Uber’s third an­nual Jan­uary price cut may ham­per its push to eke out a profit in North Amer­ica

▶ The U.S. op­er­a­tion cuts fares while promis­ing im­mi­nent profit ▶ “I’m not even sure I want to drive any­more”

Bloomberg Businessweek (North America) - - Contents -

It’s be­com­ing a bit of a hol­i­day tra­di­tion for Uber: ring­ing in the new year by low­er­ing fares. Amid a price war with ri­val Lyft, the ride-hail­ing leader re­duced its rates by 10 per­cent to 45 per­cent in 100 cities across North Amer­ica. In Detroit, Uber driv­ers’ per­mile rate is less than it takes to cover their gas and the de­pre­ci­a­tion of their cars, ac­cord­ing to IRS fig­ures. “It’s de­press­ing,” says Bill Scrog­gins, an Uber driver in In­di­anapo­lis. “I’m not even sure I want to drive any­more. It feels like I’m do­ing it for free.”

This is the third year in a row Uber has dis­counted fares in Jan­uary. It calls the cuts sea­sonal but says they could last in­def­i­nitely. Last year rates never rose again in al­most a third of cities; only in two did they re­turn to pre­cut prices. Uber has in­sti­tuted tem­po­rary hourly wage guar­an­tees to limit driv­ers’ earn­ings de­clines. It’s as­sured Scrog­gins and other out­raged driv­ers they’ll come out ahead by mak­ing more trips an hour thanks to in­creased de­mand.

That may be what Uber is telling it­self, too. A few months ago, Chief Ex­ec­u­tive Of­fi­cer Travis Kalan­ick told em­ploy­ees that North Amer­i­can op­er­a­tions would turn a profit in the se­cond quar­ter of this year. The goal sounds less re­al­is­tic in light of the price cuts. “Uber has to sac­ri­fice prof­its for growth,” says Evan Raw­ley, a pro­fes­sor at Columbia Busi­ness School.

“We care deeply about driver

earn­ings,” says An­drew Macdon­ald, a re­gional gen­eral man­ager for Uber. “We be­lieve in price cuts when de­mand slows.”

On Jan. 15, Lyft said it would cut fares, too. “With re­cent price changes from the com­pe­ti­tion, we need to take ac­tion,” Lyft wrote in an e-mail to driv­ers. The com­pany also an­nounced a $1 bil­lion round of fund­ing on Jan. 4 to help keep its pink-mus­ta­chioed cars on the road. That brought Lyft’s fundrais­ing to­tal to about $2 bil­lion—a ways from Uber’s $10 bil­lion, but enough to dash Kalan­ick’s hopes of knock­ing Lyft out of the mar­ket. Uber is also churn­ing through cash a lot faster than Lyft, hav­ing said it will spend bil­lions to push its way into China, In­dia, and South­east Asia. In the first quar­ter of 2015, Uber lost $385.1 mil­lion on $287.3 mil­lion in rev­enue, ac­cord­ing to leaked fig­ures pub­lished by the In­for­ma­tion, a tech news site. And losses are grow­ing: In the third quar­ter, Uber lost $697 mil­lion on $498 mil­lion in rev­enue, ac­cord­ing to a per­son briefed on the num­bers.

Over the first three quar­ters of 2015, Uber lost $1.7 bil­lion on $1.2 bil­lion in rev­enue. For per­spec­tive, dur­ing Ama­zon.com’s worst-ever four quar­ters, in 2000, it lost $1.4 bil­lion on $2.8 bil­lion in rev­enue. CEO Jeff Be­zos re­sponded by fir­ing more than 15 per­cent of his work­force.

As it tries to ex­pand abroad, Uber is count­ing on North Amer­ica as a mon­ey­maker. Kalan­ick pre­dicted the con­ti­nent’s im­mi­nent prof­itabil­ity last Septem­ber, dur­ing a com­pa­ny­wide gath­er­ing in Las Ve­gas. (Bey­oncé also per­formed.) Glob­ally, Uber tends to lose money per ride, but rid­er­ship is grow­ing. To­tal trips in­creased about 40 per­cent from the se­cond to the third quar­ter of 2015, says a per­son fa­mil­iar with the data. On a Novem­ber call with in­vestors, act­ing Chief Fi­nan­cial Of­fi­cer Gau­tam Gupta said the com­pany is prof­itable in two of its big­gest coun­tries, though he wouldn’t name them.

In North Amer­ica, Uber has inched to­ward profit, even with lower fares, in large part by lean­ing harder on driv­ers. It takes as much as 30 per­cent of a driver’s fares now, up from 20 per­cent two years ago. Since 2014 it’s been charg­ing rid­ers an up­front Safe Rides fee, which goes di­rectly to Uber. The fee started at $1 per ride; it’s up to $2.50 in some cities. Uber has said it uses the charge to help fund things such as safety education and back­ground checks.

If driv­ers win rights as em­ploy­ees or man­age to form unions, Uber may have to change strate­gies. For now, a steady in­flux of con­trac­tors means the com­pany can get away with added fees and rate cuts, says Si­mon Kwok, a Bos­ton driver who runs a blog about Uber and Lyft. While veter­ans com­plain that rates used to be higher, he says, “the new guys just don’t know.” �

$1.7

bil­lion Amount Uber lost in the first three quar­ters of 2015, on rev­enue

of $1.2 bil­lion “We’re gonna get Ap­ple to start build­ing their damn com­put­ers and things in this coun­try in­stead of in other coun­tries.” Don­ald Trump, dur­ing a Jan. 18 speech at Lib­erty Univer­sity. Ap­ple CEO Tim Cook has said the U.S. lacks other coun­tries’ man­u­fac­tur­ing ex­per­tise. The bot­tom line Uber’s third year of Jan­uary rate cuts is com­pli­cat­ing its ef­forts to eke out a profit in North Amer­ica by June.

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