The rideshare company Uber took losses of 1.2 billion dollars in just the first half of 2016. This loss may come as a surprise to many people. Uber was founded in 2009 and has since become a hugely popular service, now available in two hundred and nine cities across the United States and in eighty one countries. The company was reported to be worth 62.5 billion dollars in 2016, making it worth more than General Motors Co. and Ford as well as eighty percent of the S&P 500. Yet still many are saying that Uber is destined to fail, that its losses sustained in 2016 are only the beginning. How could that be?
To start, some view Uber as being in a high expense/high capital business. In order to have enough drivers it must hire people who do not have cars. According to Erik Gordon, a professor at the University of Michigan’s Ross School of Business, this means that Uber has to finance the purchase of cars for these drivers and it ends up racking up high expenses in the process. Uber doesn’t simply buy cars and ship them out, however. New drivers in need of a car can make use of various partnerships Uber has to rent, lease, or buy a car of their own. Uber recently partnered with GM’s new ride sharing service, Maven, which will allow Uber drivers to rent and use cars flexibly on a weekly basis.
A larger concern that seems to be shared more widely is that Uber is operating in a market without any barriers to entry. Uber’s product is an app, one which already has been successfully duplicated. It has already seen the downside here in the emergence of its largest competitor, Lyft. In this market consumers are looking for a ride that is cheap, fast, and lacking the unpleasant aspects sometimes found using a taxi service. That means there are few things that can set firms apart in the ride sharing business. Uber can try to be faster and provide a more pleasant experience, but these factors are largely dependent on the drivers they hire, all of whom work to the beat of their own drums (one of the reasons people are drawn to drive for Uber). That just leaves the price factor. Uber can lower their fares and try to attract more customers away from their ride sharing competitors and taxis, and they have done so multiple times now. This creates a bit of a vicious circle, however. Uber’s competitors can only respond by dropping their rates to match or beat Uber’s. In this back and forth, rates would eventually drop to merely equal costs (mostly made up of fuel costs).
According to Dr. Joe Sulmona, a transportation strategist and economist based in Vancouver, this “destructive competition” could spell huge trouble for firms like Uber. Destructive competition drives prices so low, at some point it comes apart because people can’t make a living at it, he says. If this happens, Uber will lose drivers and those that remain will have very little incentive to operate with any safety or reliability. Once it becomes clear to consumers that Uber is not to be trusted, that will spell the end.