Hubert Horan: Can Uber Ever Deliver? Part Eighteen: Lyft’s IPO Prospectus Tells Investors That It Has No Idea How Ridesharing Could Ever Be Profitable

By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants

Can Silicon Valley investors create $125-150 billion in ridesharing market value out of thin air?

This series, since the first Naked Capitalism post in 2016, has focused on Uber as the dominant and strategically pioneering ridesharing company, and as the only source of public data that could support independent analysis of ridesharing economics.

Last Friday, March 1st, Lyft issued its Form S-1, also known as a prospectus[1], significantly expanding our base of objective data about ridesharing. This post will analyze Lyft’s key   claims. Reports indicate that Lyft is pursuing an IPO value of $20-25 billion, while Uber may be pursuing as much as $125 billion from its upcoming IPO.

Uber claimed that the “ridesharing” industry it had pioneered had substantially superior economics based on major technological innovations that explained its disruption of the traditional taxi/urban car service industry. This series presented evidence showing that those claims were nonsense and that ridesharing companies were actually less efficient than the traditional companies they were driving out of business.

It is important to understand Uber and the other privately-owned ridesharing companies since   their impacts extend far beyond urban transport. One of the central themes of this series is that they have (and will continue to) significantly reduce overall economic welfare, and represent a major attack on the idea that the actions of consumers and investors in competitive markets can allocate capital to more productive uses.

The critical characteristic of ridesharing companies (such as US based Uber and Lyft, or Asian based Didi, Grab or Ola) has nothing to do with smartphone apps or competitive advantage or operational efficiency. It is the fact that they are backed by billions in cash from venture capitalists who have been willing to subsidize years of massive losses. Instead of consumers choosing the most efficient car service, those subsidies led them to choose the company that didn’t charge them for the actual cost of the service, and provided far more capacity than could be economically justified. Instead of funding the companies with the strongest sustainable competitive advantage, those subsidies led investors to fund the companies with the artificially inflated growth rates that suggested a path to quasi-monopoly market dominance.

Under private ownership, the claims that the ridesharing companies had created unprecedented levels of economic value ($70 billion for Uber, $15 billion for Lyft) had never been subject to any broad-based analyst or investor scrutiny. This series has argued that the unprecedented accomplishment of ridesharing is that its entire valuation was manufactured out of thin air. The valuation of other large Silicon Valley based companies (Amazon, Facebook) may be seriously inflated, but they had clearly established legitimate economic foundations, including powerful product and operational innovations, profits and strong cash flow.

This series has documented that Uber has no economic foundation, aside from its predatory use of billions in subsidies. None of its claimed technological innovations allowed it to produce car service at lower cost than incumbents, or create sustainable advantages over future competitors. It would still require billions in new efficiencies to reach operational breakeven, and billions more to economically justify the funding its investors provided. [2]

Lyft’s IPO kicks off the endgame of the “ridesharing” corporate value creation process

As discussed in Part Seventeen of this series [3], both Uber and Lyft filed preliminary, confidential prospectus data with the Securities and Exchange Commission in December, kicking off a race as to who would go public first. Travis Kalanick did not feel Uber was ready to face full capital market scrutiny, triggering a rebellion of Board members who impatient for actual returns on their investment. Kalanick was replaced by Dara Khosrowshahi in late 2017, who committed to take Uber public in the fourth quarter of 2019. Lyft wanted to go public first, to avoid the expected glut of IPOs this year (including Pinterest, Slack, Postmates and Airbnb) and to minimize direct comparisons with Uber. When word leaked that Lyft was targeting a first quarter IPO, Uber accelerated its filing plans but Lyft won the race.

The public release of Lyft’s S-1 filing will be followed (apparently starting the week of March 18th) with a series of investor roadshows. Based on investor feedback, Lyft and its lead investment bankers (JP Morgan, Credit Suisse and Jefferies) will set final prices and terms, and the date for the actual IPO.

Last Friday was the first time investors ever had the chance to review actual Lyft financial results. In the next few weeks they will have to decide whether they want to risk real money on the chance that Lyft’s value will continue to appreciate above the IPO price. If investors line up to buy Lyft stock at the company’s hoped-for $20-25 billion valuation, then the efforts to create ridesharing value out of thin air have succeeded, and it will make it much easier to Uber to achieve a strong valuation. Significant investor resistance to Lyft’s valuation objectives could cause serious problems for both companies, and could possibly burst the widespread public perceptions about ridesharing.

Four key questions potential Lyft IPO investors will want the S-1 to answer

  1. Does the prospectus provide data showing that Lyft have a clear path to convert its current losses into ongoing, growing profits? Is there data showing exactly which factors (e.g. the ability to raise prices, the ability to capture market share, the ability to increase operational efficiency due to scale economics or new innovations) are likely to drive years of profit improvement?
  2. Is there data showing that aggregate demand for ridesharing is likely to grow strongly for many years? What might drive future demand growth (expansion into untapped markets, the ability to continually lower prices, capturing demand currently using other transport modes)?
  3. If Lyft could achieve sustainable profitability in its core ridesharing market, is there evidence showing how it could leverage its existing infrastructure and rapidly build profitable positions in other markets?
  4. As Uber will always be larger, is there evidence showing that both a primary and secondary competitor can profitably coexist without ongoing destructive market share battles?

