The $1.1 Billion Question: What Future is There For Uber and Ridehailing?

In May 2019, Uber posted its first post-Initial Public Offering (IPO) earnings report, reporting a net loss of US$1.1 billion for Q1 2019 in spite of growing earnings and monthly active users. While new ventures such as Uber Eats exhibited impressive growth rates of 89%, the core ride-hailing business only achieved a much more muted growth rate of 20%. Furthermore, Uber was able to grow its base of monthly active users by 33% over a period that also saw the brand retreat from Asia-Pacific (APAC) to consolidate its geographic coverage.

With so many of the metrics painting a rosy picture, the scale of the loss throws the intense cost pressures facing Uber into sharp relief and raises questions about the longevity of Uber’s land grab strategy and the sustainability of ride-hailing in general.

Uber has had a clear strategy since it began operating in 2010: to leverage key technology differentiators and the deep pockets of investors to outperform and undercut the alternative personal mobility options available to consumers.

Improved User Experience:Enabling consumers to book rides and make payments through a sleek smartphone application offered a step change in consumer convenience over the use of legacy taxi services, while dynamic pricing models improved the availability and reliability of the mobility service.

Reduced Costs: Uber’s investment in Artificial Intelligence (AI) and data analytics to optimize routing and demand response gave Uber a systematic cost advantage over legacy taxi services. The company was also able, thanks to considerable backing from investors, to finance subsidized rides for consumers.

As a result, Uber was able to run circles around public transportation (which lacks dynamism) and legacy taxi services (which cannot compete from a cost perspective), with the intention of adopting a profitable pricing structure once the market for personal mobility had been cornered and Uber became the go-to platform for both drivers and riders. However, it soon became apparent that the same factors that had driven Uber’s rapid expansion, i.e., strong data analytics competence, the universal smartphone, and financial backers with deep pockets, were by no means unique to Uber, which has increasingly found itself coming up against direct competitors offering an identical, indeed commoditized service, further depressing prices and increasing expenses related to driver retention.

In response, Uber began to reign in the land grab operation, exiting the APAC region and focusing instead on the core European and U.S. markets, retaining a 70% market share in the latter market and acquiring Careem to bolster its position in the Middle East and Africa (MEA). This raises an important question—how much market share does Uber need to be profitable? If a 70% share of the ride-hailing market in the world’s largest economy is not sufficient to deliver profitability, just what market dominance will it take for Uber to deliver anything close to profitability?

The current level of spending on subsidized rides and driver retention incentives is clearly unsustainable, for both Uber and Uber’s competitors. Rather than spending vast sums to subsidize both the supply (driver retention) and demand (below-cost fares) within a commodity marketplace, ride-hailing providers should target their investments at areas of true differentiation, and on technologies that can enable a step change in the mobility on-demand cost structure.

Differentiation via New On-demand services: There is a compelling business case to develop a go-to platform for on-demand mobility. Pure ride-hailing (A to B transit) however, is essentially a commodity, with very little scope for differentiation beyond cost. Therefore, in order for a ride-hailing platform to become dominant, it must differentiate itself through the provision of other on-demand services beyond the core ride-hailing service. One of the factors that drove the success of Grab and GO-JEK in APAC was the provision of on-demand services such as food delivery, payments, parcel delivery, prescription delivery, and more. Indeed, less than 25% of for GO-JEK’s revenue comes from ride-hailing fares. Future possibilities for Uber include increasing utilization through multi-user occupancy/pooling and use-cases with greater demand during off-peak hours, such as nighttime delivery.

Investment in Driverless Services: As ABI Research demonstrated in Smart Mobility Maintenance: Modular Hardware, OTA Updates, and Prognostics (AN-2601), the only way that Uber’s current pricing structure could be maintained would be if driver costs were removed through the use of autonomous robotaxis. However, the adoption of robotaxi fleets would represent a significant disruption to ride-hailing platforms, which can attribute much of their success to date to not having to own, maintain, and operate their own fleets. The key to maximizing robotaxis’ profitability will be maximizing their utilization, which will in turn depend on the same driverless vehicles fulfilling multiple use cases beyond ride-hailing, reinforcing the need to invest in alternative on-demand use cases. The current average cost per mile for passenger vehicle ownership is US$0.71 per mile, while ride-hailing services, although subsidized, cost US$1.65 per mile. While robotaxis hold the key to bringing down the cost of ride-hailing services, a utilization level of around 70% is required to achieve a cost-per-mile of less than US$0.71, due to the high fixed hardware costs of autonomous vehicles. Ultimately, the only way that such a high level of utilization will be plausible will be to have the autonomous vehicle asset enabling use cases beyond ride-hailing.