A few months ago, Uber announced plans to launch UberEats in 100 new cities across Europe, the Middle East and Africa, bringing its global operations to around 300 cities. As Jason Droege, vice-president of Uber Everything – yes that’s his real title – explained, “I think it’s in Uber’s DNA to expand.” The food delivery division is on track to do $6 billion in bookings this year.
Earlier this month, Uber announced plans to invest in Lime, a California-based escooter company. Uber will brand and add Lime escooter service to its mobile app, giving customers another option for getting around cities, especially to and from public transit stations. This investment comes on top of Uber’s recent acquisition of dockless bike-share startup Jump. As Uber CEO Dara Khosrowshahi noted, “We see the Uber app as moving from just being about car sharing and car hailing to really helping the consumer get from A to B in the most affordable, most dependable, most convenient way.”
And not necessarily just on the ground. Uber is also actively investing in Uber Elevate, an early-stage intracity air taxi venture. As Khosrowshahi explains, “What we want to do is take growth that is coming in today and stage them and invest them in forward opportunities down the road … And we need a couple of [long-range] shots because five years from now gets here a lot faster than you think.”
Mockup of Uber Elevate Air Taxi
Given the company’s soaring ambition, are we destined to live in a world where Uber becomes the Amazon of urban transportation – the matchmaker for all intracity vehicular movement? And is that a good thing? Let’s examine the pro and con arguments in sequence.
Uber is such a polarizing enterprise, that a number of legitimate concerns need to be acknowledged upfront before extolling the company’s virtues.
- Under its founding management team, Uber pushed the boundaries of arrogance, hubris and bro culture behaviors.
- Uber ran roughshod over municipal governments in its race to establish global market dominance, exhibiting palpable disdain for mayors, regulatory authorities and taxi unions, leaving cities justifiably concerned about Uber’s plans to expand into additional modes of urban transport.
- Uber’s drivers have struggled to earn a living wage, particularly those who rely on the company as a predominant source of income. Uber has been shrinking driver compensation for years in many urban markets in its quest for profitability, while lagging its competitors on driver satisfaction and retention.
- Uber has yet to prove that they have a sustainable business model, losing more money faster than any startup in history.
Unless and until Uber can address these existential threats – particularly the last — the company cannot survive, let alone prosper. So let’s stipulate for now that under new leadership, Uber is aware of and working towards a sustainable future on all fronts.
That said, Uber has proven itself to be a prodigiously capable enterprise. It takes deep operational expertise, software development and data analytics prowess, and dogged corporate grit to build two-sided markets (rider + driver) from scratch. And the company has proven its management depth again by rapidly scaling UberEats’ three-sided market, balancing the needs of couriers, customers and restaurateurs. Recall that within just five years of its 2011 Series A funding, Uber launched rideshare operations in over 400 cities in 68 countries, and subsequently took only three years to emerge as the world’s largest food delivery service. By many measures, Uber is a formidable company.
The customers for Uber’s core rideshare business have been exceptionally well served. To the chagrin of traditional taxi operators, Uber has delivered a cheaper, faster and more convenient alternative for tens of millions of riders. Moreover, Uber has dramatically enhanced the mobility of rideshare customers with limited access to personal auto travel and/or who reside in areas poorly served by public transit and taxis. As a result, Uber has benefited low-income second shift workers, late night revelers, and many others historically constrained by limited travel options. Uber has thus created a number of positive externalities – i.e., benefits enjoyed by third-parties, including local real estate owners, restaurants, bars, shops and entertainment venues, all contributing to an expanded tax base.
In the case of UberEats, by providing restaurateurs with a number of value-added services, including app-enabled tablets, technology support, professional photo shoots and ongoing menu planning advice, the company is helping restaurateurs expand the scale and geographic scope of their business. The extraordinary growth of this division testifies to the value perceived by restaurants and customers, both of whom pay fees for UberEats’ service.
