FRANCISCO ó In the fight for more customers, drivers
and market share, ride-hailing companies have in recent
years embraced a simple but powerful strategy: cheap
Lyft and other firms have used their ample venture
capital backing to subsidize drivers and lower fares,
igniting a price war that has benefited passengers at a
great cost to the companies themselves.
a policy so common that customers have come to see heavy
ride discounts as the norm, but itís also now facing
new questions after Uber opted earlier this month to
cede the Chinese ride-hailing market to fierce
competitor Didi Chuxing.
Uber, which is valued at $62.5 billion, is no longer
sinking a billion dollars a year into artificially
keeping fares low in China, will it redirect those funds
back home to fend off competitors such as Lyft, Juno and
Via with even more subsidies than before? Or is it a
sign that fare subsidies are flat-out unsustainable,
with Uberís retreat from China serving as proof that
the strategy doesnít work?
company like Uber has to balance two things: gaining
market share while also demonstrating to investors they
can turn a profit," said Arun Sundararajan, author
of "The Sharing Economy: The End of Employment and
the Rise of Crowd-Based Capitalism," who noted that
as the ride-hailing industry matures, the race to the
bottom makes less and less sense.
growth may have been the dominant metric for success 18
months ago, but if the last year is anything to go by,
investors are now demanding a path to both profitability
and an initial public offering of stock ó one that is
likely to remain blocked if Uber continues to spend the
way it did in China.
U.S. is the market investors are looking to as proof
that Uberís model can be profitable in a way that
justifies its valuation," Sundararajan said.
"Itís going to be hard to get to profitability if
they sustain a price war with Lyft."
isnít without deep pockets either. Despite being the
distant No. 2 behind Uber, it received a $500 million
investment from General Motors this year. Sundararajan
believes that as a younger company with a comparatively
modest $5.5 billion valuation, Lyft will find it easier
to continue to raise funds compared with Uber, which has
already tapped out venture capital firms and mutual
funds, and has since turned to sovereign wealth funds
and convertible debt.
analysts havenít ruled out the possibility of Uber
driving Lyft out of the game altogether, there are
plenty of reasons why Uber ó and even consumers ó
may want to avoid a fight to the death.
Uber, which is already a market leader in the U.S. and
Europe, crushes its competition, it runs the risk of
"becoming the 800-pound gorilla" that sparks
debates about price regulation and even antitrust
concerns, said Mark Skilton, a professor at the Warwick
consumers who benefit from a cutthroat price war should
expect higher prices if a single company wins out, said
Evan Rawley, a professor at Columbia Business School who
has researched the ride-hailing industry.
network economics," he said. "The classic
bargain-and-rip-off strategy. Weíve had the bargain
phase, and now weíre heading toward the rip-off
tech industry has seen such economics before. Microsoft
was sued in 1998 for allegedly violating the Sherman
Antitrust Act. Having achieved a monopoly in the
operating system and web browser categories, the company
was accused of increasing the price of the Windows
operating system while knowing that consumers wouldnít
have an alternative but to pay up. The case was later
has said since 2014 that Uber will eventually increase
fares as soon as it has the market cornered.
hasnít revealed its market share in the U.S., but
outside its home city of San Francisco, where Lyft
commands nearly half the market, Uberís presence
dwarfs the competition.
the years since Rawleyís prediction, Uberís fares
have only gotten lower, dragging its competitors into a
costly subsidy battle. But just look to China, he said,
where this monthís news of Didi absorbing Uber China
spelled the end for both companiesí cash-draining
described the news of the merger as the start of a
transition in the ride-hailing industry from
"intense competition to collusion," in which
companies go from giving away a service at a low price
to harvesting the investment theyíve made.
STORY CAN END HERE)
knowing the inner financial workings of these privately
held companies, itís hard to know how much longer the
heavy discounts and driver subsidies will last. But
Skilton, the Warwick Business School professor, believes
that so long as the competition in the U.S. remains
fierce, the main players are more likely to offer
premium services at higher costs than they are to change
the prices of their basic services, which make up the
bulk of their ridership.
already offers its town cars and high-end SUVs as
pricier alternatives to UberX. Lyft introduced Premier
this year, allowing passengers to pay extra to ride in
high-end cars with leather seats.
race to the bottom is costly, Skilton said, and Uberís
battle in China shows that sometimes itís simply not
worth paying. Ultimately, he said, it makes more sense
for ride-hailing services to try to win market share not
by seeing how low they can go but how valuable they can
be to the customer.
it was perhaps Uber itself that put it best. Its head of
operations in Asia, Allen Penn, told the Financial Times
in June: "You can go out, spend a bunch of money in
a city and gain some market share, but thatís not
real," he said. "Youíre just kind of buying
all of it ó (though) youíre really more renting than