It’s the go-to topic for casual banter this summer, right behind mentioning how weird it feels to be socializing at all: Uber rides are now egregiously expensive. People have been shocked when rides to the airport wind up costing more than their flight, and there’s been general panic that in a “post-pandemic” society, everything will become unaffordable. It’s not just in our heads, either: The New York Times reported that, as of April, the cost of a ride had increased by 40%. But what does it all mean? Have we just now woken up from a collective fever dream about a utopia where relatively affordable, convenient ride-hailing was possible? Or is it something else?
There have been several explanations for why it feels like only lottery-winners get to take an Uber now. The most basic one is supply and demand. “When the pandemic hit in 2020, many drivers stopped driving because they couldn’t count on getting enough trips to make it worth their time,” an Uber spokesperson tells Refinery29. “In 2021, we’ve seen more riders requesting trips than there are drivers available to give them.”
But an explanation that stops there doesn’t quite cut it. There is a driver shortage, but supply and demand would then dictate that Uber would be doing everything to keep those drivers, including by paying them more. Yet, a Washington Post report revealed that drivers may not in fact be receiving their share of the much-higher fares. If that’s true, where is the money going? Uber denies the Washington Post‘s findings, and tells Refinery29 that the “majority of the price a rider pays goes to the driver,” according to a spokesperson.
Others have theorized that the fare hike may not be temporary pandemic scarcity pricing — it could be here to stay. A popular NYT piece by Kevin Roose from June argued that ride-hailing couldn’t stay cheap forever, calling the formerly affordable rates for Uber and other similar services a “millennial lifestyle subsidy.” Roose posited that these higher rates was the way it was always going to be, and that they more accurately represent the “true” cost of ride-hailing. As long as we’ve used Uber, Roose explained, it had been subsidized by its investors, and now they were no longer softening the blow for, you know, hedonistic millennials. Roose frames Uber’s current priciness as being a narrative with a moral that doesn’t condemn price-gouging start-ups, but rather singles out young, oblivious people as being naive about the price of their standard of living.
This is, again, not the full story. How can it be? While I’m not really sure what a “millennial lifestyle” is, I do know that taxis existed a long time before app-based ride-hailing did. And while taxis were never as cheap as public transportation, it’s not like they were exclusively used by socialites headed to brunch. In fact, people on the low and high end of income use taxis more than those in the middle. Data from the 2009 National Household Transportation Survey says that 41% of taxi trips that year were taken by people in households making less than $25,000. The next highest share of taxi trips (33%) were taken by people in households with an income of over $100,000. If you don’t live in a city with decent public transit, and you can’t afford a car of your own, a taxi might be the best way you have of getting somewhere.
The concept of hiring a car service isn’t an extravagance that Uber invented, nor something millennials, specifically, were spoiled by. According to Hubert Horan, a transportation industry expert who has published in-depth analyses of the company’s financial outlook, the key to understanding the sudden fare increase is simply that Uber is pushing to reach profitability right now, which it hasn’t been able to do since its founding in 2009. In his view, though, they will never actually reach it. “The claim that recent price spikes were due to the pandemic is nonsense,” he tells Refinery29. “The price spikes reflect the fact that people fundamentally were never willing to pay the true cost of Uber service.”
An Uber spokesperson told Refinery29 that the company is on track to reach “total company profitability on an adjusted EBITDA basis before the end of this year.” EBITDA stands for “earnings before interest, taxes, depreciation, and amortization,” a measure that some financial experts believe fails to provide an accurate picture of a company’s earnings because it excludes so many expenses and losses. In other words, it could be said that Uber can only present a case for being close to making money if they ignore a bunch of the ways in which they’re losing money.
There are many skeptics of the claim that Uber will soon become a profitable company, let alone by the end of 2021. Uber isn’t just falling a little short of profit. It typically loses billions of dollars every year. In 2019 alone, it posted a loss of $8.5 billion. Between 2013 to 2018, its losses totaled about $14 billion.
While other analyses have concluded that Uber’s path to profitability is a steeply uphill climb, Horan goes further. “Not only can I not imagine any remotely plausible explanation as to how Uber could suddenly become profitable after eleven years of massive losses,” he tells Refinery29, “but absolutely no one has attempted to lay out a financial analysis making such a case. Not the company, not Wall Street analysts, not academics — no one.”
A business eventually needs to make more money than it spends if it wants to survive. It doesn’t get any more basic than that. When entrepreneurs appear on the reality show Shark Tank to pitch their business ideas, they’re grilled by a panel of potential investors — the “sharks” — on exactly how their business model will work, how much revenue they’ve already generated or how much growth they’ve achieved, and what makes their company different from competitors. All of these factors (and more) are used to determine whether the business is overvalued, undervalued, or just right, and whether a shark will invest in it. A business idea that can’t prove it has a sustainable way of turning a profit is understandably unattractive.