Lyft’s prospectus doesn’t answer any of these questions

Lyft’s prospectus provides absolute no data demonstrating that it has the ability to profitably raise prices over time, increase operational efficiency or win significantly greater market share. It cites “growing the rider base” as the first plank of its future growth strategy, but provides no data showing what it thinks its current share of the market is, no estimates of future aggregate market growth, no evidence of what might drive that growth, and no explanation of what its future growth potential might be. Lyft makes no attempt to lay out a possible path to future profitability, or even a timeline as to when breakeven might be achieved.

The prospectus narrative includes a large number of claims that are completely unsubstantiated. Lyft says it has “continually improved rideshare marketplace efficiency” but provides no evidence of how its innovations or other claimed improvements actually reduced costs. It claims that “we expect our Contribution Margin to increase over the long-term as we scale and increase the usage of our platform” but provides no evidence showing how increased platform usage can drive significant margin improvements.

It highlights actions taken to “increase driver utilization when on the platform” without providing any data about actual driver utilization. It points out that “maintaining an ample number of drivers to meet rider demand” is one of the most critical drivers of performance, but provides no data on mix of drivers needed to meet that demand, and no data on driver turnover. It acknowledges “our need to provide larger incentives to drivers to help keep up with rider demand” but fails to explain how it can meet expected demand growth (or capture share from Uber) without directly reducing profitability.

The prospectus mentions several new markets Lyft is pursuing (scooter rentals, autonomous vehicles) but says absolutely nothing about the economics of those businesses, their near-term capital requirements or how they might contribute to future profitability. It acknowledges that the scooter business is currently an immaterial part of the business, but makes no attempt to explain where returns from its recent scooter company acquisition might come from, or when scooters might become a material part of the business. It mentions investments in a new “autonomous vehicle engineering center” and several AV-related joint ventures, but doesn’t say how big those investments were, or how they might eventually contribute to profitability.

The prospectus claims that “within 10 years, our goal is to have deployed a low-cost, scaled autonomous vehicle network that is capable of delivering a majority of the rides on the Lyft platform.” But it provides absolutely no explanation as to why investors should believe that Lyft will be able to more profitably operate much more expensive and risky new technology than the other companies pursuing this (still hypothetical) opportunity. It doesn’t even bother to explain why investors should believe Lyft’s claim that widespread commercial use of AVs will be possible in this timeframe, given that just two years ago Lyft was predicting this would be achieved just two years from now. [4]

Lyft’s IPO is structured so that its current senior executives will get “B” class shares that have 20 times more votes than the “A” class shares the public can buy. Thus anyone buying “A” shares must have complete faith that the current owners can lead the company to sustainable profits and steady equity appreciation. The prospectus provides no explanation as to why investors should have this level of faith in current CEO Logan Green (age 34) or President John Zimmer (age 34), who will control the majority of voting shares.

Lyft’s prospectus describes a company with negative cash flow, growing annual losses that have reached nearly a billion dollars, and declining rates of revenue growth

Lyft lost nearly a billion dollars in 2018, 32% more than it did in 2017, and the prospectus acknowledges that “[s]ince our inception, we have generated negative cash flows from operations.” The three years of results presented in the prospectus show that Lyft significantly benefited from Uber’s 2017 annus horribilis,when it faced ongoing negative publicity about its Board turmoil and problematic corporate behavior. [5] This allowed Lyft to achieve a one-time growth spurt without having to spend as much on passenger discounts, driver incentives and advertising.

2016 2017 y-o-y 2018 y-o-y
Total Lyft revenue (000) $343,298 $1,059,881 209% $2,156,616 103%
Total Lyft expense (000) $1,035,901 $1,768,153 71% $3,134,327 77%
% expenses covered by revenue 33% 60% 69%
Lyft net income (000) ($682,794) ($688,301) 1% ($911,335) 32%
Lyft net margin (199%) (65%) (42%)

2018 revenue growth was only half of 2017’s rate, while expenses grew slightly faster. Uber’’s travails allowed Lyft to cover 60% of its expenses with revenue in 2017 (versus only 33% in 2016) and cut its GAAP net margin to negative 65%. Further (but much smaller) improvements were achieved in 2018, with expense coverage improving to 69% and net margin improving to negative 42%.

