10 minute read

The Economics Of Ridesharing

The Bumpy Road Ahead    10 minute read

The Economics Of Ridesharing

All over the world, ridesharing apps provide passengers with cheaper fares and are raising billions in capital. While the industry is still in its infancy, it has already changed private transportation.

Uber is the biggest player in Europe, North America and Australia, while Ola is in the lead in India and Didi rules the Chinese market. Although these companies have managed to attract millions of active users per month, they haven’t done so without making their fair share of powerful enemies.

40m is the number of Uber’s
monthly active users

Uber is often at the centre of controversies, usually related to its running up against and sometimes breaking regulations applicable to the private transport and taxi industries in various countries.

It has also generated controversy due to its impact on established taxi companies and drivers, who have had to adapt to new ways of doing business and lower prices. Uber’s effect on existing industry players has certainly met resistance and generated anger, and the opposition to Uber and other ride-sharing platforms has also led to governmental and regulatory attempts to limit the impact of this technological change, if only to provide some reprieve to millions of taxi drivers who have found their industry suddenly ‘disrupted’. Yet, despite these efforts, ridesharing apps have made incredible profits and have managed to overcome most obstacles to date.

Drive and Strive

Ridesharing apps like Uber or Didi are available to anyone with a smartphone. They pair up the users with the drivers, who use their own vehicles to perform the service.

The business model is similar to that of a regular taxi, but the companies insist the drivers are freelancers because they use their own vehicles. Ridesharing apps have become massively popular all over the world, and millions of people prefer using the service to waiting for a traditional taxi.

Uber is currently available in 500 cities worldwide and more than 70 countries. Within its main market, the United States, the company estimates that it has now captured 84%-87% of the overall market.

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What Is Available?

Gett, based in Israel, does business in more than 100 cities across the world and is known for having lower prices than Uber and Lyft. Unlike its competitors, Gett pays its drivers an hourly wage.

Juno, which is still in a beta phase, markets itself as more competitive for drivers as it only charges 10% commission on the fare, compared to Uber’s 30%.

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Curb, on the other hand, uses taxi drivers in its services but has the advantage of being able to schedule a future ride for customers who prefer to plan ahead.

Summon is a smaller company that only offers rides in California at the moment, but provides flat prices that stay unchanged regardless of the duration of the journey.

But none of these companies can compete with Uber’s giant market share.

The Big Bucks

Still a private company with no known plans to file for an IPO anytime soon, Uber keeps raising capital through rounds of investment. In June, the company raised $3.5bn investment from Saudi Arabia’s public investment fund and $2bn in the leveraged loan market.

$15bn Total private capital raised by Uber

At the moment, the company is valued at approximately $68bn, a surprising amount considering it only saw profits in the second quarter of 2016 at a low rate of $0.19 per ride in the US and Canada market.

Financial Concerns

The fact that Uber is still losing money does not seem to scare away the investors who are willing to bet billions on the company. However, investor confidence in the company seems to rely more on the future potential than on current balance sheet. Just like its revenues, the losses have also reportedly increased every year.

Still a private company, Uber has been very keen on revealing as little information as possible about its overall financial situation. However, according to several reports, the company lost approximately $50m in the fiscal year of 2013. This number went up to $671m in 2014 and to $1bn the following year. According to Bloomberg, the company saw $1.27bn in losses in the first half of 2016.

$1.27bn is how much Uber reportedly lost
in the first half of 2016

However, the losses are closely related to the long battle Uber has been fighting in Asia, where it has been struggling to gain a considerable share of the market due to fierce and vast competition in several local countries.

The Chinese Deal

Didi Chuxing, the Chinese equivalent of Uber, was created when Alibaba and Tencent decided to merge the largest ridesharing apps in the region. So far, Didi received $1bn investment from Apple and will likely release an English version of the app in the near future. One of the advantages of the app is that users can request a ride with China’s most popular chatting app, WeChat.

Uber spent an estimated $2bn in the Chinese market but ended up admitting defeat and merging with the competitor in a $35bn deal, receiving a 20% stake in Didi.

In India, Uber’s expansion has also encountered plenty of roadblocks. In 2015, company executives announced plans to spend $1bn in the country. However, the American startup is competing against the local company Ola.

