Will Uber Ever Make a Profit? Maybe—If It Charges a Monthly Fee | Opinion

What? Uber doesn't make money? Who knew?

Apparently not the investors who paid $45 per share when the company went public in mid-May only to see Uber's stock price plummet as the grim earnings numbers piled up. As of Friday morning, Uber shares were selling for about $26, following recent third-quarter reports showing a loss of $1.2 billion, a nasty drop but not nearly as jaw-dropping as the previous quarter, which saw the company lose $5.2 billion.

Watching all of this, those of us ancients who lived through the tech bubble in the early 2000s might be forgiven a moment's nostalgia as we recall Pets.com. An icon of new-economy cool, Pets.com attracted all the best venture capital—including a 30 percent investment from Amazon—went public in February 2000 and liquidated in November of the same year. In a lifespan shorter than most gerbils, the company never made a dime.

Businesses succeed by filling a real need. Pets.com had a website and a clever Superbowl ad, but it didn't do anything that needed to be done. The company's founders thought people needed help buying pet supplies. They were wrong. In the world before websites, there was not an epidemic of starving pets. If people needed dog food, they just threw a bag in the grocery cart.

Uber, on the other hand, is a business trying to solve a huge problem: the vastly underutilized capacity in our personal transportation system. In the tough business of commercial transportation, capacity utilization is the holy grail. Airlines want to keep planes in the air and railroads want to keep rolling stock rolling—all that expensive capital needs to be earning revenue.

Cars, though, spend most of their time parked.

For the most part, that is a sensible tradeoff of efficiency for convenience—selling off the family's second car would result in higher capacity utilization at the cost of some truly epic arguments. But it is still an enormous waste. Think, for example, about that huge line of taxicabs at major airports where drivers often wait for several hours to pick up a passenger. And then think about how many cars are cold and dark at 2 a.m., when responsible drinkers hand over their keys and need a ride home. Surely, people would pay to solve this problem.

But just because there's money to be made on a problem doesn't mean a firm can make it. For Uber to finally generate a profit, the company has to solve one of the trickiest issues any business must face: how to get your customers to pay for your overhead.

Understand that Uber is not in the business of selling car rides. That's what their drivers do. Uber is in the business of selling access to a network connecting drivers and passengers. And the costs of building out a network are almost entirely fixed. In other words, allowing one more driver or user to access the app doesn't make it more expensive to build the app.

Lots of companies face high fixed costs—drug companies, for example, spend billions to develop a product that costs pennies to manufacture. And most figure out a way to make their customers pay for those costs.

Uber's problem, though, is harder than these other businesses' precisely because it's selling a network, and networks become more valuable the more people sign on. This makes Uber a deeply conflicted business. On the one hand, company leaders wanted to expand their network (something they did very well—the Uber network is now huge) by making it easy and cheap to use the network. But now that they're a publicly traded company, they need to come up with a revenue model that will pay for the network.

Whether Uber can solve that problem remains to be seen, but it's worth noting that other companies have figured out how to profitably sell a network. One way to do it—let's call it the Facebook Model—is to sell advertising. This model, however, is likely unhelpful to Uber simply because people don't spend much time on the Uber App—at closing time, they devote a frenzied few moments summoning an Uber and then go back to posting regrettable videos on social media.

Uber
The Uber logo is seen on a car in Washington, D.C., on July 9. Alastair Pike/AFP/Getty

The other solution—let's call this the Amazon Prime Model—is to charge a monthly or annual fee. Maybe that sounds crazy, but it might just work. Surveys report that about 25 percent of American adults use the service, which works out to 50 million people. Uber could charge riders $5 per month for the right to log on to the service—a third of the price of a hipster's cocktail—and Uber would earn over $3 billion a year. That makes it profitable. (The 2019 numbers reported to date include some one-time expenses. The 2018 loss of $1.8 billion is probably a better measure of how much more Uber needs to earn.)

Is that the solution? Who knows? And if a simple subscription model wouldn't work, maybe instead it could be something more complex involving tiered pricing or fixed fees paid by drivers in exchange for a bigger cut of fares. The point is that Uber is working on a real problem that has a plausible solution. Before you write off Uber as a tech-nerd fantasy, ask yourself a question: How much would I pay for this app?

Michael Davis, Ph.D., teaches economics and global strategy to MBAs and online MBAs at the Cox School of Business at SMU in Dallas.

The views expressed in this article are the writer's own.

Will Uber Ever Make a Profit? Maybe—If It Charges a Monthly Fee | Opinion | Opinion