Lyft’s prospectus shows that its largest source (over $1 billion) of recent margin improvement– cutting driver take home pay to minimum wage levels—is unsustainable

Lyft’s reported results would actually be substantially worse if it had not imposed unilateral cuts to driver compensation. These were achieved by charging drivers more for using Lyft’s software. [6] In 2016 Lyft kept 18% of gross passenger fares (excluding tolls, tips and discounts). The other 82% were gross driver receipts before their vehicle, insurance, maintenance and fuel expenses. Lyft increased its share of gross fares to 23% in 2017 and to 27% in 2018. This represents a $925 million transfer from drivers to Lyft’s shareholders. Had the 2016 driver/Lyft percentage split remained in place, Lyft’s 2018 net loss would have been $1.6 billion, and its net margin would have been negative 65% instead of negative 42%.

The Lyft prospectus provides the first public data on the actual volume of ridesharing trips; Uber has never published any volume data that would allow one to calculate average prices or unit costs. Lyft passengers paid $11.73 per trip (excluding tolls, tips and discounts) in 2016 and paid slightly higher (4-6%) prices in 2017/18. But 2018 gross fare payments were 323% higher than they had been in 2016.and total Lyft revenues increased 528%. But what drivers got per ride had actually declined from $9.61 to $9.52. The entire value of the (very small) passenger fare increase and the (very large) total volume increase went to Lyft, while individual drivers gained nothing.

2016 2017 2018 18 vs 16
Total rides (000) 162,400 375,600 619,400 281%
Gross Pax fares paid (x-$000) $1,904,700 $4,586,700 $8,054,400 323%
Total Lyft revenue (x-$000) $343,298 $1,059,881 $2,156,616 528%
Lyft share 18% 23% 27% 49%
Driver share 82% 77% 73% (11%)
Gross pax fare per trip $11.73 $12.21 $13.00 11%
Lyft revenue per ride (x) $2.11 $2.82 $3.48 65%
Lyft expense per ride $6.38 $4.71 $5.06 (21%)
Driver gross revenue per ride(x) $9.61 $9.39 $9.52 (1%)
Lyft Rev @ 2016 18%/82% split $343,298 $825,606 $1,449,792 322%
Lyft Net Income @ 2016 split ($682,794) ($922,576) ($1,618,159)
Lyft gain from driver pay cuts 0 $234,275 $706,824
x-excluding driver/rider incentive impacts

The $925 million impact shown in the table actually understates the magnitude of the labor to capital wealth transfer because Lyft’s data misrepresents what passengers actually paid and what drivers actually received. Passenger discounts and driver incentives should be included in any calculation of prices or compensation, but are included in “Sales and Marketing Expenses” ($434 million in 2016, $804 million in 2018) along with advertising costs. Sales and Marketing expense per passenger trip fell from $2.67 to $1.30 and was the only expense category where Lyft achieved major unit cost reductions. Much of this was likely due to driver incentives cutbacks, producing even larger reductions in driver revenue per trip than shown in the table. The prospectus describes these unilateral pay cuts as management actions to “improv[e] the efficiency and effectiveness of certain driver incentives.”

While driver welfare may not be a major concern for some of the investors evaluating Lyft’s IPO, they should be able to recognize that there will be very little potential to use even deeper driver pay cuts to improve unit economics going forward. Lyft’s recent emphasis on ensuring the driver/vehicle capacity needed to capture additional share from Uber suggests that Lyft’s unit economics will likely worsen, and its margin gains cannot be extrapolated into the future.

Lyft’s data demonstrates that its business model has the same structural flaws as Uber’s

The table below combines the last five years of (unaudited) Uber data presented earlier in this series with the newly available three years of Lyft data. The same patterns appear in both sets of data, although the timing varies due to Uber’s faster early development and its 2017 travails.

Margin improvement at both companies was primarily driven by unilateral driver pay cuts. Uber achieved $3 billion in P&L gains after cutting its driver share of passenger fares from 83% to 68% between 2014 and 2016, similar to Lyft’s 2016-2018 cuts. [7] Uber was forced to partially rescind these cuts as it fought to stem driver and traffic losses in 2017. Uber’s problems allowed Lyft to increase its share of the two company’s revenue from 5% to 12% in 2017, which made it easier for them to cut back on driver incentives. [8] The comparison further confirms that further margin gains from driver pay cuts are likely unachievable, and that any market share battles will likely require both higher driver pay and increased rider incentives.

None of this data suggests that either company has any of the powerful scale economies needed to rapidly “grow into profitability.” Obviously, the ability to unilaterally cut driver pay is not a “scale economy” and if legitimate scale economies existed, evidence of strong margin improvements would have appeared by now.

