The pioneer of ride-hailing is having some problems. It is reported that Uber has lost $1.2 billion in the first half of the year. The company’s losses, along with its revenue, have increased along with its global ambitions, and it can be easily seen.
In 2015, the losses were at least $2 billion, and in their total seven years of operation, they’ve lost at least $4 billion. Another contribution to the massive losses the company experienced this year was the rather fierce price war with competitor Lyft. Uber believes it holds between 84 and 87 percent of the American market; Lyft disagrees with the assertion, claiming that their market share in the main American cities is over 20 percent and has sharply grown since last year.
However, it seems that the smaller company is losing more money than giant Uber, as investors in Lyft were told that their losses would be kept under $50 million per month back in April.
This would be $150 million per each quarter of the year, compared to Uber’s approximately $100 million losses in the second quarter of 2016. Uber delivered 62 million rides, and Lyft just 13.9 million.
Why is Uber losing money?
These expenses aren’t particularly strange, it’s common for companies to experience significant losses in their attempts to build and expand their market shares. Both Lyft and Uber have significant expenses in driver bonuses, discounts, and promotional credits.
Economists think that Lyft can be profitable with its comparatively small market share of roughly 20 percent, as it could reduce expenses because of economies of scale.
The challenge for companies who experience losses in their battles over market share is to become profitable, according to Joe Grundfest, a professor of law and business at Stanford.
“It’s hardly rare for companies to lose large sums of money as they try to build significant markets and battle for market share. The interesting challenge is for them to turn the corner to become profitable, cash-flow positive entities,” stated Professor Grundfest
The opportunities of ride-hailing
Ride-hailing services such as Uber and Lyft are a growing market with an estimated value of $40 billion. This market has interesting characteristics that set it apart from more traditional ones, and according to experts in the field, allow for plenty of room for competition between various service providers.
As ride-hailing lacks huge infrastructure costs, a workforce with a specialized skillset, or customers who might have various difficulties switching to a competing service provider, competition is expected to thrive.
This means that even if a company is the first in the area, it won’t necessarily dominate the market there. The growing market also has few entry barriers, which further promote competition.
However, many people involved, such as investors, believe that ride-hailing is a market where there will be a dominant number one company in the industry or a winner-takes-all situation.
An event that seems to support this view, and is the biggest step towards the consolidation of the market thus far, comes from the Chinese behemoth company Didi Chuxing.
The business has just signed a deal with Uber Technologies, consisting of a 17.5 percent stake in the Chinese company and $1 billion investment for Uber, in exchange for the latter’s withdrawal from China. Uber had lost $2 billion in two years in China; the deal puts an end to those losses.
As mentioned before, investors believe that there is more than enough room for competition, even if Uber is the dominant player — other companies are there, not as big, but still present and with the potential to be profitable.
Sources: The Chicago Tribune