame. Uber, in LA specifically, doesn't have a scale advantage over Lyft, so why would a rider pick one over the other?
Most likely: price.
Sure, some people just get into a routine and always go with the more well-known brand like Uber, but the experience is essentially the same. As long as you don't have to wait 5 more minutes for a Lyft, price becomes the main selling point.
Lyft has tried to leverage its brand as a selling point, but it might be difficult.
If Lyft spends more money to make their drivers happier, maybe the drivers will give riders a more pleasant experience, increasing retention. But then, Lyft will probably need to raise prices for riders or take more of each transaction from the drivers. These are the economics of experience.
However, there is one caveat. The underlying principle from economics is that resources are scarce. For these two companies, this principle, at least in the short term, is being violated. There is a reason both Lyft and Uber went public at the time they did.
MONEY.
Lyft raised $3.5 billion and Uber raised $8 billion. Right now, Lyft might not have to choose between treating drivers better and raising prices. That's a fool's choice when you have nearly $4 billion in the bank.
However, reality will catch up. One day, these economic principles will reign.
There is another interesting aspect at play which is international expansion.
Lyft has been laser-focused on the US. But Uber has expanded a ton internationally (probably too much). Once again, it comes back to the economies of scale issue.
Ridesharing does not scale globally. Acquiring a driver in Mumbai does not help Uber in LA. Sure, it helps scale the brand and that's why some people will only order from Uber the rest of their lives.
But I doubt that's the case for most people. Since the value proposition is localized, price and experience are the main factors. Lyft has an advantage in that it is focused only on the US. Whereas, each dollar that Uber spends to make the price or experience better internationally, means one less dollar that it can do so in the US where Lyft is doubling down.
Optionality
And we haven't even talked about UberEats or UberFreight yet. Uber is doing some really interesting things by leveraging its drivers to help out in other ways. Rather than compete on price and experience for ridesharing, the company is leveraging additional capabilities.
Imagine you're an Uber driver and you just dropped someone off. Then you get a notification to go to a nearby restaurant to pick up an UberEats order. You could make some more money by not having to wait as long. And Uber would be increasing its driver utilization, making themselves more money in the process.
I'm more excited about UberEats and UberFreight than its core ridesharing business. In food delivery, it already has more localized scale versus competitors like DoorDash and GrubHub. Competition is relative. Uber has bigger scale advantages in food delivery than it does in ridesharing because Lyft is so pervasive in the US now.
Another big component for Uber and Lyft is autonomous vehicles. Some people say this will be THE most important factor for these companies because it is the crux for profitability. Last year, Uber lost $3 billion and Lyft lost nearly $1 billion. While it's slowly getting better relative to the sales numbers, it will be tough for the companies to be profitable in the long term, especially as they each try to compete on price and experience. Remember, the economic reality always wins out.
Let's think about how this would work for a minute.
- Would a company own a fleet of self-driving cars and then unleash them on humanity?
- Would the company buy them or manufacture these cars?
- Would they even look like normal cars or could they fit more people since the seating arrangements don't necessarily have to be the same as they are now?
- Who would own the autonomous software?
So many questions…
Let's take a stab at what the future could look like and then work backwards from there.
As a caveat, this is some informed speculation, but the timeline of these developments is beyond my pay-grade.
Ok, back to the future (not the movie). Seeing as most people have a car, it would be an incredible amount of waste if those assets were not leveraged. A nice compromise would be if an autonomous software could be downloaded into any car with a computer. This would be a daunting task because I'm sure the circuitry is very different among different car manufacturers. Still, imagine you could make money off of your car by downloading this software and then it would autonomously go around and be a taxi, or should I say Uber, for people.
Further, more problems arise.
- How would insurance work?
- Would the software be so good that car insurance would go out of business?
- Would gas stations be converted to allow autonomous fill-ups?
OR
Will Elon Musk simply be the only one to manufacture autonomous vehicles at a reasonable price point? Maybe a downloadable software isn't even feasible? Plus, a gas-powered, autonomous vehicle seems like an oxymoron.
Maybe the price of an electric car will get so low that individuals would buy their own fleets and make passive income? Or maybe Tesla will create the autonomous software and license it to other car manufacturers?
It is difficult to tell where Uber and Lyft fit into all of this. For one, both companies are asset light. Owning a physical fleet would be a different ballgame altogether. So the likely case is a hybrid model where Lyft collaborates with autonomous driving companies.
And that has actually been the case already. At the beginning of 2018, Lyft partnered with Aptiv to put a few dozen self-driving BMWs on the road in Las Vegas. The value prop to Aptiv is a licensing funnel by utilizing Lyft's network of riders. The value prop to Lyft, of course, is the opportunity to piggyback on the technology.
But with this strategy, the short run is tough. First, Lyft and/or Uber must pay for the licensed technology and then they need to service the cars. A self-driving car can't throw away trash or charge by itself. Sure, the autonomous vehicle has a safety driver in these early stages, but that's the thing, you still have to pay him/her. All things considered, Lyft and Uber would likely take losses on each autonomous ride. Once the technology gets good enough where the safety driver is no longer needed, the value prop becomes clearer. However, that is probably still a few years away.
This hybrid network would utilize what Lyft and Uber are best at: being a really big transportation network.
A possible future scenario could be the following.
Waymo, Google's self-driving unit, could be the first company to make a solid autonomous software. Then Tesla, using its manufacturing capabilities could buy a license for Waymo's software. And the last layer would be Lyft and Uber as the network connecting riders to the autonomous vehicles.
It might look something like this:
Now this is a lot of pontificating, but this is a feasible route for an autonomous taxi network.
Coming back to reality, these hybrid networks will need to slowly add more autonomous vehicles over time. Human drivers are not going away just yet.
So what does all of this mean?
Well, it is clear that transportation is changing rapidly. Lyft and Uber are a duopoly that controls a vast majority of the ridesharing market. But there are some key considerations for both companies to become profitable one day.
First, they must not engage in a price war. If it becomes a race to 0, the riders will win and Lyft and Uber will hemorrhage cash until a smarter competitor swoops in.
Second, a hybrid network of autonomous vehicles could provide additional cost savings in the long, long run. In the short run, however, it would likely prove more expensive as the cars must be personally cared for.
Third, since scale benefits are localized, each company will probably venture into adjacent spaces to increase the utilization of the drivers (i.e. food delivery, personal shopping, etc.)
If I had to put my money on either Uber or Lyft for the next decade, it would be a tough one.
On one hand, I have more faith in Lyft's management. Plus, Lyft is more focused geographically which could be a real advantage. I also like how Lyft is trying to differentiate itself through branding and rider experience as capital is aplenty.
But on the other hand, Uber seems to be taking advantage of its optionality better than Lyft. UberEats and UberFreight are looking like they could be monster revenue segments one day. Plus, Uber has become a verb. Usually, a tell-tale sign of a moat.
Investors might be wise to just invest in both with equal amounts and let it ride. It is hard to tell which will be a better investment because both businesses have slightly different areas of focus.
All in all, it is clear ridesharing is a huge and growing trend. However, the path to profitability for both main players will likely be a rocky one since the scaling effects aren't global and autonomous networks are still a ways off.
One thing I can say for sure; it will be fun to see how this all plays out.
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