 ($ millions) 2014 2015 2016 2017 2018
Uber gross pax fares $2,957 $8,900 $20,000 $36,180 $49,560
–% change year over year   201% 125% 81% 37%
Uber % pax fares retained by drivers 83% 77% 68% 79% 77%
Uber total revenue $495 $2,010 $6,450 $7,778 $11,359
–% change year over year   306% 221% 21% 46%
% Uber expenses covered by revenue 42% 43% 62% 64% 82%
Uber GAAP net margin (136%) (132%) (62%) (57%) (35%)
Lyft gross pax fares $1,905 $4,587 $8,054
–% change year over year       141% 76%
Lyft % pax fares retained by drivers 82% 77% 73%
Lyft total revenue $343 $1,060 $2,157
–% change year over year       209% 103%
% Lyft expenses covered by revenue 33% 60% 69%
Lyft GAAP net margin (199%) (65%) (42%)
Lyft % combined gross fares 9% 11% 14%
Lyft % combined revenue 5% 12% 16%
Lyft % combined net losses 15% 13% 19%

The rate of revenue growth has steadily declined at both companies, further underscoring that investors should not extrapolate recent margin gains many years into the future. Given its earlier growth, Uber’s deacceleration appears to have started a bit sooner. Past growth rates cannot be used as the basis for future forecasts because they are not based on either the ability to provide this capacity profitably, or the powerful scale economies that would drive profitability by rapidly reducing unit costs. Ridesharing growth is simply a function of investor willingness to fund losses in pursuit of market share or the growth rates that naive investors might misperceive as an indicator of future value.

Lyft’s business model also has a major weakness Uber does not face

As discussed previously in this series, there is no evidence that Uber’s investors ever believed they could achieve sustainable profits from efficient ridesharing operations in competitive markets. Uber was always pursuing the quasi-monopoly industry dominance that would (hypothetically) allow them to exploit platform-driven artificial market power.

All of the other large ridesharing companies in other markets (Didi, Grab, etc.) have been similarly focused on using predatory subsidies to pursue market dominance. Many of Softbank’s ridesharing investments were designed to accelerate the process of consolidating around dominate national/regional companies.

While these strategies were based on serious misconceptions about network economies, and none of these companies have shown any signs of sustainable operational profitability, they at least had some plausible logic behind them. Almost all of the smaller companies that attempted to compete with them (including Uber in China, Russia and Southeast Asia) have given up and sold out.

Lyft is the only large scale ridesharing company that claims it is worth tens of billions of dollars but does not have, and will never have a dominant market position, and has never attempted to explain how a secondary position could become viable. Even if one ignores more fundamental economic problems (such as the inability to produce car service at a cost consumers are willing to pay for) Lyft’s future viability depends on the ability of both Uber and Lyft to achieve sustainable profitability. Ridesharing has none of the characteristics (profitability, market maturity) that allow other competitive industries to maintain a stable pricing/competitive environment.

The dueling Lyft-Uber IPO process has demonstrated the instability of the current market. Lyft has aggressively worked to maximize the market share numbers it can present to investors, but this has already triggered worries about a fare war [9] and concerns that Lyft’s prospectus has materially overstated its actual market share. [10]

On what basis does Lyft argue that investors should value it at $20-25 billion?

Lyft’s prospectus makes no attempt to provide investors with data-based explanations of how it could achieve sustainable profitability or strong ongoing equity appreciation. One presumes that the stated $20-25 billion valuation targets simply reflect the financial ambitions of Lyft’s owners and investment bankers. Even if one uses the crude metrics such as multiples of revenue often used for valuation guestimates, these targets implausibly imply future appreciation potential stronger than Facebook’s. [11]

Undoubtedly some investors may buy the stock based on purely speculative logic, hoping for short term appreciation based on pent-up demand for new IPO issues, or mass market misperceptions about ridesharing. But the economics of ridesharing are not that complicated, and any investor willing to do a bit of research will fail to find evidence of sustainable profitability, much less the evidence that could justify these extremely rich valuations.

Lyft’s central prospectus claim is that investors should anticipate huge future growth because “Transportation is a Massive Market Opportunity” (“twice as large as healthcare”), because Lyft’s real business is “transportation as a service (TaaS)” and “we are one of only two companies that have established a TaaS network at scale across the United States. This scale positions us to be a leader in the transportation revolution.”

This claim is complete garbage. Lyft’s only business is its highly unprofitable urban car service, unless one wants to give them credit for their (currently immaterial) scooter rentals. The prospectus makes no effort to explain what a fully developed TaaS business might look like, or the investment future shareholders would be required to fund in order to create it. Lyft began publicizing its “vision” about a “transportation revolution” several years ago, [12] but fails to explain why none of its revolutionary predictions (“By 2025, private car ownership will all-but end in major U.S. cities”) have any chance of becoming true.

No other urban car service operator has ever profitably expanded into a wider range of transport services. Uber’s investors used to make similar claims that their true potential should be based on the entire urban transport market, including cars and mass transit. [13] Even though Uber continues to (unprofitably) invest far more in auxiliary businesses such as scooters and food delivery than Lyft does, it stopped making broader claims about its ability to grow across the transportation world years ago.

As with Uber’s past claims, Lyft’s TaaS “vision” rests on the false supposition that ridesharing will not only achieve sustainable profitability, but will continue to drive its costs down so dramatically that ridesharing becomes more economical than transit and car ownership. Instead of laying out delusional fantasies about the long-term future, Lyft might more usefully explain how it might someday drive its costs down to the level that the typical Yellow Cab company achieved years ago.

