Can Uber Ever Be Profitable? [part 4 of 4]

his is the last of a four-part series on Uber’s past and future. Today’s article focuses on how and if Uber can deliver on the long-term, transformative, profitable future that its CEO has promised.

1. Why Uber May Never Be Profitable — June 2, 2019
2. Are There Quick Fixes To Improve Uber’s Profitability? – June 3, 2019
3. What Can Uber Do In The Short- To Medium-Term To Reverse Its Steep Losses? – June 4, 2019
4. Can Uber Ever Deliver The Transformative, Profitable Future That Its CEO Has Promised? – June 5, 2019

In the months leading up to Uber’s IPO, to deflect attention from the company’s worsening financial performance, CEO Dara Khosrowshahi increasingly promoted his long-term vision for Uber to become the Amazon of transportation.   “If there’s one big goal for Uber it’s to replace car ownership,” he told the Financial Times in October. Can Uber deliver the transformative, profitable future that Dara Khosrowshahi has promised?  It’s a long shot, that under the best of circumstances, will take a very long time to play out. We have to start by taking autonomous vehicles (AVs) off the table. AVs pose both an existential threat and potential savior for Uber, which is why the company continues to invest billions of dollars protect its future. But realistically, the likelihood is virtually nil that:

• AV’s will be widely deployed within the next decade, and that…
• Uber’s technology will emerge as one of the few winners suitable for both its own use and to profitably license to others, and that…
• Ridesharing operating economics will radically improve with capital-intensive AV technology that Uber may or may not control.

Investors with an extremely long time horizon and a high risk tolerance may want to take the AV bet on Uber, but Khosrowshahi needs to build a profitable, resilient enterprise long before AVs possibly come to the company’s rescue. The key to Uber’s turnaround is reconstructing its current operations in ways that eliminate the business model weaknesses that cripple its financial performance. What would Uber’s version of the Amazon of transportation look like? Imagine a world in the not-too-distant-future, where Uber becomes the dominant global provider of multi-modal Mobility as a Service (MaaS), where customers could enter a desired destination on Uber’s enhanced app and select their preferred travel mode(s) from a wide array of choices, including

• Individual or pooled ridesharing services, as now
• All public transportation services
• Micro-mobility services: ebikes and scooters
• Peer-to-peer short-term car rental
• Longer-term car rental
• Emerging new travel modes, including autonomous mobility aircraft
• Any combination of the above (e.g. Uber Pool to a commuter rail station, train to city center, scooter to the workplace; or, bike to peer-to-peer car rental location, return vehicle after several stops, walk home, etc.).

The app would give each user the ability to select their preferred travel mode(s), reflecting their personal preferences for speed, cost, or other attributes. The combined fares would then be automatically charged to the customer’s Uber account, with payments automatically allocated to each service provider, according to multi-lateral revenue sharing agreements. Encrypted codes on the user’s smartphone would enable automated access to each mode used, and enroute, customers would be alerted via smartphone to any logistical problems, necessitating rerouting at no additional traveler cost. Customers could choose to utilize Uber’s expanded mobility services on an à la carte basis, at a price no more expensive than current fares on each mode used. Alternatively, customers could pay a monthly subscription fee in return for varying discounts tied to the chosen payment plan. In the highest monthly payment tier, subscribers would receive virtually unlimited access to the full suite of multi-mode services at low or no per-trip cost, which for most households would be cheaper than the amortized cost of vehicle ownership. Uber’s envisioned mobility as a service offering would thus compete not only against other ridesharing, public transport and taxi services, but against individual car ownership itself, which helps explain how Khosrowshahi arrived at his breathtakingly high estimate ($12 trillion!) of Uber’s total addressable market. Like Amazon, Uber’s MaaS vision would lend itself to numerous product line extensions. Uber Eats would of course be folded into the expanded MaaS platform with à la carte and subscription plans. Local package delivery would be sure to follow, and Uber of course would also add payment and revenue allocation services to its value chain. After enrolling a massive base of loyal customers (like Amazon Prime), whose monthly subscription payments would lock in repeat use, other transportation service providers would clamor to become included on Uber’s platform. After all, in an Uber-controlled MaaS world, standalone micro-mobility providers like Bird, Lime, Skip, Scoot, and Spin, and food delivery providers like Postmates, Doordash, GrubHub, and Caviar would be at a severe disadvantage. While Lyft also aspires to move towards a similar MaaS vision, Uber’s scale and scope advantages should ultimately prevail in a winner-take-most market outcome. At least that’s the storyline behind Khosrowshahi’s vision. Can Uber realistically succeed in becoming the dominant one-stop shop for urban mobility? The company already has some of the building blocks in place.

