Their fixed costs are servers and engineering. If they set their prices higher than what drivers are willing to accept they should make money.
I don’t see how “basic economics” is the enemy. Their enemy is setting expectations too high. If they were happy with a profit of $100M a year they would be sustainable forever.
If they raise prices then quantity of rides will go down. If quantity of rides goes down, it becomes harder to earn a living as a driver. If it is harder to earn a living as a driver, there are fewer drivers. If there are fewer drivers, then the cost of drivers goes up.
Not to mention the fact that if uber becomes 10% more expensive a large chunk of those customers will just go to lyft.
A driver only gets paid if a passenger rides. If Uber increases the costs of their rides over a competitor, the the customers will opt to the competition.
Uber will see their margin squeezed down to nothing because they add nothing of value to the transaction: Any random cab company can buy a dispatch app.
That is actually the case in many markets - in Russia local city cab companies all have their apps, so you have three-four installed and you're good to go. And Russian Uber (aka Yandex.Taxi) is here as well
Because if anyone can be a taxi anytime (aka open market), then you get a race to the bottom, both in quality and availability. Then there isn't a steady supply and a lot of collateral problems (accidents, crime, etc). The solution a century ago was to regulate: limited number of taxis and minimum driver qualifications. In the days before apps and routing, it meant that there were taxis available most of the time, except for maybe at peak times.
My point is that taxis are an extremely good example of why you need regulation. Uber and Lyft will succeed to the point they can replace that regulation (cheap enough fares, good enough cars and drivers).
You could also argue that Uber and Lyft are controlling the taxi market because they don't let drivers set their own fare. From the point of view of the driver, taxi-driving is an Uber-Lyft-sanctioned cartel right now.
The cost structure of any urban car service company has four components: vehicle costs (typically 18 percent of total, including acquisition, financing, maintenance, and licensing), corporate costs (15 percent, including dispatching, advertising, overhead functions such as IT and legal, and returns to shareholders), fuel (9 percent), and driver compensation (58 percent, including benefits).5
Uber’s business model shifts the vehicle costs (ownership, maintenance, insurance) that traditional companies used to incur to its “independent contractor” drivers. Passenger fares need to cover total (Uber plus driver) costs. But shifting the burden of vehicle costs and financing onto drivers makes those costs higher, since hundreds of thousands of drivers with limited capital and business experience cannot possibly manage these costs as well as even a typical traditional cab company. Traditional cab companies also have much lower corporate costs, as they avoid Uber’s huge expenditures in areas like political lobbying, global branding, IT development, big corporate headquarters, etc.
Uber should also have higher driver costs than traditional operators, because the huge increase in the demand for drivers should have improved wages, benefits, and working conditions. As will be discussed below, however, Uber initially offered incentives that increased its driver costs, but since 2015 has suppressed take-home pay to minimum wage levels. This exercise of artificial market power cannot be considered an Uber efficiency or productivity advantage.
===== On Structural Problems:
Far from revolutionizing the future of transportation, Uber has not solved any of the industry’s long-standing structural problems.
Most taxi demand is low-income; higher fares would shrink traffic and reduce utilization. Taxi demand is sociologically bipolar: 55 percent of demand comes from people earning less than $40,000 per year while 35 percent comes from people earning more than $100,000.10 Demand from lower-income people is driven by access to jobs in areas (or at times of day) when transit service is poor or nonexistent. Given the current income distribution of riders, any attempt to balance supply and demand will either drive lower-income passengers out of the market or result in wealthy customers being charged less than they might be willing to pay. Uber does not have the lower cost structure needed to improve service while keeping fares low, and apparently realizes that only a small portion of the market is willing to pay fares that would cover the true cost of its service. Higher prices would also reduce vehicle utilization and destroy any notion that Uber’s business has exceptional growth potential.