Lyft’s IPO prospectus appears targeted at investors who are willfully ignorant of industry economics but are willing to risk their capital on the basis of emotive narratives.[14]  People willing to respond to long term industry “visions” but unwilling to think about the (false) claims about cost competitiveness they are based on, or recognize that the predictions based on that vision were all wrong. People willing to respond to claims about “core values focus on authenticity, empathy and support for others” but unwilling to recognize that the IPO that could make its founders billionaires depends on having unilaterally cut driver take-home pay down to minimum wage levels.

____________

[1] Lyft’s S-1 can be downloaded from the SEC’s Edgar website at https://www.sec.gov/Archives/edgar/data/1759509/000119312519059849/d633517ds1.htm#toc633517_12

[2] All of the central arguments about Uber/ridesharing economics are documented in my Transportation Law Journal article  Will the Growth of Uber Increase Economic Welfare? 44 Transp. L.J., 33-105 (2017) which is available for download at SSRN:   https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2933177

[3] Can Uber Ever Deliver? Part Seventeen (February 16, 2019)

[4] Andrew J. Hawkins, Lyft’s president says ‘majority’ of rides will be in self-driving cars by 2021, The Verge, 18 September 2016

[5] The Uber board turmoil and the events that triggered 2017’s negative publicity were discussed in Part Ten (June 15, 2017)

[6] While Lyft’s prospectus maintains the legal fiction that its revenue comes from the voluntary payments from independent driver/entrepreneurs who have chosen to purchase Lyft’s software, Lyft’s drivers are obligated to use this software, and to accept whatever “software charges” (commission rates) and trip fares Lyft choses to impose. Under the Uber/Lyft business model, drivers who wish to drive on anything more than a casual basis must incur significant vehicle costs and financing obligations, and Uber and Lyft use this artificial power to lock-in drivers who might want to quit when they realize how low their actual take-hoe pay is or when that pay is unilaterally cut. Nothing in the prospectus suggests that these increased “software charges” had been justified by anything Lyft did to make its software product more valuable to drivers.

[7] See in particular Part Eleven (December 12, 2017) and Part Sixteen (August 13, 2018). The key study documenting take-home pay below minimum wage levels was Lawrence Mishel,  Uber and the labor market: Uber drivers’ compensation, wages, and the scale of Uber and the gig economy, Economic Policy Institute, 15 May 2018;

[8] The data strongly suggests that Lyft might not have survived without Uber’s 2017 public ugliness. Lyft was holding discussions with potential acquirers before realizing its windfall revenue growth. Jordan Golson, Lyft reportedly declined GM’s $6 billion acquisition offer, The Verge, 29 August 2016.

[9]Amir Efrati, Lyft Kicks Off Price War With Uber Ahead of IPOs, The Information, 25 February 2019; Kate Clark, Here’s why you’re getting all those sweet Uber and Lyft discounts, Techcrunch, 26 February 2019

[10] An independent firm measured Lyft’s US share as 29%, versus the 39% claimed in the prospectus. Alison Griswold, How Lyft stacks up against Uber, Quartz, 1 March 2019

[11] Eric Newcomer & Olivia Zaleski, Lyft Touts Growth to IPO Investors as Losses Near $1 Billion, Bloomberg, 1 March 2019. At $25 billion, Lyft would match Snap, which had the highest ever revenue-multiple based valuation at the time of its IPO. Potential Lyft investors might consider that Snap’s equity value collapsed from over $24/share to under $6/share in the nine months following its IPO. Kurt Wagner & Rani Molla, Two years after going public, Snap’s problems are still all about growth, Recode, 1 March 2019

[12] John Zimmer, The Road Ahead, Medium, 18 September 2016

[13] Bill Gurley, How to Miss By a Mile: An Alternative Look at Uber’s Potential Market Size, Above The Crowd(July 11, 2014)

[14] Perversely, if Lyft’s IPO is successful, it will be largely due to artificially constructed narratives about the wonderful economics of ridesharing that were developed and promulgated by Uber, not by Lyft. See Part Nine (march 15, 2017)

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45 comments

  1. The Rev Kev

    Can Uber and Lyft ever deliver? In short, no. If you do not have positive cash-flow when you are self-standing, then you are ‘all hat and no cattle’. It’s like fracking in the US. Without those Wall Street billions continuously flowing in, most would have shut years ago. And so it is for Uber and Lyft.

    Reply
  2. Larry

    Does Lyft break out tips in this filing? I’m curious if tips improve driver economics at all. Uber finally relented and allowed tipping, but I’ve not heard how this is impacting driver bottom line.

    Reply
    1. California Bob

      re: “… I’ve not heard how this is impacting driver bottom line”

      Nor will you ever know, for sure. When I (occasionally) use Uber I tip in cash, and so does everybody I know.