Yet Uber has never struggled to attract investors. In 2019, the company went public. In its initial public offering (IPO), the price of a share was set at $45, and the company was valued at about $82.4 billion. This valuation was already much lower than the $120 billion that some on Wall Street had proposed, and the stock price and valuation fell further after its IPO. Still, by this point Uber was broadly seen as an enormous win for investors. Its valuation was proof that Uber had started out as a scrappy start-up but had now achieved undeniable success, even as it continued to lose unfathomable amounts of money — and even though in its S-1, a document that every company must file with the SEC if it wants to go public, Uber acknowledged and warned that it was possible it would never become profitable.
What would Uber’s valuation have been on Shark Tank? On what basis would it have claimed to be worth over $80 billion? Could it have withstood even a few minutes of scrutiny on a reality TV show? In a 2019 article published in the journal American Affairs, Horan writes, “This is not a case of a company with a reasonably sound operating business that has managed to inflate stock market expectations a bit. This is a case of a massive valuation that has no relationship to any economic fundamentals.”
The typical explanation of the Uber model is that its focus has been on growth, not profit. A seemingly never-ending glut of capital allowed Uber to keep scaling up until it was everywhere, in some areas more ubiquitous than taxis and ensuring that the populace relied on its service. If taking an Uber is decadent, as the NYT piece suggested, it’s an excess that Uber and its investors obviously intended everyone to get hooked on. According to Horan, its plan was to “eliminate all meaningful competition and then profit from this quasi-monopoly power” in the exact same way that Amazon has managed to do for e-commerce. Except that it hasn’t worked.
The reason for that, says Horan, is that operating this kind of transportation service is expensive, and Uber doesn’t have an edge over its competitors. It hasn’t figured out how to provide transportation-for-hire far more efficiently than “traditional operators” such as taxis. It’s not like it invented some patented super-fuel. A smartphone app that matches passengers with drivers can be — and has been — replicated by countless other companies. “Nothing in Uber’s business model has actually solved any of the problems that plagued traditional taxis,” Horan says. “Uber never had the type of scale or network economies that had allowed other Silicon Valley-funded companies to ‘grow into profitability.'”
Horan argues in his American Affairs article that although Uber markets itself as a tech platform, using an app to dispatch drivers to passengers doesn’t magically cut down on the costs of operating a taxi company. “The only meaningful economic distinction between ‘taxis’ and ‘ridesharing’ is that the latter avoids regulations that traditional taxis must still obey and depends on billions in predatory investor subsidies,” he writes. And in fact, he observes that Uber’s costs are higher than the taxi industry’s costs “in every category other than fuel.”
Uber-optimists would point out that even if the company hasn’t achieved sustained profitability yet, at least it’s losing less money over time. As of September 2015, Uber’s profit margin for the year was at negative 143%. In 2018, its profit margin was negative 35%. Progress, right? But Horan points out that this margin has narrowed almost entirely due to driver pay cuts. “If Uber drivers still received their 2015 share of each passenger dollar,” he writes, “Uber’s negative margins would still be in the triple digits.”
The main operational “efficiency” the company seems to have honed is paying less and less for labor. Before New York City set a wage-floor for drivers in 2018, their median hourly pay was below the city’s $15/hr minimum wage. Rideshare drivers weren’t protected by the minimum wage law because they’re misclassified as independent contractors instead of as employees. About 40% of drivers qualified for Medicaid before the wage-floor was instituted. A study also found that in NYC, 90% of app-based drivers were immigrants, and for two-thirds of them, driving was their sole source of income. In fact, 80% of them had bought a car “for the main or significant purpose of earning a living by driving.” A 2020 study of take-home pay after expenses for rideshare drivers in Seattle found that their hourly rate was $9.73, far lower than what Uber and Lyft claimed.
The need for human drivers seems to be a vexing problem for the ride-hailing industry. It just costs too much. That’s why Uber once staked so much of its future on a measure that could reduce their operational costs by 60%: not having workers at all. In January of last year, Uber said that its investment in self-driving cars would be the key to future profitability. But we’re still far from being able to rely on this tech, and by December 2020, Uber had sold off its self-driving research unit.
Another step toward a hypothetical path to profitability would be to increase its market share further. Uber isn’t just competing with taxis and privately owned vehicles — it’s eyeing public transportation as well, later amending its original S-1 to remove several parts talking about how it views public transit as competition and as part of its market. So if we imagined a world where no one owned cars, no one had access to public transit, if our only option was self-driving Uber cars or Uber buses, and everyone ordered their food through Uber Eats — would the company finally be profitable then?
Madjid Serri has been driving in the Bay Area for about six years now. He’s 36 — a millennial — and moved to the U.S. from Algeria seven years ago. When asked if it’s true that he’s making a lot more money through Uber now, since fares are higher, he says, “No. They’re always lying.”
