The Uber strike should worry investors and the company because it points to a fundamental problem with its business model (LYFT)

Uber and Lyft and their investors should be worried about the strike Wednesday by the app-based taxi companies’ drivers.
The labor action highlights a fundamental problem with the companies’ businesses — they’re losing lots of money in spite of paying their drivers poverty wages and have no easy way to solve the problem.
The conundrum is likely to get only more intense — both Uber and Lyft are now public, and public shareholders don’t generally tolerate ongoing losses.
But attempts in New York to raise prices to pay drivers more have hurt both companies’ businesses.
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The strike Wednesday by Uber and Lyft drivers should serve as a warning to the companies and particularly to their investors.

That’s not because the labor action likely harmed Uber or Lyft’s business that day in any significant way. Instead, the strike is important because it points to the fundamental flaw in their businesses.

The two companies have built their services around paying their drivers pitifully low wages. That fact was at the center of Wednesday’s strike; drivers are indicating through that action and through other means that they aren’t going to continue put up with the poor pay.

But it’s not at all clear whether Uber or Lyft can afford to give them a raise. The two companies are burning through cash hand over fist — in spite of giving drivers such poor compensation. And they’re likely to come under increasing pressure to staunch those losses, even as drivers demand a raise.

How they can solve that conundrum is anyone’s guess. I think there’s a good chance they simply can’t, and both drivers and investors are going to lose out as a result.

Uber and Lyft drivers earn poverty wages

Drivers cited several reason for going on strike, safety concerns and a lack of transparency over how the companies calculate their compensation and the factors they weigh when deciding whether to remove drivers from their services. But the overriding issue behind the driver action was anger over low and falling compensation.

Carlo Allegri/ReutersIt’s not hard to understand why. The average Uber driver makes just $11.77 an hour after deducting the company’s fees and the driver’s vehicle expenses, the Economic Policy Institute estimated in a study last year that focused just on the biggest ride-hailing company. But as low as that wage is — it’s below the poverty line for a family of four — it’s actually overstating their real earnings.

Because Uber doesn’t classify drivers as employees, the drivers are considered to be self-employed. That means that in addition to the part of the payroll tax that all employees — self-employed or not — pay, they also have to pay the part that employers normally cover. It also means that they don’t get health or retirement benefits from Uber, so they have to pay for those out of their own pockets. If you take into account those costs — the employer side of the payroll tax and the cost of modest health and retirement benefits, the average Uber driver made just $9.21 an hour, the EPI found. That’s below the poverty wage for a family of three.

Wednesday strike followed one in March by drivers in Los Angeles, San Francisco, and San Diego. And there are other signs of increasing driver discontent.

The average Uber driver only works for the company for three months, the EPI study found, meaning that few see it as a sustainable long-term job. And as the economy has improved, attrition among Uber and Lyft drivers and other so-called gig-economy workers has spiked, the Wall Street Journal reported last week. In some cases, attrition levels may be hitting an astounding 500% a year, the Journal reported, citing the chief operating officer of a job placement firm that works closely with such companies.

The companies could have a tough time offering raises

Uber, Lyft, and their cohorts could likely staunch such attrition and driver discontent by giving drivers and other gig workers a raise. But the ride-hailing companies could find that difficult to do, even if they were inclined to do it. Despite the minuscule compensation they give their drivers, neither company has been able to generate consistent profits, much less become self-sustaining.

Last year, Uber burned through $2.1 billion in cash from its operations and and its investments in property and equipment. Lyft, meanwhile, consumed nearly $350 million from its operations and such capital investments.

Read this: Uber is telling the world it’s just like Amazon: Here’s why the similarities are only skin-deep

Such red ink hasn’t been much of a problem to date, because both companies were private and their venture investors were willing to subsidize their losses in the hope of having a big payoff when the companies went public.

But as of Friday, neither company will be protected and succored by private investors anymore. Lyft held its initial public offering in March, and Uber made its public market debut on Friday. Unlike venture investors, public shareholders tend to be far less tolerant of ongoing losses; they won’t subsidize them ad infinitum. So both companies are sure to come under increasing pressure to stem the red ink.

It’s hard to see how they can do that and pay drivers more, unless they raise prices on consumers. But the intense competition between the two companies — and the continued existence of alternatives such as traditional taxis and public transit — makes it difficult for either to hike prices significantly.

New York shows how wage and price hikes can hurt

New York is a case in point. The city put in place new rules at the end of last year that require Uber and Lyft to pay drivers a minimum wage of $17.22 an hour after expenses. In response, both companies hiked their prices. But they both reportedly offset those hikes with generous customer discounts.

The end result was that both companies’ business in the city suffered. In the document Uber filed in advance of its IPO, it warned that the new regulations, including the wage hike, "had a negative impact on our financial performance in New York City in the first quarter of 2019 and may have a similar adverse impact in the future."

In a blog post, Lyft said that the regulations had a "negative impact on driver earnings," which almost certainly meant that they affected its business as well. The company essentially ran a test on two separate days in which it didn’t offer customer discounts to offset its price hikes and found that the prices customers paid rose 24% and the number of rides fell 26%.

In other words, the companies’ services aren’t nearly as competitive or attractive to consumers if the companies have to pay their drivers fair wages.

Both companies are hoping robo-taxis will save them

Smith Collection/Gado/Getty Images)=Both companies have indicated they believe the long-term solution to the problem is to move to driverless vehicles. If they had robo-taxis instead of human driven ones, they wouldn’t have to worry at all about driver compensation. Lyft took a step in this direction this week when it announced a deal with Waymo whereby its customers will be able to order a ride in one of the latter’s self-driving vehicles in suburban Phoenix.

But the idea of fully replacing human Uber and Lyft drivers with self-driving cars may be a distant dream.

I’ve spoken with numerous investors lately who focus narrowly on the self-driving car space. It’s in their interest to promote the market and for their investments to pay off sooner rather than later. Their general assessment is that the technology is not mature enough to be used outside of suburban, or fixed, environments right now. Vehicles capable of autonomously and safely navigating the dense urban environments where Uber and Lyft have gotten the most traction are still years — and maybe decades — away.

So I’m not sure how Uber or Lyft solves this conundrum. What I do know is it’s not going away. And if the strike Wednesday is any indication, the problem may get much worse before Uber or Lyft solves it.

Got a tip about Uber, Lyft, or another tech company? Contact this reporter via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.

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Source: Business Insider – twolverton@businessinsider.com (Troy Wolverton)