Uneven geographic demand creates unavoidable empty backhaul costs. Taxi demand, as with demand for every other form of urban transport, has extreme temporal and geographic peaks. Most cities have a dense core area where taxi demand is highest, and taxis operating within that zone can maintain reasonably high daily utilization. But the true cost of trips to neighborhoods outside that zone can be as much as twice normal trip costs since they will have an empty backhaul. Low-income neighborhoods receive poor taxi service because drivers rationally avoid trips where they won’t find a return fare. Uber does nothing to create new demand that can fill those empty seats, and has no way to vary fares based on backhaul utilization. People expect that the fare to the airport should be roughly the same at 6 a.m. (when the cab will return empty) as at 4 p.m. (when return fares are queued up).
Extremely high cost of peak capacity. Peak taxi demand occurs during the late evening, especially on Friday and Saturday nights. As with rush-hour transit and expressway peaks, the cost of the capacity needed to serve peak demand is four to five times the cost of serving demand on Tuesday morning. Cab companies cannot afford to provide all the expensive capacity demanded, creating conflict as wealthier people headed to restaurants and clubs fight over the limited supply of cabs with late-shift workers at hospitals and warehouses. Uber has done nothing to reduce the high cost of peak service or find paying passengers anxious to travel at off hours. Uber’s core business proposition (“push a button, get a car!”) by definition requires far more capacity and much lower utilization rates than traditional operators.
Overcapacity risk. Taxi businesses in unregulated markets have no natural barriers to entry, and thus face the risk of ruinous overcapacity that reduces utilization and precludes a workable balance of supply and demand. As both Uber and past cases of unlimited market entry have demonstrated, new entrants don’t charge fares high enough to cover full operating costs, ensuring major losses for everyone.
Uber did not suddenly discover ways to dramatically improve productivity and service quality that everyone else in the industry had been too stupid to recognize for the past hundred years.11 In fact, nothing in Uber’s business model solves any of the major problems that have long frustrated users.
Otherwise, yeah, Uber did fundamentally improve both productivity and service quality vs. traditional cab companies. Mobile apps are an obvious service quality improvement (predictable waiting times, ease of finding cabs in remote locations, ease of payment), and allow Uber to provide the same level of service (i.e. availability / waiting times) as traditional cab companies, but with less drivers (since a user doesn't need to actually see a cab in order to hail it).
All other issues apply equally to cab companies - e.g. empty backhaul costs, cost of peak capacity, bimodal income distribution of users - except that Uber does, or at least could, solve them better with technological means - e.g. Uber Pool and Uber Eats for backhaul costs, automated and/or predictable surcharge for peak capacity issues, Uber Black to target richer users.
Overcapacity risk: in some locations, cabs were practically unlimited (e.g. Slovenia) so this existed before, in other locations limits were either because of monopoly (e.g. NYC) or skills (e.g. London), both of which Uber improves - breaking monopoly lowers prices for users (without decreasing driver wages, simply by destroying the profits of rent-seeking medalion owners), and there's no need to know every street of London in the era of Google Maps (and I definitely don't want to pay for it).
So, let's not kid ourselves - Uber is strictly better than what was before, and given its global availability, it also has a moat (when you land in city X, are you gonna load and set up local taxi cab that you don't know or trust, or just use Uber?), though there are still some regulatory / monopoly issues (e.g. in London Uber can't use bus lanes, whereas black cabs can). But I want to take Uber whenever I can and I want London cabs to die in fire.
(Having said that, I'm short on Uber as I think it's overvalued - but that doesn't mean without value. Also, I'm not against regulation - cities could improve relevant regulation e.g. preventing Uber from lying about surcharges, driver availability / location and preventing drivers from cancelling rides, but most cities choose to instead serve entrenched interests by (attempting to, yet fortunately often failing) enforcing monopolies.)
TL;DR: quoted part of article is mostly wrong.
This was true when they started and not really true today. There are many taxi companies with proper licenses and full time employees using the same app model as Uber. Taxify (nowadays Bolt) is one example.
