Is Uber's Business Model Really Sustainable?

Is Uber's Business Model Really Sustainable?

People love to rideshare using an app, but how long can Uber's model survive after the impact of COVID-19?

Uber and Lyft seemingly operate as a duopoly in the US because they control over 95% of the ridesharing market. The concept is loved by their users and any frequent rider today is unable to imagine a life without this mode of transportation.

The ability to hail a ride using your phone is a real necessity and was already being fulfiled by Sidecar in the US years before Uber was associated with its innovation. Uber became the popular choice by making the app experience seamless and through excess marketing and ride discounts to initial customers. They implemented a business model of large commission and fees to faciliate the huge discounts given to riders which then snowballed into larger and larger control over the Drivers to make the riders happy.

They were warned in 2012 and 2013 that in the long-term their business model could be detrimental. The companies instead assumed that their high commissions would be justified if they had a larger marketshare because their driver would on average earn more daily.

Now 7 years later, they are seeing the long-term effects of their business model that the war for larger market share has instead created a dupoly and did not increase driver wages tremendously. On top pf this, the devastating pandemic has made Uber's growth-only strategy very questionable.

“By now, it’s becoming increasingly apparent that the issues that are putting Uber in the news frequently don’t have much to do with either its business model or its identity as a tech company,” said Arun Sundararajan, a professor at New York University’s Stern School of Business. “If Uber fails—and there’s no guarantee that it will—all of Uber’s investors won’t say, ‘Were we wrong to invest in tech?’” Sundararajan said. “They will say, ‘Did we misread the capabilities of this one company?’”

“A lot of people who are smarter than me have come to the conclusion that we’re in a bubble,” says Rita McGrath, a professor of management at Columbia Business School. “What we’re starting to see is the early signals.”

Uber's extremely high valuations at record losses in previous years makes McGrath and Sundaranjan very skeptical of Uber's adamant narrative that they are still a growth company chasing a $1T total addressable market. Their vision is large and operations team is experienced but they are continuing to build on the wrong fundamentals, a model which does not well for the Drivers.

“To me, it’s a big question of whether they are going to be able to sustain the business model,” McGrath told me. “They have been very disruptive to incumbents, but there are no significant barriers to entry to their model. If you switch [services], you maybe have to re-enter your credit-card information and download a new app, but from there you’re good to go. There are pundits who say it’s only a matter of time.”

What happens then? This raises the question of what happens to all the other unicorns—over 180 startups today valued massively at over a $1 billion according to the latest count by the venture capital database CB Insights?

Despite Uber's popularity, it will be unlikely that anything will set off some terrible chain reaction in Silicon Valley. “You need to make a distinction,” McGrath said, “between the startups that are really creating value and have something that will protect them in the event of imitation—versus the ones that are built on a lot of assumptions that really haven’t been tested yet, and money has been pouring into them because [it] have nowhere else to go.”

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