According to Serri, Uber frequently adjusts the terms of how drivers work and what trip information they can see. Up until recently, for example, he could see an estimate of the fare, the pick-up point, and drop-off point when a request came in, and accept or decline accordingly.
But this was a level of transparency that was only provided to drivers briefly, and only in California. Last year, Uber allowed California drivers to see more trip information and even set their own prices in response to a state law that told the ride-hailing industry to stop misclassifying drivers as independent contractors. One of the criteria required to be a true independent contractor is that you have a great degree of control over how you work. If you can’t negotiate your own price and see exactly where you’re going before you accept a ride, it’s harder to claim that you’re really an independent contractor.
In November 2020, though, California passed a ballot measure called Proposition 22, exempting companies like Uber, Lyft, DoorDash, Instacart and Postmates from having to properly treat drivers as employees. It would take 7/8ths of the California legislature to amend Prop 22. In April of this year, Uber rolled back its price-setting and trip information policies in the state, citing an increase in drivers declining trip requests. Now, CA drivers can see the fare, destination, and distance only if they’ve accepted at least 50% of the past 10 trip requests.
Uber acknowledges that they’re facing a driver shortage because many realized during the pandemic that driving wasn’t “worth their time.” But who makes that determination, if such transparency policies no longer exist even in California, and drivers accept rides without knowing exactly how much they will earn?
Though the company says that most of the fare goes to drivers — many drivers insist this isn’t true. Uber has faced lawsuits from drivers claiming that the company takes a bigger cut of the fare than what’s laid out in their contract. They say that the fare passengers see isn’t the same one drivers see. That’s why Serri asks his riders if they would be willing to screenshot and share with him the fare they see on the app. “This is our proof,” he says. By comparing his earnings breakdown with the passenger’s receipt, he realizes that Uber is sometimes taking over 50% of the fare. Uber’s commission varies, but Serri says that his agreement with them states that the company will only take a 25% cut.
He joined the group Rideshare Drivers United in the last year because he realized drivers had to do something. Drivers in the Bay Area had tried to organize before, but the efforts fell through. “It’s very hard to form a union between individual drivers because we are from different nationalities, different languages. It’s really hard to communicate,” says Serri.
A driver’s earnings are not set in stone when a ride is requested. While as a passenger you might be told exactly what you’re paying upfront, the driver’s actual pay is calculated by distance and time. Serri says that right now his rate is about 72 cents per mile, and about 22 cents per minute. He says that when he first began driving with Uber, the rate was closer to $1.50 per mile. In his experience, the rates change once or twice a year, continuing to trend lower and lower. “They send us a [new] agreement, you have to read everything, but most drivers are not really reading the agreement. It’s really hard to read,” he says, especially since many of them are not native English-speakers.
Ride-hailing companies have advertised driving for them as a convenient, flexible side hustle to make extra money. While it’s true that most drivers are only doing it part-time, these companies couldn’t operate without their full-time drivers — despite being a minority, full-timers complete over half of all rides. “This is my main job,” says Serri. “Usually I’m working 50 hours a week.”
Right now, Uber doesn’t just want more drivers. It’s particularly interested in recruiting people who can drive “20, 30, 40 hours a week,” according to CEO Dara Khosrowshahi. In April, the company announced it was spending $250 million on incentives and pay guarantees if drivers sign up or return now. But a one-time bonus isn’t a substitute for higher hourly earnings, for getting a bigger permanent share of the fare, for employment protections like minimum wage, unemployment insurance, and workers compensation.
The real reason Uber rides have become suddenly more expensive may be because it’s struggling to make two plus two equal five. Paying drivers so little only works until the point that a critical number of them decide that it isn’t worth any of their time. Nor can it just keep raising fares, or even keep them raised. Then, it would run the risk of ride-hailing truly becoming a service only for the wealthy elite — and there aren’t as many of those as Uber would like. If fewer people use it, its market will shrink and impact revenue, even with higher per-passenger fares. No wonder Uber’s dream of profitability still seems hopelessly out of reach.
The price of an Uber isn’t so much a dilemma for millennial lifestyles, then, as it is a crisis for the entire ride-hailing industry — and, their continued exploitation of drivers is at the core of it. The real question isn’t whether Uber rides have gotten too expensive for us. It’s whether those rides have gotten too expensive for Uber — it’s whether or not Uber can even afford to exist.
Like what you see? How about some more R29 goodness, right here?
Do Uber And Lyft Really Offer Flexible Gig Work?
Uber Says Gig Workers Are Their Own Bosses
Uber Sexual Assault Reports Shows Abuse Problem
from Refinery29 https://ift.tt/3hIWqYT
via IFTTT