      Reply
    1. Brooklin Bridge

      The “law” has become somewhat of a sick insider joke. There were already laws governing use and licensing of Taxi’s and other forms of per trip or “rental” transportation in place that Uber and Lyft have completely (and alarmingly successfully) ignored. As with privacy and Verizon, “laws” adversely affecting giant corporations or financial entities will be retroactively changed as the need arises, though as the author pointed out, that is more tricky (expensive) in the case where the laws are local to each state. The question for many investors is, just how far and cheaply can Uber and Lyft corrupt the law/policy in each state to make profitability a legal (or at the very least a functionally impossible to avoid) requirement of it’s citizens?

      Reply
      1. Brooklin Bridge

        “just how far and cheaply” -> “just how far and cheaply and above all quickly […]

        Note also, reliance on the contemporary “fast and loose” legal and political environment may be a more crucial aspect of why these bottom feeders will succeed in their IPOs when their business plan is so obviously lacking in all other aspects. Whether or not they ever become profitable may be completely beside the point as there seems to be an unlimited and equally uncritical appetite for corporate plunder schemes.

        Reply
  3. notabanker

    The cabbage patch dolls of Wall Street.

    $20-25 billion may tide them over for the 10 year bridge to AV’s. Of course, that would mean controlling growth and hoping Elon gets his act together.

    But as we hit peak ppm of atmospheric carbon, there will be less serfs to go around. 10 year automation windows may be too optimistic. 5 would be a lot safer, in which case they are probably covered.

    Reply
    1. Dan

      That assumes AV’s will ever be viable on a large scale, given our current road system. I don’t think they will. There are an infinite number of variables that have to be dealt with in real-world driving. That translates to an infinite amount of linear programming, which can never be achieved, obviously. You simply cannot reproduce human intuition. And no, “artificial intelligence,” which isn’t intelligent at all in the human sense of the word, won’t help.

      AV’s can’t even distinguish road lines properly at this point. That’s not to mention the ethical dilemmas we’re all aware of by now. If a child chases a ball into the road, is the car going to be programmed to avoid the child at the cost of injuring the occupants of the vehicle, or vice versa? I believe Mercedes has already said it’s AV’s will be programmed to protect it’s occupants at all costs.

      The only way AV’s might be viable is to drastically restructure our road system to greatly reduce the amount of variables they have to contend with. For that price, we might as well pour the money into greatly improving and expanding our rail system. But there’s not much profit to be had in trains, so…

      Reply
      1. shinola

        Glad you brought these items up.

        AV’s will not be viable unless specialized infrastructure is designed & constructed to accommodate them (i.e. “smart roads”). Does anyone think Uber, Lyft and/or Tesla would pay for this?

        Then there’s the liability problem. The only way that co’s making AV’s can avoid liability for damage, death or injuries caused by their vehicles is to have laws enacted that exempt them from that liability; in other words, liability for any accident would automatically be assigned to the other party regardless.

        There are probably other externalized costs that I haven’t considered yet.

        Reply
        1. Sanxi

          Ya, but even with AV, that allows Uber to take 100% of the fare? And what about the capital cost of the AV, Elon going to front it. And what no one going to what to own one. None of this is ever going to happen.

          Reply
      2. winkipop

        yeah. kinda gotta agree. auto driving vehicles don’t seem to be coming over the horizon Anytime soon.

        Reply
  4. Watt4Bob

    This sounds like a fair description of the democratic side of the neoliberal consensus if you ask me.

    People willing to respond to claims about “core values focus on authenticity, empathy and support for others” but unwilling to recognize that the IPO that could make its founders billionaires depends on having unilaterally cut driver take-home pay down to minimum wage levels.

    The beatings will continue until morale improves.

    Reply
    1. Louis Fyne

      it’s even worse than comparing the 1099ers to minimum wage employees.

      at least minimum wage employees get some semblance of a safety net: workers’ comp, unemployment insurance, maybe life insurance or health insurance if lucky.

      Uber-Lyft (grubhub, instacart, Amazon, doordash, etc) 1099 drivers don’t even get that.

      Reply
  5. Mark Kinnucan

    Based on everything in this article, Lyft’s strategy seems obvious to me. First, they convince enough people to buy in at their $20-25 billion valuation. When Uber follows suit with its IPO at $125 billion, Uber’s management takes all that ready cash and buys Lyft for a comfortable boost over the $25 billion.

    Finally, our missing-in-action antitrust officials allow the deal to sail through, and Uber has its monopoly. It’s the American way!

    When it’s all accomplished, we’ll finally be able to see whether those pesky consumers will really pay monopoly prices for a ride…

    Reply
    1. Michael Fiorillo

      We’ll also have to wait a few years for the terminal implosion of local mass transit, which is an inherent part of the business model.

      So far, in NYC under the governance of Cuomo (the Governor, not the Mayor, controls the regional transit agency), that’s playing out as they might wish, while the streets are choked and swarming with cars…

      Reply
      1. Yves Smith Post author

        Um, no. On Feb 2, the city implemented a “congestion charge” which is not a congestion charge at all since it goes 24/7. Weirdly I can’t ‘find the details in Google, but having had to take a couple of cabs, the charge is ~$3 during the day and ~$4 in the later PM and evenings. This applies to cabs and rideshare vehicles.

