Struggle for profitability
Uber’s struggle for profitability – and the potential limitations of a commodified taxi product that could be undercut on price by competitors such as Lyft and Bolt (formerly Taxify) – has led analysts to speculate that Uber will develop into an integrated platform for multiple transport and delivery services.
“The best comparison I hear our CEO speak to is that Amazon started as a bookstore, but today it’s an everything store… We want to be an app that evolves to meet all of your mobility needs. In the context of Lagos, that might be that you get a tuk-tuk to the ferry, go to the ferry to avoid the traffic and get a high capacity vehicle like a bus on the other side. We want to be a go-to solution for commuters across the cities where we operate.”
Whether regulatory bodies will welcome this remains an open question. The firm’s controversial model, under which drivers are not formal employees, remains the focus of intense criticism. Appearing with Lits on a “gig economy” panel at the World Economic Forum, Winnie Byanyima, executive director of Oxfam International, accused the firm of exploiting drivers and complained that governments had “let rich owners of the technology run away with the benefits and crush millions of people.”
Lits says that the firm is tackling African unemployment and insists it has become much more engaged with regulatory authorities.
“[Early on] we had to launch, prove the model, scale. We’ve now got a track record, we’re here for the long term. They’re seeing that commitment and benefit, and there’s more engagement from regulators to hear us out. In new cities, we don’t just want to launch and the first time a regulator hears about it is reading a newspaper.”
And yet operating across multiple markets and transport sectors necessitates huge investment at a time when Uber’s impatient investors are asking where the profits will come from in a model heavily dependent on driver financial incentives and rider discounts. In September, the firm announced its biggest-ever quarterly loss of $5.24bn in Q2, and revenue growth lagged expectations. In IPO filings Uber warned it may never turn a profit.
Analysts from Goldman Sachs warned of “intense competition, regulatory issues, and operating pressures,” but Lits insists the strategy is one of choice.
“What you’ve seen globally is that a lot of expenses within the Uber world are Uber controlled, the major expenses being rider and driver incentives. If you look at income statements which are publicly available that’s where a lot of the investment is going. What’s good about that is that’s largely within our control and if Uber wanted to become profitable globally, they could reduce those incentives and become profitable relatively quickly because those are controllable expenses. Obviously within that there’s a trade-off, do you want to invest and grow quicker or invest less and grow at a slower rate?”
Will investment continue?
Chief executive Dara Khosrowshahi argued that 2019 would be the firm’s peak investment year before reductions in 2020 and 2021. For now, Lits says incentives are important for African growth.
“I think as a general theme, when we launch in a new country that [incentivisation] would be critical,” says Lits.
“If we launch a new product like UberBoda we need to prove the business case to drivers and provide some comfort around earnings, so yes we would invest. But to your point, it doesn’t make sense to invest in perpetuity, but it’s important to have some investment up front to get that initial growth and traction.”
Are the African operations profitable?
“Obviously being in this environment I can’t really go into detail around profitability. I can say we’re very committed to the markets we’re in and we’re not going anywhere.”
Alon Lits, General Manager at Uber.