The quest for market share: Is Uber’s business model sustainable?

By Mary Ebeling

A new analysis of the scant information on Uber’s profits and losses—information normally confined to investor meetings at this privately held company—calls into question the long-term sustainability of the company. It also raises concerns about whether Uber will be the transportation solution that some cities and transit companies have looked for.

As a privately-held company, Uber is not required to release its financials or undergo the same audits as a publicly-traded company. But investors have been briefed, and the information is leaking out. Financial analysts are beginning to question the business model, as it suggests that the company is subsidizing artificially low fares as a way to gain market share in cities where the company operates. The main concern voiced in the financial blogosphere is that Uber could be attempting to set up a monopoly in the ride-hail industry that will result in higher, not lower, pricing.

This concern is not associated with fears that Uber will kill transit. This is unlikely to happen, as Uber serves a different niche. Transit specializes in moving large numbers of people per service hour along a fixed route, taking advantage of economies of scale. The strength of transportation network companies (TNCs) like Uber or Lyft lies in the ability to bridge first- and last-mile gaps in fixed route service, or to provide transportation during hours when transit is either running reduced service or not running at all. However, as transit agencies in communities across the country enter into partnerships with Uber, Lyft, or other TNCs to address these first and last mile challenges they would do well to investigate the financial stability of those companies.

The recent financial discussion focuses on the subsidies appearing to flow from investor capital, which is presumably finite. These same analysts voice concerns that Uber intends to capture market share through artificially low pricing made possible by the subsidies. Once it eliminates the competition, it is uncertain if the prices will remain affordable to customers.

“For the year ending September 2015, Uber reported losses of $2 billion on revenue of $1.4 billion, a negative 143 percent profit margin. Thus Uber’s current operations depend on $2 billion in subsidies, funded out of the $13 billion in cash its investors have provided.” This analyst estimates Uber customers paid just 41 percent of the cost of a trip.

According to an analyst at Bloomberg Technology, Uber is “spending hugely on driver subsidies … mostly overseas.” Uber also lays claim to between 84 and 87 percent of ride hail bookings, showing bookings grew to 5 billion dollars in first quarter of 2016. These numbers include the different services Uber offers, including Uberpool and package delivery. Given the growing importance of this service in a multimodal transportation system the industry should remain current on developments with the TNCs.

We reached out to Uber for comment, but did not receive any response.

Mary Ebeling is a Transportation Policy Analyst at SSTI.