With 75 million global customers and over 5 billion rides under its belt, Uber is in an exceptionally strong position to rapidly scale its recent entry into two-wheeled vehicle services. By tapping on its app, customers will soon be able to find their ideal mode of travel, amongst a variety of options integrating Uber and public transport services. And further down the road, the emergence of electric autonomous vehicles (not to mention air taxi services) hold the promise for even faster, more environmentally friendly urban transport services.
Uber’s ambitious plans to enhance urban mobility are set against the backdrop of deteriorating public transportation service in many large urban markets. For example, in my native New York City, average subway speeds today are slower now than they were in 1950. And even accounting for scheduled speed reductions, only two-thirds of trains operate on time. Despite longstanding overcrowding and deteriorating performance, New York City failed to build any additional rail capacity for nearly 80 years. Last year, NYC opened its first new subway line since 1940, but the 2nd Avenue subway served only three stations, and cost taxpayers nearly $2.5 billion (ten times the real cost per mile of subway construction over a century ago). Crippling political disputes have dimmed the prospect for improved conditions for the foreseeable future − and New York City is not alone. Public transit systems in San Francisco, Chicago, Washington DC and Philadelphia are also struggling with budget pressures and deteriorating service levels.
Against this backdrop, what’s not to like about a formidable private enterprise with a soaring ambition to enhance urban mobility? Given all that Uber has already accomplished, why not encourage them to continue disrupting decaying public transport systems?
The question isn’t whether private or public entities are better suited to develop and operate urban transportation systems. It’s how cities can best serve the needs of multiple constituencies in complex, dynamic urban environments in partnership with private enterprise.
Transportation systems serve as the lifeblood of a city’s economy, vitality and social welfare. Each element of the network generates significant positive and negative externalities that are rarely accounted for by private transport operators. Therefore, city governments (through established political processes, tortuous as they may be) must set the priorities and operating rules for the urban transportation system as a whole.
To see this, consider that virtually every major urban transport system in the US (and most worldwide) loses money.
Average Loss Per Passenger Ride, U.S. Metro Rail Systems, 2013
Why is this? One could argue that municipal transport agencies are inherently inefficient business operators. But a more plausible and universal explanation is that as a matter of public policy, city governments choose to subsidize urban transport services in order to stimulate economic growth and to enhance mobility, tourist appeal, and public welfare. Relatedly, cities also choose to provide service during off-peak, low-volume periods to enhance urban mobility if not profitability. To offset their transit operating losses, municipal governments use their statutory authority to progressively tax residents and businesses, creating what is deemed to be net positive social and economic welfare.
Private transport companies like Uber have no mechanism to monetize their positive externalities, and thus must compete at a disadvantage against heavily subsidized public transportation. This market dynamic undoubtedly contributes to the significant losses that Uber has sustained since its inception.
On the flip side, rideshare companies also create negative externalities – e.g. congestion, air quality degradation, and land use conflicts – whose harmful effects are borne by the public at large, often without any accountability or recompense. Cities have learned this lesson the hard way from the largely unchecked expansion of rideshare services, and some are now imposing significant capacity restrictions on nascent escooter and shared bike services.
But with respect to auto-based ridesharing services, considerable damage has already been done, highlighting the imperative for more effective, holistic government oversight for the urban transportation system as a whole. For a company that has long reveled in thumbing its nose at what it perceived as government incompetence and lethargy, Uber’s aspiration to become the Amazon of urban transportation may well (and should) now depend on its ability to forge effective public-private partnerships.
An examination of urban traffic trends provides a useful case in point.
Cities across the U.S. are experiencing soul-crushing congestion, and as a surprise to no one, it’s been getting worse. Average taxi speeds in midtown Manhattan have been steadily declining towards the pace of a brisk walk. Suburban buses to Boston have added 30 minutes or more to their morning commute times over the past decade. And in San Francisco, traffic congestion has grown by 80% since 2010.
A number of systemic factors contribute to urban gridlock, including the decade-long robust U.S. economic recovery, the continuing degradation of our nation’s infrastructure and the growing appeal of urban centers for business and residential activity. But a large body of evidence also points to rideshare services as exacerbating urban congestion. Take New York City, for example, where for decades the number of yellow cabs has been capped at around 13,500 vehicles. But, app-based rideshare companies now have over 80,000 drivers cruising city streets on a daily basis. In San Francisco, only 1,800 taxis are now outgunned by 45,000 rideshare drivers.
