…The upshot of all of this is that it’s remarkably difficult for rideshare drivers to make minimum wage, which has led to the recent push in the California assembly to reclassify them as employees, rather than independent contractors. This would mandate minimum wages, health benefits, and sick leave — and could cost Uber and Lyft hundreds of millions of dollars.
Which would be fine if these companies were enjoying healthy profit margins off of unregulated labor. But, as Josh Barro asked of Uber in a New York magazine article, “does this company not like money?” It doesn’t seem to. Uber lost about $3 billion last year (Lyft, a much smaller company, didn’t do any better, losing $911 million.
In its S-1 filing, or prospectus for investors, before its disastrous IPO, Uber outlined exactly how it expects to continue losing money. In essence, Uber sells its product below cost in an effort to crowd out other market competitors, who are also selling their products below cost. And even if competitors start selling at cost or are driven out of the market, Uber still must sell below cost, to compete with public transit and private cars.
The other factor driving Uber’s losses in that its vaunted “surge pricing” mechanism has been partially rolled back. This practice — matching driver supply with rider demand by decreasing pay when demand is low and increasing it during peak hours — created a double backlash. Drivers would be deterred from coming back to work after a low-paying day, and riders had an even more negative reaction to large price spikes. Without this at the center of Uber’s strategy, it’s left selling consistently below cost in an effort to maintain a workforce and ridership.
So Uber is effectively a middleman for a money transfer from venture-capital (VC) firms to consumers. It takes a loss on every ride, subsidized by a massive valuation that looks increasingly like a fairy tale.
…Uber and Lyft may be able to absorb these costs for a short time if investors still think there is hope for the company. But the IPO debacle — in which it significantly underperformed its private valuation — shows that confidence may be waning.
California’s bill is expected to be heavily modified and of course would apply only in one state. But California accounts for a sixth of Uber’s and a quarter of Lyft’s business, containing the critical Bay Area and Los Angeles regions, which are dense and car-centric enough for ridesharing to make a tolerable profit margin.
And if the bill is a model for the nation, especially the urban and progressive areas where ridesharing is most common, Uber and Lyft could be bubbles on the verge of popping. They both have flawed business models. They expanded far too quickly due to massive valuations. And they face an increasingly hostile regulatory environment, from London to New York to San Francisco.