        Charges for private cars and trucks are in the works. Rumor is ~$11 for private cars, on top of tolls (now $8.50).

        Traffic is notably down and cabs tell me their business totally sucks now.

        Reply
        1. Michael Fiorillo

          I can’t comment on post-February 2nd traffic in the city, but sucky business for yellow cabs doesn’t mean Manhattan streets aren’t still overrun with ride share (I hate even using that term) vehicles, easily recognized by their TLC plates…

          My comment was more generally referring to the huge increase in traffic since the advent of rideshare platforms.

          And destroying-mass-transit-as-a-business-model is still the case with these characters.

          Reply
    2. shinola

      There’s a reason that one of the topic categories listed for this article is “Ridiculously obvious scams”…

      Reply
    3. lyman alpha blob

      They won’t pay monopoly prices, the companies will go under, and anyone dumb enough to buy into the IPO and hold it for more than about 30 seconds will be caught holding the bag.

      But Kalanick et al will walk away squillionaires for perpetrating their grift on a massive scale, because as you said, it’s the American way!

      Reply
  6. Ptb

    Too bad. The old Zimride, which was a genuine ride sharing system and not a gps based taxi service, was actually very good.

    As for the IPO… they say “it can’t hurt to ask”, right? Raise smth like 4B, keep the exponential growth pumping for 2 more years with, say, 25% losses to keep the story plausible, then get out by threatening to undermine Uber’s pricing power until uber offers an acceptable (to class B shares) buyout. Solid enough plan. /sarc /but not really

    Reply
  7. California Bob

    I’d be interested in a metric that tracks ride-sharing viability vs. the economy; i.e. IMO people turned to Uber/Lyft driving when the economy was in more-worse shape than it is now to ‘make ends meet.’ If jobs grow and wages increase in other ‘industries,’ I suspect more drivers will quit (if they can make comparable take-home without the weird hours and wear-and-tear on their vehicles). That, theoretically, would force the ride-sharing companies to pay more to drivers, creating ever-greater losses.

    Reply
  8. Louis Fyne

    Even if Uber-Lyft merged and formed a monopoly, ridehail can never be profitable at the current rates.

    even if a magic unicorn delivered a fleet of truly autonomous cars tomorrow, Uber-Lyft (or whoever winds up owning the cars) still would have to internalize costs currently borne by drivers—particularly deadhead miles, maintenance, and cleaning.

    And should rates rise to cover costs + minimal return of capital, elasticity of demand kicks in and people revert to public transport, walking, private cars, or carpooling—and the house of cards collapses.

    Turnover must be immense as I constantly see junk mail sent to “Postal Customer” at my house promoting Uber’s new driver promotions.

    Reply
    1. vlade

      Cleaning is IMO a very big part of what the shared autonomous vehicle proponents ignore.

      When I talk to cab drivers, not a few of them say that they prefer to avoid times that most non-cabbies would consider a bonanza – very boozy evenings when a lot of people get sloshed and want to get home. They say that the risk of having to clean the car just doesn’t cut it. Even if they have penalties for soling it, one said “try to get it out of a drunk without calling police”. Those that do work those times/places, tend to be very careful on who they pick up.

      All of that goes out of the window. Not to mention that even stuff like simple littering is more likely in a vehicle where no-one’s looking at you directly (see some public transport vehicles).

      Reply
    2. Skip Intro

      Owning cars, or any depreciating capital assets is anathema to the entire Uber/Lyft business model, which relies on externalizing the costs of cars and maintenance onto their victims drivers.

      Reply
  9. Rajesh K

    Lyft does not need to argue anything. That’s why we have pension funds, etc to vacuum up this dog poo.

    Reply
  10. Tim

    Any idea how long the average trip is? I’m curious about how much of the driver’s $9.52 would go to gas, maintenance and depreciation on her car and also, how many trips a driver might reasonably expect to make in a 8 hour day?

    Reply
    1. Synoia

      I’m curious about how much of the driver’s $9.52 would go to gas, maintenance and depreciation on her car

      $9.53 at least. /s

      Reply
  11. JimTan

    Let’s also not forget that there are legal, regulatory and political claims which currently challenge the legitimacy of ride share business models. According to a recent article that discusses risk-factors in Lyft’s IPO prospectus:

    “Attorney Shannon Liss-Riordan, who has sued ride-hailing companies on behalf of drivers, said her firm has more than a thousand cases in private arbitration with technology startups. “This is not a settled issue. This issue is continuing to be litigated,” she said. “These companies think they have side-stepped enforcement of the wage laws for their drivers by implementing arbitration agreements that just make it more difficult for drivers to pursue claims against them.” Lawmakers in California, home to both Uber and Lyft, have been reassessing the state’s independent contractor laws. Last year, the state Supreme Court issued a landmark ruling expanding the types of workers who are entitled to employee status. The implications of that decision are just starting to become clear. In short: While Lyft has been operating on the same business model since 2012, court proceedings may be just warming up.”