• Broader range of services than most competitors (car-based ridesharing, scooters, bikes, food delivery, stakes in developing air mobility services)
• Leading market share in hundreds of cities
• Partnerships with public transit tracking service Moovit to power real-time transit updates, and digital transit ticketing platform Masabi to sell tickets
• Budding relationships with transit agencies for in-app multi-mode trip planning, mode choice, and payments, as already implemented in Denver.
• Dedicated team of professionals committed to expanding Uber’s broad vision
• A strong balance sheet

As the ex-CEO of Expedia, Khosrowshahi clearly knows that companies who succeed in becoming a one-stop shop for aggregated transportation services can be immensely profitable at the expense of subordinated service providers. As such, Khosrowshahi undoubtedly would love Uber to recreate the success of online travel agency Booking.com, which captured most of the shareholder value gains over the past decade in the airline and hospitality sectors. But Uber faces daunting challenges in fulfilling Khosrowshahi’s vision of becoming the dominant global provider of urban mobility services.

1. Scalability To achieve global (or even national) MaaS market dominance, Uber needs to forge partnerships with transportation service providers — starting with local transit agencies — one metropolitan area at a time. In contrast, when an online travel agency (OTA) like Expedia convinces Delta or Hyatt to list their offerings, the OTA gains access to the entire global flight and hotel inventory in one fell swoop. Thus, even if public transport service providers were currently ready, willing and able to integrate their services with Uber’s MaaS app (and they’re not), forging the requisite service level agreements, revenue sharing rules, and complex systems integration tasks across Uber’s geographic footprint would take a very long time.
2. Transit Agency Reluctance

By sheer force of numbers, public transport has to be at the heart of a truly comprehensive MaaS service in Uber’s largest urban markets. For example, nearly six million passengers ride the New York City transit system every weekday. But therein lies the challenge, as most city transit operators currently have neither the will nor the way to support Uber’s ambitious MaaS vision, for a number of reasons

• Uber is perceived more like a for-profit competitor than a partner by many city transit agencies. Fueling this belief, in its initial S-1 IPO filing, Uber explicitly stated that the company’s future growth depended on better competing with public transportation − identified as a $1 trillion market opportunity. Uber subsequently amended its S-1 to remove the offending language, but transit agency suspicions understandably linger.
• Confirming city government concerns, several studies have shown a direct link between Uber’s ridesharing growth and declining transit ridership in most metropolitan areas.
• Uber is still trying to overcome lingering ill will in many city governments as the result of its uncollaborative past behavior
• Many city transit agencies have statutory restrictions against paying a booking or agency fee on transit fares. And even if not restricted by law, transit agencies that are already saddled with deep operating losses would be understandably reluctant to pay booking fees to a profit-making enterprise.
• There are legitimate concerns that Uber would be a biased and untrustworthy partner, promoting its own ridesharing and micro-mobility services over public transportation on an Uber-run MaaS app
• Even if a transit agency wanted to partner with Uber, many simply don’t have the systems in place to allow for fully automated digital fare operations, nor the budgets to transform their current infrastructure.

3. Competitive DynamicsFor obvious reasons, other urban transportation and food delivery providers (e.g. Lyft, Bird, DoorDash) will strongly resist listing their services on an Uber MaaS app, particularly in cities where they currently enjoy strong market positions. Unlike OTA’s (e.g., Expedia and Booking.com), Uber is in direct competition with the very providers that could strengthen the appeal of a comprehensive MaaS offering. The Catch 22 isUber can’t attract third-party providers unless they already command a dominant market share position, and for now, Uber lacks market dominance against strong, well-capitalized competitors.
4. Inconclusive MaaS Experience To Date For the reasons above, the first truly multi-modal MaaS pilots have been developed by third-party providers, who aggregate, rather than operate urban transport services. Finland has emerged as a pioneer in MaaS endeavors, reflecting its densely populated urban areas, excellent public transportation systems and broad societal belief in the need for planet-friendly mobility services. MaaS Global launched a Helsinki-based service named Whim in October 2016, giving consumers the opportunity to plan, book and pay for urban trips individually, or under various subscription pricing plans. Whim has since expanded to Birmingham and Antwerp, and plans to expand to the US, Japan, and Australia later this year.