Ola expanded massively within the Indian market after buying a lot of up-and-coming apps. When Uber tried to get a piece of the pie, it was already too late. Ola is attractive to its users because it offers multiple services and takes cash payments as well as cards. Now, it even has a rickshaw service in several cities of the country.

When the Law Wins

Some of the biggest challenges to date for ridesharing apps are related to legislation in different markets. The apps are facing serious backlash on multiple fronts, having managed to generate anger and disdain from local governments, taxi drivers and taxi companies. The disruptive effect of Uber and other ridesharing apps has generated a fight-back,

Taxi drivers pose a particularly strong threat to ridesharing apps. For example, they want ridesharing drivers to pay the same taxes as they do.

In Canada, for example, taxi drivers argue that Uber stole half of their business and, in July 2015 sued the company for $400m. In France, everything took an even more serious turn when the government decided to back the taxi drivers’ complaints, and some Uber managers were arrested for providing illegal taxi services.

The company also faced some harsh regulation in Germany when courts ruled that the company had violated the law by employing drivers without a proper license for transport. The company is currently facing legal actions in approximately 30 countries.

Highway To Where?

Uber drivers have not had an easy time either, and the future does not look so bright. Besides being the target of intimidation, harassment and violence from angry taxi drivers all over the world, their situation is often more precarious than the company lets on.

There have been several reports revealing the behind-the-scenes story of being an Uber driver that point towards precarious employment prospects and uncertain wages, depending on where the driver works. Drivers are independent contractors and, therefore, are paid a portion of the fare for every ride. So, the more rides they provide, the more they get paid. But when times are slow, driver incomes could suffer badly with no safety net of an hourly wage or company support.

$23is how much some Uber drivers
make per hour

Studies have pointed out that, in cities like New York or Los Angeles where there is a high demand, Uber drivers can make between $19 and $23 per hour. This is an appetising sum, considerably higher than most typical minimum wage jobs. Plus, the drivers can get tips on top of their earnings. The estimated annual earnings of an Uber driver in New York City is $80,839. On the other hand, demand can be much lower in smaller, less-populated cities, and the experience in New York is not necessarily representative of the average life of an Uber driver.

Some drivers in countries like the UK have grouped and tried to establish a labour union to fight against the fact that Uber describes itself not as an employer, but as a platform through which drivers and riders communicate. They want to be entitled to sick leave, paid holidays and working conditions adapted to the new technologies. They are facing an uphill battle in convincing Uber to change, and it is unclear if Uber can maintain its competitive advantage if traditional labour models are applied to what investors and management hope to maintain as a platform (and not as a traditional taxi company).

The Future Is Coming

Another possible threat to the future ridesharing drivers is the looming dawn of self-driving cars. For years, Silicon Valley has been hard at work to create, develop and test the technology, which promises to transform transportation, particularly when combined with new low- and zero-carbon emissions technologies.

This development could be either bad news or an incredible opportunity for companies that specialise in facilitating rides. What would happen if these apps could provide the rides without having to pay the drivers because of the simple fact that there would be no more need for them?

In 2015, Uber partnered up with a few dozens researchers to develop self-driving technology, and now the technology is being tested, with riders being driven around by cars that drive themselves.

However, even if Uber is successful in deploying the technology at a pace that allows it to remain competitive in a fast-paced, ever-changing market, it will face even fiercer competition than it does now with the taxi industry. Google has been testing its own self-driving technology for years and now Alphabet, Google’s mother company, has Waymo, a company that manufactures autonomous vehicles. At the same time, traditional car manufacturers can also join both the self-driving and ridesharing markets.

Looking Through the Windshield

While Uber seems to be in healthy shape, with enough capital to venture itself into “dangerous” territories for years to come, the company is experiencing battles on multiple fronts and will likely face even tougher adversaries in the future.

While developing technologies and trying to stay competitive, attract new drivers and new customers while keeping the old ones, ridesharing apps will have to deal with the growing number of ongoing lawsuits around the world.

An IPO would make Uber the first public company of its kind and shed light on its future plans and current balance sheets, increasing insight into this developing and ever more important industry that moves millions, if not billions of people a year. However, the start-up is not having trouble raising capital privately, which indicates that the public might not be able to anticipate, for now, the future of their getting from point A to point B.

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