    Reply
  12. Synoia

    This series has documented that Uber has no economic foundation, aside from its predatory use of billions in subsidies.

    True for cars with drivers. Remove the cost of drivers, and the numbers change dramatically.

    Gross Pax fares paid (x-$000) $8,054,400 323%
    Total Lyft revenue (x-$000) $2,156,616 528%

    Lyft share 18% 23% 27% 49%
    Driver share 82% 77% 73% (11%)

    If driver share goes to zero, self driving card, then Lit’s 2018 gross in 2018 would be 2,156,616 – $911,335 = $1,245,281

    Both Uber and Lift’s path to profitability is via Driverless Cars.

    An investment in either firm is a bet on Driver Less Cars.

    Reply
    1. ChristopherJ

      Agree Synoia, and the key to making it work for investors in driverless cars and existing car owners and customers is to get the humans off the roads.

      Then, it all works. I no longer need two car spaces and two cars at home. Hell, I don’t even need parking where I want to go… And, the traffic goes like a train as all the cars are connected

      Reply
      1. Synoia

        Yes – Driverless cars:

        How would roads now funded? By mileage? A driverless car would be on the road 24×7, and would thus exert more ware and tear on the roads.

        Would car license taxes stop subsidizing trucks?

        I don’t see the need for public funding for a part of “the commons,” used by privately ownerd driverless cars, nor do I believe would private money maintain rural roads.

        The change to non-ownership of cars is fraught with complex economics and policy.

        As usual the devil is in the details.

        Reply
    2. Sanxi

      Except, then you have to buy the cars. Rental car companies can compete nicely, except in either case there is no money, unless you are selling insurance.

      Reply
      1. RMO

        Assuming fully automatic cars are feasible (and I seem to far more optimistic about this being possible than most here and even I wouldn’t bet a plugged nickel on them becoming reality in less than a decade, if they ever do) turning Lyft or Uber into a robot-taxi Johnny Cab empire would require them to actually buy, insure, store, maintain, repair etc. those cars. Right now they offload all that to the drivers. Even if they accomplished assembling that fleet, unless the company managed to develop a completely proprietary and notably superior autonomous driving mechanisms and software they still wouldn’t have anything to offer that couldn’t be replicated by many other companies. Further, fully autonomous cars still wouldn’t do a lot to solve city transportation problems as there would need to be a excess amount of them over what is required to meet average demand in order to deal with the typical twice a day rush hour. Better city planning and public transport is what is really needed and the Uber/Lyft etc. focus is actually pulling resources away from that.

        I’m glad we don’t allow these companies to do business where I live. Uber Eats has reared its ugly head though.

        Reply
    3. Brian Kullman

      Today the “cost of the driver” includes the capital and operating costs of the vehicle supplied by the driver, as well as driver “wages”. All of the foregoing costs remain even with AV: capital cost, depreciation, maintenance, fueling, parking, cleaning/washing, insurance, etc.

      That said, investor interest can only be explained by an assumption that AV will somehow transform the current economics, monopoly “rent” can be extracted, or some scale economies not yet found are discovered.

      Reply
    4. jocker12

      If you remove the cost of drivers, you also remove the assets/the cars, because all vehicles are owned by the drivers. Now, if you think of creating a fleet, change the numbers again and add purchase, maintenance insurance and fuel value on corporate (Uber or Lyft) expense.

      Reply
  13. Amid Vats Hod

    The reality is that the only customers both uber & lyft have are the drivers ie 6 of 1 & half a dozen of the other ie same as same as. No loyalties amongst drivers only contempt & even hatred for these apps.

    Price is critical to riders who are less loyal but would in a flash be back to using taxis were rideshare to set prices in order to profit.

    But no, it is not all about profit (it really is) but also about paying drivers. It seems world wide that Labour rights organisations, left leaning govts & Unions are waking up to the damage the gig economy & casualisation is causing. No livable wage, no certainty & zero security. This will have a massive impact & deliver the final deadly blow.

    I’m not upbeat at all about autonomous cars ie they are happening & the transition will be slow. Yes, someone will need to own them & maintain & garage so presently the best suited & equipped to do this would be localised cab companies.

    Of course Uber & Lyft both claim they are not transportation companies only an app (when it suits them). Owning autonomous cars (they won’t be able to afford) clearly puts them into transportation. But then they will be long gone by the time this starts to become a reality.

    Sadly I must agree with an earlier comment ‘that mum & dad pension funds will be used to vacuum up this dog poo’. If institutionalised investment houses , mutuals etc put these stocks into mum & dad retirement savings to bail out their criminal bankster mates it amounts to criminal negligence. Read the prospectus as these businesses will never make a profit.

    Reply
  14. Michael

    So basically this article is saying, investors are willing going into Ponzi Scheme, but will withdraw their investment money from the initial profit made by inflating a superficial IPO value. This should be criminal.

    Reply

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