The Dude has long been wary of the gig economy. During a brief period of unemployment in 2016, he signed up for a couple of the piece-work freelance sites. He found that they were a race to the bottom, with your work effort being constantly reduced in value until you get to less than $1/hour of work required.
So, it is not without this lens that he views the ride share companies – Lyft and Uber – as a house of cards.
Their model of being merely a platform that connects their drivers, relieving themselves of the cost of employees (wages, benefits, legal exposure) and theoretically maximizing their profit potential sounds good from the outside.
But to gain their current dominance, it required outside funding to reduce the cost to consumers to be less than taking a yellow cab fare wise. If you follow their financial disclosures during their “Unicorn” days, it was clear that ever more VC money was being used to subsidize rides across the globe, but in particular in the largest markets. The goal being to undercut the entrenched taxi market, reducing their profitability to nil.
As they approached their respective IPO’s they knew they needed to whitewash their abusive pricing and subsidizing of rides, and they did that largely via squeezing their most precious commodity, their drivers. The percentage paid to drivers was cut repeatedly, in an effort to tart up their books, and to offer a glimmer of hope of one day being profitable.
The Pandemic Strikes
Suddenly, the black swan happens, a highly contagious virus virtually shuts down the demand for traffic as metropolitan area after metro area issued shelter-in-place orders. The few riders were terrified of contracting the COVID-19 virus from the driver or previous riders, and the drivers were similarly freaked out. Of course, call outs (that is users requesting rides via the app) declined precipitously.
Sure, they are pivoting to food and other goods delivery, but that has a tiny fraction of the revenue potential, and even steeper barriers to profitability than ride shares1. But it is something. Drivers need money to stay alive, so they are clamoring to deliver goods as much as they can, but there is a limit.
While the “Shelter In Place” orders will be eased as testing for antibodies grows, it is certain that public confidence to go out, to book rides, to get in “stranger’s” cars will likely take a LONG time to recover.
Long term implications
While it is too soon to tell how this will shake out for the ride share companies, it is certain to cause not just belt tightening, but some significant organizational changes. Already there is evidence of drastic cuts to driver recruitment incentives, marketing budgets, and other seed corn that is required to prime the pump, and keep growth happening. One has to assume that a lot of paring of clerical and staff is coming.
The Dude does feel that the hardest hit demographic, the drivers, may never recover from this. I am sure that many of them will seek more predictable streams of revenue, that will require Uber and Lyft to increase incentives to drive, only to be pressured by the market to reduce costs (aka driver cut of the ride fee) and to reduce ride costs to entice riders who may be wary of the COVID risk to get in a strange car, now matter how clean it is, again.
Food delivery is less profitable than riders, and that won’t make up the deficit.
Yep, it is a lousy time to be long in either Uber or Lyft stocks, the Dude thinks.
Perhaps this will be the beginning of the end of “We are the Uber of xxx” where XXX is any service VC pitches. After a decade, Uber hasn’t found the recipe to profitability, has laid waste to the taxi industry, and now there are legions of drivers who need to find alternative employment.
- In hindsight from late 2023, this isn’t strictly true. The related food delivery services have built out an efficient order taking pipeline to overlay on restaurants, and companies like Doordash and UberEats are firmly enmeshed. Alas, this seems to really squeeze the profitability of the restaurants. ↩︎