As someone who used call cabs in various Polish towns and suburbs since early 2000s, is claiming this was particularly bad is short memory or is the US bad at not just mass transit but also taxi service? I could get a cab within 15 minutes pretty much in any agglomeration, and even close suburbs. I didn't even need an app.
...I had that happen _once_, and:
> at least they tell you immediately if the driver cancels.
...exactly that happened. Amazing, it's like they ask you for your phone number for a reason. This wasn't much of a problem pretty much since cell phones became a mainstay. I am not sure how Uber improves on that, guesses from the travel path that the driver gave up even if the driver decides not to report?
With cabs, you're expecting a cabby to call to dispatch that they're not picking you up. A cabby can easily be on the way to pick you up, find someone on the way and never let you know. That's a big difference in both what's possible, and what the reality is: cabbies never let you know if they're not coming in my experience. That said, many cab companies have an app now.
...what? That sounds really unlikely.
> cabbies never let you know if they're not coming in my experience.
Well, that's opposite of mine.
Even if Uber isn't operating with more efficiency right now due to R&D and global expansion, there's no reason why they can't be given that they aren't operated by a guy on a telephone manually dispatching cars.
"Nearly impossible" is a simultaneously weak and strong claim. Let's try to break it down.
It may be useful to distinguish between shared rides and people using Lyft / Uber / X for a single group riding to a single destination. If there are stats on the distribution of number of parties in a single trip for the major providers, that would be a helpful stat. My anecdotal experience is that most rides I've taken and that I've seen others take are not shared, particularly for those on the higher end of the willingness-to-pay spectrum mentioned in the article. (If you're on your way to an important meeting, do you really want to throw in the variability of maybe picking up someone else along the route?) I don't think Lyft and Uber are perceived primarily as shared-ride services -- they originated as alternatives to single-party, single-destination rides. IOW, as direct alternatives to existing taxi service.
In terms of efficiency, please look at the breakdown of costs in the article -- I even excerpted some of those here. The cost of dispatch is actually quite low among the components of costs to run an urban hail-ride fleet. Look at Uber's R&D costs and, even amortized over the anticipated rides, and compare that to "a guy on a telephone." One fully-loaded Uber engineer's salary would pay for tens of full-time dispatchers in N. Amer. / European cities and hundreds of dispatchers where labor costs are lower. Similarly, the costs of fleet operations in terms of cars are going to be higher. Do you think "some driver with an app" can maintain and utilize a vehicle better than a taxi fleet, which can run the car 24/7 and have centralized maintenance facilities and bulk discounts on supplies and fuel? Efficiency considerations need to take into account both the costs and benefits. I think one of the points the article is trying to make is that Uber has been hiding these costs or relying on subsidies from private investors until recently.
One of the broader points the article attempts to make is that urban ride-hail fleets have attempted to optimize for things other than the pure efficiency of the rides. For example, they optimize for serving otherwise underserved areas (where some taxis won't go or won't take you because they're concerned about the unpaid backhaul). They optimize for some driver protections. I think it's useful to consider what is going into any definition of "efficiency." Is it utilization time of the vehicle? (This doesn't account for number of passengers served if the rides are longer because the rides are in suburbs rather than dense urban cores. It also doesn't account for taxis being utilized 24/7 while a privately-operated Uber maybe is operated 14 or so hours / day -- if the driver is willing to push the margins of safety and sanity.) The number of rides per hour? The time it takes per unit of distance? (On that last point, there's some evidence that the rise of uncapped ride-hailing services in urban cores has led to significant traffic increases s.t. it's actually slower to get around now in dense cities precisely because of Uber.) The article attempts to call attention to some of these other possible dimensions of optimization. Depending on which dimensions are optimized and the transportation network, it is entirely possible for "a guy on a telephone" to be more efficient. And questions of fairness -- for drivers, for pedestrians and mass transit riders, and for others -- will be affected by that choice of optimization.
Uber could be profitable at higher prices. But would we just be left with a higher-priced taxi service that significantly decreased fairness?