2022 is shaping up to be the year of profitability. The P-word was front and center in the earnings calls of many a sharing economy company in the latest quarter, whose execs are eager to let investors know that while they might not be there quite yet, they are very much working on it:
Uber highlighted its “focus on profitable growth” and platform advantages that will let it “deliver significant profitability and durable growth as investors rightly expect from globally scaled technology platforms,” then sent a memo to staff about showing investors the money
Lyft reiterated its commitment to “being adjusted ebitda profitable” and to “reaching GAAP profitable over time”
Airbnb said it expects its first full year of net income profitability in 2022
DoorDash emphasized that its core U.S. restaurant business is profitable, with increasing profit margins, and that it chooses to reinvest those profits in order to grow the business
Bird said it planned to “accelerate our path to profitability,” projecting its first quarter of positive adjusted ebitda in the third quarter of 2022 and a full year of positive adjusted ebitda in 2023
These declarations of profitability have appeared alongside a massive selloff in public technology stocks and a bearish turn by venture capitalists, who have suddenly become critical of the startup excesses they spent roughly a decade funding.
We talked last week about how crazy it is that Uber still isn’t profitable. Uber is 13 years old and the definition of scale, but has struggled to translate that scale into profits, counter to the Silicon Valley adage that early-stage losses can be made up later in volume. As I said before, if your unit economics aren’t there and you lose money on each transaction, more scale just means bigger losses.
Can these companies ever make money? This is the existential question. The answer I think is yes, but it will come with a fundamental shift in our understanding of what sort of services Uber and its peers in the gig/sharing economy offer, and for whom. As Henry Grabar wrote in Slate this week, the decade of cheap rides is over:
How Uber rights the ship is not for me to figure out, but one obvious answer is that rides have been getting—and will continue to get—more expensive. Average Uber prices rose 92 percent between 2018 and 2021, according to data from Rakuten; a separate analysis reports an increase of 45 percent between 2019 and 2022. Both Uber and Lyft have added a surcharge for riders that helps drivers account for high gas prices. And all that was before last week’s ultimatum.
Think of it as a city-transportation parallel to what economists are calling the end of the “era of free money,” as interest rates finally rise. It’s the end of a decade in which we changed our systems, our habits, even our architecture, around the assumption that we could be driven around for cheap.
This, I think, is the right answer. We know people like on-demand services like ride-hail, food and grocery delivery, and e-bike and e-scooter rentals. They are convenient! They work! They make life easier for a lot of consumers! The problem isn’t that these services lack value, it’s that venture capital subsidies made them artificially cheap for the better part of a decade. The great promise of the on-demand economy was that on-demand could be available to anyone, or at least to anyone with a smartphone and some degree of disposable income. The reality may very well be that these are luxury services that can only survive at luxury prices.
This is where scale pays off: Uber has so many customers at this point that even as it raises prices there should still be plenty of people who are willing to pay the higher rates. This isn’t even a hypothetical. The average price of an UberX ride before tips has risen 40% over the past three years, according to analysis from YipitData. At the same time, Uber’s mobility revenue grew 37% from 2020 to 2021, as ride volumes increased coming out of the pandemic. And in the first quarter of 2022, Uber’s mobility revenue overtook delivery revenue for the first time since late 2020. In other words, rides might be more expensive, but people are still taking Ubers.
This is what will be interesting to watch as companies pivot toward profitability this year: which ones, like Uber, have the scale and dominance to retain customers at higher price points, and which will bleed users? This is much bigger than Uber: it’s a litmus test of a key Silicon Valley thesis, that with enough time and money you can form powerful consumer habits that will endure even when the subsidies finally go away.
Very good write-up. I know I rant about ridehail never making money, but you point out the picture is complex. I still don't see how ridehail makes (much) money, though maybe delivery will (in which case we tell all the investors who bought the ridehail story "just kidding," I guess). But I think ridehail WILL be profitable: hey, taxis are profitable! I just don't think r/h will be profitable ENOUGH to justify all the losses to date and all the overhead going forward. One path to profit as you point out is to raise prices: but then r/h is abandoning one of the key planks in its value platform: cheaper than taxis! Another path that you point out is through branding: maybe the brand is strong enough to earn a price premium (like Coke versus Aldi's Summit brand cola). It might be... but then one has to wonder why the heck Uber put taxis on its app in NYC (and maybe elsewhere, later?)! No better way to erode your own brand by showing rivals and their pricing on your own app! So I rephrase my rant: leaving aside delivery and other businesses, I think "core" ridehail will eventually make money, but deliver an ROI below these companies' cost of capital, as what profit is made is chewed up by ridiculously bloated overheads, or owed to investors who have poured in the billions over the years.
