Photo: Reuters
Photo: Reuters

Opinion | Uber’s IPO filing affirms a dangerous business model

The game seems to be to wipe out rivals with cheap fares and then raise prices in a mad rush for profitability

Last week, in Delhi, I took an Uber cab to the airport from my home, a distance of about 14 kilometres. The fare came to 235. Two days later, on my return to the city, I decided to hop into a prepaid cab to go home from the airport. For exactly the same distance, I paid 400, a difference of 70%. Nothing had changed in those two days, not fuel prices, not even the price of cars and my home hadn’t moved further either.

To what do I attribute this huge difference in fares then?

Either the prepaid taxis in Delhi, run by the Delhi Traffic Police, were fleecing me, or Uber was being extra sweet to me.

Or maybe the two are in entirely different businesses. That is to say, the prepaid cabs are in the business of making money. As for Uber, profits aren’t what this is all about.

Don’t take my word for it. Here’s what the company said in its recent initial public offering (IPO) filing: “We have incurred significant losses since inception, including in the United States and other major markets. We expect our operating expenses to increase significantly in the foreseeable future and we may not achieve profitability." That sounds ominous. Is the company saying it may not achieve profitability ever?

In 2018, Uber posted an operating loss of $3 billion on $11.3 billion in revenue. Its main home-market rival, Lyft, which operates only in the US and Canada, wasn’t much better off with a net loss of $911 million. Not surprisingly, shares of Lyft were trading at $57 apiece, 35% below their listing price on the company’s Nasdaq debut last month.

Uber’s core ride-sharing business is also under some stress with growth slowing. What’s more, regulators across the world have been looking askance at its monopolistic designs. At the same time, it is forced to buy its way into the other flanking businesses it is getting into. In Uber Eats, for instance, which has declined for two successive quarters, it is forced to accept a lower rate of revenue to gross bookings, to bring on board what it calls “large-volume restaurants at a lower service fee and in geographies with greater competition, such as the United States and India". Unfortunately, Uber Eats hasn’t been too successful in India, with media reports suggesting that the company may look to offload the business.

None of this has cramped the company’s appetite for big acquisitions, though. In March, it reached an agreement to acquire Dubai-based Careem Inc. for $3.1 billion. This follows acquisition of companies like Swipe Labs, Geometric Intelligence and Otto over the last few years.

It’s a strange paradox. If app-based ride-sharing companies such as Uber are the future of transportation, that future isn’t looking particularly profitable. And, while Travis Kalanick and Garrett Camp, the two founders of Uber, are both billionaires, the company has burnt serious cash in the 10 years leading up to its IPO.

Effectively, Uber’s numbers point to a strange new and scary model of doing business, wherein well-funded startups disrupt an existing industry with some innovative service tweaks and then lead a vicious race to the bottom. The big plan, if it can be called that, is to be the last man standing in a bleeding business and then, when all other competitors are dead, hike prices in a mad rush to profitability. Ola, Uber, and Airbnb, as well as other gig economy startups, are all following this playbook. In many ways, Jio is doing much the same to the telecom business in India, though to be fair, it is being funded by profits from Reliance’s other businesses.

The only way Uber or Ola can become profitable is if their profit margins rise significantly from current levels. For that, the companies will either need to charge higher prices from customers or slash the unit cost of a ride by paying drivers less or reduce their marketing spends. In India, driver earnings of all the ride-sharing companies are already under severe strain. In fact, the average monthly pay of an Ola or Uber driver in India is approximately 13,769, according to Indeed.com, an employment-related search engine for job listings. That’s a far cry from the halcyon days when drivers were wooed with incentives and gifts adding up to a tidy little package at the end of the month.

A March 2018 story in Hindustan Times, when Uber and Ola drivers across the country were on strike, chronicled their difficult working conditions amid declining earnings.

In India, there is little scope for further cuts in fares. The average cost of a 10-km Uber ride, as calculated by BusinessofApps, in Delhi is about $3.06, compared to $11.33 in Dubai, $9.22 in Istanbul and $18.74 in New York, making India one of the cheapest destinations for the use of ride-sharing cabs. Much like the disastrous cuts in airline tickets, which brought Jet Airways to its knees, any further reduction in taxi passenger fares may actually be counterproductive, with companies running the danger of drivers quitting their platforms.

There is no doubt that ride-sharing service companies are here to stay. Uber and Lyft, between them, account for twice the number of daily rides in New York than the city’s iconic yellow taxis do. Clearly, passengers have voted for the ease, comfort and lower prices that they offer. For Uber and its like, this has translated into rapid growth. However, as listed companies, they might find that investors need something more than the comfort of market share.

Sundeep Khanna is an executive editor at Mint and oversees the newsroom’s corporate coverage.

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