Where is the demand for this explosive growth of ridesharing coming from? Taxi companies rightfully complain that Uber, Lyft and other upstarts are stealing “their” customers (ignoring longstanding consumer frustration with shoddy and expensive taxi service). But even if taxi demand were completely absorbed by rideshare services, that still wouldn’t account for millions of additional customers served by Uber, Lyft an others in major metro areas. So obviously, rideshare services are stimulating new trips that previously wouldn’t have been taken, and by diverting demand from less congesting forms of urban transportation: mass transit, biking and walking.
In Boston for example, a recent large-scale study of commuting patterns found that 53% of Uber and Lyft passengers would have walked, biked or used mass transit had a ride-hailing option not been available. And in New York City, a comprehensive recent analysis of traffic data confirms that ridesharing is increasingly substituting for mass transit, most notably during the morning and afternoon rush hours, when road congestion is at its worst.
Annual Change in NYC Ridership by Mode (in millions)
It wasn’t supposed to be this way. On the eve of Uber’s fifth anniversary (2015), cofounder and CEO Travis Kalanick promised that his company would provide a solution to urban traffic congestion and its related carbon emissions, while delivering a safe and better alternative to public transportation. But as it has turned out, Uber’s utopian aspirations were premised on six profoundly flawed assumptions on the economics and operational effectiveness of ridesharing services.
- Uber’s asset-light business model and strong network effects would allow it to achieve huge economies of scale and an unassailable first mover advantage in each of the markets it entered.
- Uber’s prodigious fundraising success would give it ample reserves to drive competition from the market and establish global monopoly control and pricing power.
- Uber’s scale advantage and sophisticated AI algorithms would power a superior service offering, translating into shorter wait times for passengers and drivers and improved driver productivity, which in turn would allow Uber to achieve the trifecta of low fares, attractive driver compensation and corporate profitability.
- Private and public investors would enthusiastically continue to fund Uber’s business growth for the foreseeable future, despite a lengthening track record of unsustainable economics.
- With consumers on its side, municipal governments would be unwilling or unable to restrict its ever-expanding operations, even after recognizing that Uber’s business priorities often conflict with public policy goals for sustainable, efficient modes of public transportation and adequate compensation for a large and growing sector of city employment.
- Over the longer term, the combination of available funds from capital markets and retained corporate earnings would fund a seamless transition to autonomous vehicle operations, promising an even more utopian future.
The first three assumptions have already proven demonstrably false as capably analyzed by Hubert Horan, Seyi Fabode, and myself. For example, conventional wisdom held that Uber would enjoy a global winner-take-most outcome because of their outsized balance sheet and strong network effects. But to the extent that network effects exist, they are local, not global. The fact that Uber enjoys an 89% market share in Tampa, doesn’t help them in Portland, where Uber’s market share is trending below 50%. In NYC, Uber’s market share has been steadily declining over the past three years. And globally, Uber has struggled to achieve market share leadership in many large markets, including Brazil and India and in China, Russia and SE Asia, where Uber has already discontinued unprofitable operations. While network effects do exist within each metro market, the benefits are significantly weakened by low switching costs, which enable drivers and riders to utilize whichever ridesharing service offers the best deal on any given trip.
While Uber’s business model has created enormous value for consumers, propelling the company’s rapid growth, its aggressive pricing policy simply hasn’t generated enough revenue to deliver attractive compensation to drivers and sizable profits to shareholders. By pricing its services 30% or more below comparable taxi fares and then retaining 25% to 30% of gross bookings for itself, Uber has squeezed the revenues available to compensate drivers, who are ultimately responsible for providing the labor, equipment, maintenance, insurance and fuel to serve consumers. There is nothing in Uber’s business model that promises to reduce these factor costs, nor are there inherent economies of scale that would lower unit operating costs with continued growth.
