Why the Decade of Cheap Uber Rides Is Over

Investors subsidized cheap ride hailing for a decade in order to corner the market and drive out cabs as well as public transportation. 

The investors now want their return on investment - and drivers who have options thanks to the Great Resignation - expect to make a living wage. Which means those who came of age expecting a $5 ride anywhere face a lifestyle change. JL 

Henry Grabar reports in Slate, image Andrew Kelly, Reuters:

Uber has lost an astounding sum since its founding in 2009 - $30 billion in the five years since the company’s finances became public. This amounted to an enormous, investor-fueled subsidy of  ride-hailing habits. Those days are over.  Rides have been getting - and will continue to get - more expensive. Uber prices rose 92% between 2018 and 2021. Both Uber and Lyft have added a surcharge for riders that helps drivers account for high gas prices. (But) that subsidy distorted the market, quashed business models that might have thrived. Those effects might reverse if rising prices push people back onto the bus.

Recently I was talking with an executive who used to work in car-sharing—the wave of companies, led by Zipcar and car2go, that tried to disrupt automobile ownership in the 2010s. Many of those companies are now gone or in retreat, for which he offered a few explanations, such as the cost of maintaining the fleet (a broken window might eat up a couple months of a car’s revenue) and the logistical hassle in cities that liked the idea of new mobility options but didn’t always want to part with the curb space that made them possible.

One of the biggest factors in car-sharing’s demise, the executive said, was Uber. Getting a door-to-door ride was always going to be more convenient than renting a car yourself. But here’s the weird thing: For much of the last decade, even for long rides, taking an Uber has also been cheaper.

That is because Uber has lost an astounding sum since its founding in 2009, including more than $30 billion in the five-odd years since the company’s finances became public. Together with earlier losses and a similar strategy at rival Lyft, this has amounted to an enormous, investor-fueled subsidy of America’s ride-hailing habit.

Those days are over, Uber CEO Dara Khosrowshahi told employees in a memo last week. “The average employee at Uber is barely over 30, which means you’ve spent your career in a long and unprecedented bull run,” he wrote. “This next period will be different, and it will require a different approach. … We have to make sure our unit economics work before we go big.”

As Ali Griswold observes in her newsletter about the sharing economy, that’s a weird line coming from a guy whose company’s market cap is five times the size of American Airlines. Uber is big. “Uber has always said it would reach profitability at scale, thanks to network effects, etc.,” Griswold writes, “but what is scale if not a company that operates in 72 countries and more than 10,500 cities, which last year had 118 million active users every month and completed 6.3 billion rides/trips/deliveries? Uber is the definition of scale, yet it is still nowhere near consistent and reliable profitability.”

How Uber rights the ship is not for me to figure out, but one obvious answer is that rides have been getting—and will continue to get—more expensive. Average Uber prices rose 92 percent between 2018 and 2021, according to data from Rakuten; a separate analysis reports an increase of 45 percent between 2019 and 2022. Both Uber and Lyft have added a surcharge for riders that helps drivers account for high gas prices. And all that was before last week’s ultimatum

Think of it as a city-transportation parallel to what economists are calling the end of the “era of free money,” as interest rates finally rise. It’s the end of a decade in which we changed our systems, our habits, even our architecture, around the assumption that we could be driven around for cheap.

The cynical assumption was always that Uber was burning all that investor cash in order to corner the market. Once it killed off car service, taxi cartels, and its ride-hail rivals, the company would stop charging riders less than it was paying drivers and prices would have to go up. On Monday morning, an Uber from Manhattan to JFK Airport was $100—nearly double the fixed yellow cab rate. But good luck finding a yellow cab!

The Uber-taxicab showdown is how most people conceive of Uber’s market-swallowing impact, but the Decade of Cheap Rides had more profound effects on how we live and get around. The failure of car-sharing companies like Maven and car2go is one example of how all that subsidy distorted the market, quashed business models that might otherwise have thrived, and changed habits that might have otherwise endured. It did this for the good—reducing the size of parking lots, suppressing drunken driving—and for the bad, increasing car ownership and traffic congestion.

One well-known consequence of the rider subsidy is the decline in public transit. One study estimates the arrival of Uber and Lyft in a city decreases rail ridership by 1.29 percent and bus ridership by 1.7 percent each year. In San Francisco, where Uber was founded, the authors estimate Uber has decreased bus ridership by 12.7 percent. A second study concluded a 5.4 percent decline in bus ridership in midsize cities. A third study clocked the decline at 8.9 percent. A related Uber phenomenon has been a sizable increase in downtown traffic congestion.

Those effects might reverse if rising prices push people back onto the bus. But other changes have more sticking power: The assumption that Uber would debut flying cars and autonomous vehicles any minute now helped discourage investment in better transit service and capital projects. Airports have been redesigned to account for flyers’ likelihood of taking cabs. Real estate developers reacted as the premium for transit access declined. Observers credited Uber and Lyft with helping to “revitalize Nashville’s urban core” and with “changing nightlife in Los Angeles.” Food service entrepreneurs went all-in on delivery, opening “ghost kitchens” that sometimes prepared food for a half-dozen “restaurants” at a time.

While the transportation-network companies probably increased vehicle ownership, they also gave cities cover to reduce expensive parking mandates, and developers responded with smaller garages or no parking at all. The builders of Cul de Sac, Phoenix’s first parking-free development, credit the rise of “ride sharing” for making their project possible. It has also changed the model for restaurants and bars, which don’t require as much parking as they used to. That’s good for land use and very good for drunken driving rates, which have fallen significantly as Uber uptake has increased.

Many of those changes have been beneficial. Some have been less so: New York City, for example, overthrew its old taxi regulation system overnight, bankrupting the immigrant entrepreneurs who bought in. The question now is whether all our Uber adaptations stick around as the company seeks profitability and free cash flow. Maybe it doesn’t matter that much if prices go up: An on-demand ride is such a good product—and the bus so unreliable, the parking so hard to find, driving so tedious—that people may be willing to pay twice what they did before. Companies come and go, their products and prices change, and consumers adapt.

But maybe not. The level of money plowed into creating the Uber-Lyft system is reminiscent less of typical corporate expansion than of a big government project like the Concorde. The supersonic jet ultimately wasn’t a good enough product to endure in spite of all the money that had been spent on its development. But at least when the Concorde revealed itself to be fundamentally incompatible with the times, it didn’t employ millions of people and ferry around billions more.