While it has achieved impressive growth to date, facilitating 3.8 million trips through 2018, it’s important to view Whim’s impact in perspective. Whim accounted for only .5% of all transit trips in Helsinki last year and the city’s transit agency has still not opened up its ticketing system to allow Whim subscribers to enjoy the convenience of monthly passes (forcing Whim users to obtain a new ticket every time they ride). And not surprisingly, Uber has refused to link its service in Helsinki to the Whim app. Whim’s experience illustrates the difficulty of getting all available urban transport providers on board to support the objectives of a citywide MaaS provider, and Uber is likely to experience even greater resistance, given its competitive conflicts with existing transportation providers. Another European MaaS operator, UbiGo, launched a MaaS pilot in Gothenburg, Sweden in 2016, enrolling 70 households who agreed to exclusively use its multi-modal service app as a substitute for personal auto use for six months. While pilot users reported being generally satisfied with their car-less experience, UbiGo was unable to transition to a broader commercial application. The company just launched a new MaaS service in Stockholm whose impact is yet to be determined. As is evident, MaaS systems are still at a very early stage of development. Considerably more operational experience is required to validate the potential of MaaS to enhance urban mobility at lower cost, congestion and environmental harm than uncoordinated transportation systems currently in use. The experience from early pilots suggests that successful MaaS providers need to overcome three key challenges: effective governance, consumer acceptance, and economic viability. The governance challenge relates to the need to integrate the full range of services offered by public and private urban transport operators, each of whom has very different objectives, priorities, and capabilities. The second challenge is the need to change consumer behavior, convincing car-owning households to substitute MaaS services for habitual auto use. And the third challenge relates to the ability of MaaS enterprises to achieve financial viability in a sector where both private and public transportation service providers have been chronically unprofitable. There are legitimate concerns with ceding control of urban mobility – the lifeblood of a city’s economic and social welfare – to any private operator, but especially Uber, whose past uncollaborative behavior, closed platform architecture, and urgent profit needs may conflict with the objectives and sensibilities of municipal governments. Such governance concerns will either delay or preclude Uber from gaining permission to incorporate transit services on its app, force all MaaS players to utilize open architecture platforms (as is already the case in Finland), and/or trigger regulatory pricing controls, all of which would weaken the financial upside of Uber’s grand vision. Summing it up It’s easy to see why CEO Dara Khosrowshahi has been talking up his long-term vision to transform Uber’s business model and financial performance. The company’s existing business model will likely never yield the returns required to justify even its current sub-IPO market value, let alone attractive shareholder value growth going forward. Therefore Uber needs to move with urgency towards its stated goal of becoming the Amazon of transportation, delivering a global MaaS platform to ultimately replace most privately owned cars. Khosrowshahi doesn’t have the luxury of time. Unlike Amazon, which started generating significant and growing positive operating cash flow in its eighth year as a company, Uber continues to burn cash at a frightening rate (almost $6 billion in the past three years), a decade after its launch. Having confidence in Khosrowshahi’s ability to speed the realization of his long-term vision, requires one to embrace four fantastical beliefs:

1. Hundreds of municipal governments will  move independently with unusual consensus and speed in agreeing to subordinate their public transportation services to Uber’s increasingly dominant MaaS platform on financial terms favorable to Uber
2. Consumers will willingly abandon their cars to rely on the convenience of Uber’s MaaS platform, dramatically expanding the demand for modes of transportation already offered today through uncoordinated public and private operators
3. Uber will be able to coerce third-party providers to accept booking fees on Uber’s platform, and/or convince consumers to pay convenience fees (à la Ticketron) to purchase urban mobility services, thereby generating sizeable profits on the backs of transportation modes (e.g. mass transit, ridesharing, micro-mobility services) that have been individually and collectively highly unprofitable for years.
4. Investors will continue to support Uber as a public company, in an environment more attuned to quarterly earnings than highly uncertain, long-term visions, requiring heavy capital investment and protracted negative operating cash flows.

Needless to say, making Khosrowshahi’s vision a reality faces a long runway and steep odds.

~source