This leads to an inherent conflict between the business objectives of Uber, its drivers and the metro areas in which it operates. Uber’s revenues are directly proportional to the number of trips it can facilitate, and thus the company has strong incentives to continuously scale its business. Drivers of course want to maximize their revenue per hour worked. But as Uber continues to recruit drivers, the revenue potential per driver inevitably declines. As the highest revenue-generating neighborhoods become increasingly saturated, new drivers are forced to seek less attractive service territories to find customers. And since Uber currently pays no penalty for saturating its network with idle drivers, not surprisingly, Uber driver productivity and compensation remain low. Recent studies have found that Uber and Lyft drivers operating in major metro areas remain idle 42% to 54% of the time they are logged onto their driver apps. These relatively low productivity rates contribute to low driver compensation and worsening city center congestion as rideshare drivers prowl city streets in search of their next fare.
In response, there have been increasing calls for government agencies to regulate rideshare company business practices. For example, in a recent Wired story, Felix Salmon succinctly served up this draconian diagnosis and prescription to solve the urban congestion problem:
The world’s cities are dying. The diagnosis is heart disease, or, as it’s also known, traffic congestion. The cause of the problem is Uber, Lyft, and other ride-hailing services. The solution to the problem is taxes.
Specifically, Salmon proposes that rideshare companies be assessed a “congestion tax” – say 10 cents per minute for the amount of time their vehicles spend traveling less than 10 MPH on city streets or less than 40 MPH on highways. As such, Salmon argues that rideshare vehicles would only be taxed when they are contributing to heavy congestion, serving to dissuade drivers and passengers from wanting to use rideshare services in gridlock conditions. Salmon goes on to advise city politicians that “if it’s politically difficult for you to tax all drivers, remember that you don’t need to do that. Just tax Uber and Lyft instead. You can have much the same result, with a fraction of the political downside.”
In New York, a recent deeply researched study funded by the Taxi and Limousine Commission recommended requiring a minimum hourly wage for rideshare drivers, while also providing financial incentives for rideshare companies to increase utilization rates – i.e., the percent of time drivers actually serve revenue-generating customers while logged on to rideshare apps. The proposed minimum wage of $17.22 per hour after expenses would increase driver earnings by about 22.5% on average, or $6,345 per driver per year. The authors argue that this sizable increase in driver compensation could be funded by a combination of improved driver productivity, fare increases and rideshare company margin cuts, while also concluding that resulting productivity improvements would ameliorate NYC traffic congestion.
On the surface, these proposals sound intriguing and well-intentioned in addressing the concerns of two aggrieved stakeholders in NYC’s transportation system: financially strapped rideshare drivers and city residents trapped in gridlock traffic. But on closer inspection, the proposed initiatives would neither solve the identified problems nor build the foundation for systemic and lasting improvements in urban mobility. Three issues merit critical review:
- Targeting only rideshare companies to “solve” NYC’s paralyzing congestion problem may be politically expedient, but focuses on the tail wagging the dog
- Imposing steep taxes and/or minimum wage increases on rideshare companies would severely compromise the financial viability of rideshare companies already challenged by shaky economics
- City governments would be better served by building a holistic long-term public-private partnership (PPP) with rideshare companies to deliver coordinated, sustainable improvements in urban transportation service
Tail wagging the dog
Every day, nearly three-quarters of a million vehicles, most with one occupant, enter the most congested downtown area of Manhattan. Viewed in this context, less than 10% of the vehicles in Manhattan are operated by app-based rideshare drivers. Granted rideshare drivers make multiple trips during the course of the day. Nonetheless, during rush hour periods, the preponderance of vehicles on NYC streets are not operated by rideshare drivers. If New York City is truly serious about controlling crippling rush hour traffic, it should impose congestion pricing on all vehicles operating in the borough during rush hour, as has successfully been implemented in London, Milan and Singapore. The revenue generated from universal congestion pricing could be used to promote systemwide improvements to urban transportation. Uber has already signaled their support for congestion fees in NYC provided that all vehicles are treated equally. Political expediency won’t solve systemic problems.