All that money, all that hype, all these years, and (the core ridehail portion of) Uber is reduced to "another option among several on a free app, priced about the same as its rivals." Meh.
(I promise to stop commenting so frequently here, this is your substack, not mine! Sorry!)
I pointed out that no one had ever laid out an explanation based on actual industry economics as to how (after $31 billion in losses) Uber could suddenly transform itself into a company that could earn sustainable profits.
Harry Campbell didn’t answer the question. He asserted that all Uber had to do was raise prices but failed to explain any of the other parts of the equation (e.g. efficiency, costs, demand, competition) needed to actually produce profits. How much would driver compensation increase if passengers were paying 50-100% higher fares? What portion of Uber’s 2019 customers would accept fares this high? Yet he condescendingly insisted that the solution to all of Uber’s problems was “Really not that hard to understand.”
It would be difficult to understand is why Uber’s investors spent 13 years pursuing a strategy based on using low prices to build massive scale, and pursuing a dominant position in a vastly expanded urban car service industry if there was a simple and easy path to profitability by charging substantially higher prices than anyone had ever thought to charge? Were all the investors that poured billions into Uber and Lyft and steadfastly supported the low price strategy for a decade too stupid to recognize the vast superiority of high prices? Were the armies of highly paid engineers and economists and other senior Uber executives incapable of analyzing pricing alternatives, even in the face of mounting losses, and even after Khosrowshahi replaced Kalanick’s “hyper-growth at any cost” approach with one nominally committed to someday generating positive cash flow and profits? Had everyone in the hundred years of pre-Uber taxi operations also stupidly held prices down because they were totally clueless about the basics of industry supply and demand?
Campbell’s assertion assumes a large percentage of urban car service customers was always willing to substantially higher prices. If so, why had every previous premium priced car service model (e.g limos) been unable to expand outside insignificant niches? If so, why did Uber abandon its original premium approach in favor of a mass market approach? Why did the tens of thousands of people in the industry struggling over many decades to find a profitable formula reject what Harry Campbell sees is the obvious answer and is “Really not that hard to understand.” If this is the obvious answer for Uber wouldn’t “raise prices a whole lot” also be the obvious answer for transit operators, airlines and lots of other transportation services?
Among the things that are difficult to understand is why people like Campbell falsely claim that Uber supplanted traditional taxis because of superior innovative technology and that its superiority created the brand loyalty that could allow it to significantly raise prices. Yes, traditional taxi service was unpopular, and people liked that Uber offer substantially more service in cleaner cars at lower prices. But the long recognized things that made taxis unpopular (e.g. unclean cars, can’t get a car on Saturday night or when it rains, poor service to many neighborhoods) was because better service was much more costly and the market was totally unwilling to for those higher cost services. Rush hour service on urban transit and expressways is also highly unpopular because (just like taxis) better and cheaper service is wildly uneconomic, and no one has come up with a way to dramatically reduce the cost and improve the efficiency of urban transport. Uber’s app didn’t improve cost efficiency and Campbell’s nationwide taxi app wouldn’t either.
Uber was only popular because of those billion-dollar subsidies, and that popularity will eventually disappear as people discover that it now offers less service at much higher prices than Yellow Cab used to. Which is why it works ruthlessly to suppress any public information about its actual prices and service levels. It will be able to get away with high prices for a while since its anti-competitive predatory behavior destroyed all the competitors that actually had lower costs. But a very large portion of traditional car service users will be priced out of the market and cities will only get a fraction of the car service they used to get.
Uber dishonestly claimed it had found a magic formula that could produce bother better/cheaper and strong financial returns on billions in risky investment. This magic formula produced $31 billion in losses. Griswold had no idea what might work going forward and neither does Campbell. Every time I’ve asked over the years if anyone can lay out a plausible path to sustainable Uber profitability, all I get is magical thinking.