There are plenty of stories out these days championing the future of Uber, noting it as a “disruptive” technology and convinced that it is the key to the future of urban transportation. I’ve been skeptical for a variety of reasons but perhaps never more so than right now. The company is spending plenty of cash to acquire new members (paying both sides on a referral event gets pricey in a hurry) and that’s OK so long as the free rides eventually translate into a pattern of paid (and profitable) usage. Given recent announcements about pricing in New York City, San Francisco and Boston, however, it is unclear just how well that’s working for them.
It was five weeks ago, in early July, that the prices in New York were cut. Turns out that they want more riders and being more expensive than a yellow cab wasn’t doing so well for them on that front. The new prices are, based on Uber’s math, cheaper than a cab thanks to a 20% rate cut. That cut is a temporary one according to the company, though it is unclear when the rates might go back up or to what level they’ll increase.
Boston is a slightly different situation. The company cut rates by 25% in June on a temporary basis, similar to the NYC move. But rather than raise them up at the end of that trial Uber instead cut fares again, this time an additional 15% was lopped off. This puts the service at a dramatically lower rate than taxis in the markets Uber identified, much moreso than the numbers in NYC. The Bay Area also got a 25% cut for the summer.
And yet there are mixed messages about the overall impact the move has to the company. In Boston the cost of the June rate cuts appeared to come as part of the company’s budget; they stated that, “The price cut is only for riders – drivers are not impacted by the lower fare.” That detail was not mentioned in the latest announcement so it is unclear if the payouts to drivers remain at the higher levels or if they’re taking a hit on the additional cut here. For NYC it is a slightly different story. Uber maintains that this is a good deal for drivers, even as it admits the fare cut is being passed along to the drivers rather than absorbed by the company:
What we’ve seen in cities across the country is that lower fares mean greater demand, lower pickup times and more trips per hour — increasing earning potential and creating better economics for drivers. What does what mean in the long run? They’ll be making more than ever!
Unlike in Boston, however, the drivers in NYC are rather heavily regulated. They must be licensed as a livery driver by the NYC authorities. So it is quite unlikely that Uber is their only gig for acquiring business or that a sudden influx of new drivers is going to appear as rates get cut. On the contrary, it is likely that fewer drivers will participate as their revenues per ride go down, at least based on the rationale Uber uses for their Surge Pricing model (in order to meet the high demand of passengers fares must increase so drivers are willing to get out on the roads. Now we’re supposed to believe that drivers are going to want to be on the road more at lower rates, not higher ones, because they will have more fares. My admittedly rudimentary understanding of basic economics has my not-quite-so-rudimentary bullshit-o-meter going off on this one.
Putting aside the various legal issues surrounding their operation in many locales Uber faces a very difficult balancing act. They must keep fares low enough to attract paying customers while keeping the payout to drivers high enough that they can actually find people willing to drive those customers around. And as the novelty wears off it is unclear that consumers are willing to pay for the rides, even where the rates are demonstrably lower than taxi fares. So either people are unwilling to give up driving their own cars (unlikely in the major cities noted here), mass transit is more viable than some want to admit (entirely possible in these cities) or the demographics of taxi/Uber riders and smartphone users don’t overlap (maybe a bit??).
Or something else. Like maybe Uber isn’t really all that “disruptive” after all. Car dispatch systems have been around for decades. Just putting it in an app rather than via a call center isn’t all that special.
Then again, the drivers are all contractors paid on commission and, other than marketing, the overhead to run the apps is pretty low. Though the legal bills likely are not.
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