Uber lost more than $4 billion last year, and has signaled the likelihood for continuing heavy losses going forward. If city governments impose stringent congestion taxes and/or minimum wage requirements, the company’s financial viability would be at risk. At a minimum, Uber would be forced to raise prices (perhaps considerably) and rein in its ambitious growth initiatives. Investors would undoubtedly be less inclined to provide new capital, perhaps scuttling Uber’s planned IPO in 2019.
Some might conclude that this scenario is just and overdue. But there are downside consequences. Increased prices would disproportionately harm low-income riders, many of whom rely on rideshare services to reach job sites poorly served by public transport. Urban gridlock would not be “solved,” absent a more systemic approach to congestion pricing. And most of all, singularly focusing on rideshare companies would crimp their operations without addressing the broader mobility needs of the city as a whole.
For better and worse, ridesharing companies have become a significant component of the urban transportation landscape. Problems arise because the priorities of rideshare operators (hyper-growth and profitability) conflict with broader city objectives for reduced congestion, air pollution and land use conflicts. Under the circumstances, allowing rideshare companies unfettered freedom to operate as they choose on city streets is no more optimal than singularly penalizing them for systemic shortcomings in urban transportation service.
It doesn’t have to be this way. There are numerous opportunities to enhance urban mobility by coordinating the activities of city governments and rideshare companies in public-private partnerships. For example:
- Rideshare companies and city transit agencies have amassed extensive databases on urban traffic patterns that would be invaluable in ongoing planning efforts to enhance urban mobility. With appropriate privacy safeguards, sharing data on urban travel trends could benefit all parties
- Rideshare services have an opportunity to further enhance urban mobility by expanding pooled ride services. Operational challenges have limited the growth of such services to date. Drivers complain that it’s too difficult to pick up passengers in dense traffic conditions, making the trips stressful, unduly long and inadequately compensated. Passengers often express the same complaints. But suppose city governments partnered with rideshare companies to create designated carpool pickup areas (akin to bus stops). Uber, Lyft et al could lease access to these sites (yielding city revenue), passengers would know exactly where to connect with their pooled ride vehicle and enjoy quicker trips and drivers would benefit from safer, more reliable and more profitable operations. Higher vehicle occupancy for shared ride services holds the potential to benefit all city stakeholders
- Relatedly, coordinating a citywide congestion tax on all vehicles could reverse chronic and worsening urban congestion. Rideshare companies should certainly pay their fair share of such levies, but arguably should receive some relief for pooled ride operations. Under any circumstances, the determination of appropriate congestion charges should be applied to all vehicles operating in congested central business districts.
- The emergence of escooters and shared bike services offers considerable potential to enhance the attractiveness of public transit service and/or to provide a better alternative to more expensive, congesting and polluting auto travel. There are numerous actions that could be taken to enhance the appeal of two-wheeled travel modes, including the provision of adequate parking spaces for bikes and scooters outside high volume subway stations, expanding the availability of bike/scooter lanes on city streets and offering preferential pricing packages for commuters who use both public and private transportation modes. But implementing such initiatives requires close coordination between private operators and city transport agencies to effectively deploy and continuously improve equitable and efficient mixed-mode services.
- Longer-term, autonomous vehicles hold even greater potential to enhance urban mobility and to shift city landscapes from auto-centric to pedestrian and open space land use. A driverless vehicle future may be a decade or more away, but it’s not too early to initiate ongoing public-private partnerships to conduct long-range planning towards a utopian future.
Future City Landscape
Under the current state of play, both private and public urban transportation providers are struggling with financial pressures and deteriorating service levels. Neither Uber nor city transportation agencies can optimally meet their respective objectives entirely on their own, nor by demonizing, ignoring or punishing the other side. Rather, enhancing urban mobility for the benefit of all stakeholders can best be achieved through effective public-private partnerships aimed at developing systemic transport solutions. Advances in technology hold the promise for dramatic enhancements in the quality of urban life. But getting to a utopian future will require more effective and collaborative management today.
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