# Opinion: Basic economics means Uber and Lyft can’t rely on driverless cars to become profitable



## Hugh G (Sep 22, 2016)

*Opinion: Basic economics means Uber and Lyft can't rely on driverless cars to become profitable *


Published: Aug 12, 2019 1:14 p.m. ET
*By RichAlton *
*https://www.marketwatch.com/story/b...iverless-cars-to-become-profitable-2019-08-12*


* 
Aggressive price-cutting won't disappear with autonomous vehicles, so gross margins will remain wafer-thin
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AFP/Getty Images - Drivers protest outside LAX International Airport in May.

With Uber and Lyft both announcing large quarterly losses last week, it's clear they have a long way to go to reach profitability, and analysts are increasingly focused on the long-term viability of the industry.

One potential pathway is the advent and utilization of autonomous vehicles (AVs), which could reduce the single largest expense incurred by the ride-hailing networks: compensation to human drivers. However, just adding AVs to lower costs won't be a silver bullet.

While margins are difficult to pin down, some data has shown city-level gross margins to be approximately 10%, meaning that a ride that costs a customer $2 would cost Uber UBER, -7.62% or Lyft LYFT, -4.97% $1.80 to provide, leaving them with a 20-cent gross profit.

Under widely held assumptions in the AV space, the cost of providing that same ride could drop from $1.80 to $1 and eventually lower. So, a $2 ride would then earn Uber or Lyft $1 in gross profit-five times the profit as a human-driven ride. Multiply that improved profit per ride across millions of rides and it's easy to see why Uber and Lyft are eager to bring autonomous vehicles into their networks.

But how realistic is this scenario? Unfortunately, AVs will not dramatically improve profitability to the ride-hailing firms.

*Watch this:* How computer simulation can make autonomous cars a reality

Ride-hailing is fundamentally a commodity, meaning a ride from Uber is effectively no different than a ride from Lyft. With commodity products, the profit margins almost always migrate to levels just barely above the marginal cost to provide the product. So. In fact, the ride-hailing industry shares some unflattering characteristics with another industry selling commodity products-airlines.

Like air travelers, ride-hailing customers are very price sensitive, routinely checking prices across apps before booking a ride. This is another similarity with the airline industry - it's incredibly easy for customers to discover the lowest price.

Given the price sensitivity of customers, small changes in price can directly lead to changes in market share. This is a well-known aspect of competition among airlines. If one airline wants to quickly load up a flight on a route on which it competes with another airline, it only needs to lower its price so that its flight appears at the top of search listings.

Likewise, if Uber wants to temporarily take market share in a city, it can undercut Lyft's pricing and take an outsized chunk of market volume. And, given the ease and speed with which prices can be changed, the temptation to do so is virtually irresistible. Competitors don't stand still in the face of price cuts and naturally retaliate by matching or undercutting their rival's new price. In part, it's these kinds of price wars that have made profitability so elusive for Uber and Lyft.

All of these factors combine to produce an industry in which prices will inevitably march lower and lower until they barely exceed costs, resulting in subsistence profits. In the example where an autonomous ride costs $1 to provide, we would expect the price of that ride to drift down to around $1.10, earning the ride-hailing company a similar 10% margin.

Though a boon for penny-pinching riders, the emergence of autonomous vehicles will have a relatively muted impact on the profitability of ride-hailing companies themselves. AVs are unlikely to solve the dynamics that lead to aggressive price-cutting that eats away at margins.

To improve their profitability, Uber and Lyft will need to look elsewhere, although the challenging economics of running a commodity business will be difficult to fully escape.


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## tohunt4me (Nov 23, 2015)

Well
Uber & Lyft have had " RACE TO THE BOTTOM" with Our Wages ( Drivers).

I guess it is time for a Stock per Share Price
" RACE TO THE BOTTOM".

LETS SEE WHO GETS TO .0.00 FIRST !


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## Sandhills (Feb 9, 2018)

Problem with that article is takes only an economic view. It ignores the politics of the ridrshare/gig economy.

Prior to automation you have an industry that employs many , think recently read article quoting something as high as 18% of Ozzie's have some income derived from gig economy.

That mass involved is already attracting a backlash , regulators are typically slow then pile in and over regulate.

Politics have created and broken many businesses including creating the taxi industry cartel world wide thru licenses.

Examples of non commodity costs that may be Imposed are min hourly rates for drivers and road use taxes on autonomous vehicles.

So think that article bit narrow.

It also ignores the premium end of market, some may want a premium clean car with human driver and be willing to pay above commodity prices.


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## tohunt4me (Nov 23, 2015)

Nuclear Flying Cars !


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## Hugh G (Sep 22, 2016)

Some points to ponder:


Who cleans the car of normal trash left behind by riders
Then there's the issue of those vomit incidences !
Some of the busier roundabouts up here around Noosa are very green and filled with gorgeous trees and shrubs - which hinder drivers from seeing other vehicles. There are frequent accidents, so much so that the tow truck drivers just park around the corner in busy times so they can be first on the scene. That would be a real test of driverless cars as confused drivers suddenly change lanes in the middle of the roundabout


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## Sandhills (Feb 9, 2018)

Your living the (my) dream!


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## 25rides7daysaweek (Nov 20, 2017)

Hugh G said:


> *Opinion: Basic economics means Uber and Lyft can't rely on driverless cars to become profitable *
> 
> 
> Published: Aug 12, 2019 1:14 p.m. ET
> ...


When they have to pay for they're own vehicles and dont have to pay us 
the prices are gonna go WAY UP.


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