Dave Lee: Uber really needs Lyft to stay in the ride-share race

The second scenario involves using aggressive price cuts to see off the competition before jacking up fares and cutting driver pay as soon as consumers and gig workers have few other options.

Are we at that point? Looking at the market today, you might think so. Having swiftly upended the taxi industry across the world, in recent months Uber has also stretched its domination over longtime U.S. rival Lyft, which has seen its market share fall to as little as 24% in March from around 33% pre-pandemic, according to data from Bloomberg Second Measure.

The latest round of company earnings showed Uber thriving — gross bookings were up 19% year-on-year, customer growth up 13% — while Lyft is merely surviving. The latter beat analysts’ targets in this year’s first quarter but issued softer-than-expected guidance, blamed on investments needed to regain ground with Uber.

If Lyft can’t pull off the “challenging yet necessary turnaround,” as Citi analysts described it, it would be bad news for consumers who value choice. And it could be bad news for Uber, too.

David Risher, Lyft’s new chief executive officer, was put in place in April as investors finally ran out of patience with Lyft’s co-founders. He quickly announced job cuts — 26% of the company - and conceded the best hope for Lyft was a strong second place behind the “800-pound gorilla” of Uber.

If the above theory of profitability is correct, then now might be the time for Uber to strike: Finish off Lyft once and for all, take the market for itself, and get to the exciting business of screwing us all over.

But Lyft’s decline, were it to worsen, would do Uber CEO Dara Khosrowshahi few favors. Speaking to Bloomberg TV last week, the smooth-talking boss sounded like a conflict-adverse cowboy. His message: These towns are plenty big enough for the both of us, actually.

“I think we can both do fine,” Khosrowshahi said. “The mobility marketplace is growing. People are going out more, they’re going to restaurants, they’re returning to work. We are definitely seeing those tail winds, and I wouldn’t be surprised if Lyft does too going forward.”

I don’t believe that Khosrowshahi, who rescued Uber’s grotty reputation from the gutter, was being insincere. Lyft only operates in the United States and Canada, and it’s strongest on the West Coast, where the post-pandemic recovery has been slower than in other regions. Lyft’s position should improve as these markets regain strength.

And that suits Uber just fine. If Lyft ceased being a meaningful competitor, the landscape would change dramatically. Regulatory attention, which brought about significant (if still limited) concessions on working conditions, would be reexamined. Uber’s claim that drivers are “independent contractors” falls down if there is only one legitimate choice of ride-share platform. The company’s already dubious position that it should only consider “active” driving hours when calculating benefits, because drivers can work for other apps when out on the road, would lose credibility fast.

In Washington, any hint of an Uber ride-share monopoly would sound the alarm at Lina Khan’s Federal Trade Commission. She may feel a combined ride-share and delivery giant would make things unjustly difficult for DoorDash, the current leader in delivery, if Uber is in a position to use ride-share profits to buttress aggressive food pricing. We saw a version of this sentiment when Uber looked at acquiring smaller food player Grubhub in 2020, with antitrust hawks in the Senate calling for heavy scrutiny.

Improved consumer sentiment toward Uber might also unravel. Despite having long been more expensive than Lyft — according to YipitData — any fluctuation in price would be met with suspicion and anger. When two ride-share companies push surge pricing during peak moments, it’s the market. If it’s just one player doing so, it’s exploitation. The 2017 -DeleteUber trend, which caused a notable loss of customers, arose when users felt Uber was profiting from a lack of taxis due to a strike.

Uber might start to draw that special kind of contempt many Americans reserve for monopolistic internet service providers. Or that single company that inexplicably charges you $5 for a luggage trolley at what seems like every U.S. airport.

Besides, Uber doesn’t need to take drastic action to beat Lyft. Shrewd leadership post-lockdown has moved it well along a third route to sustained profitability, one that consists of growing the business and improving its margins.

Uber has earned its lead. Rapid investments in driver supply in early 2021 caught Lyft on the hop, and Uber was also quicker to incentivize drivers with bonuses as well as changes to its app such as showing fares upfront.

Uber Eats’ popularity boomed during the pandemic and has persisted, with improved economics (more deliveries per hour, per driver) thanks to technological improvements. New ride-share products — like pre-booking and hourly bookings - have helped maintain growth. Uber now cooperates with the old enemy, taxi firms, and has launched partnerships to sell tickets for public transport. On top of all that, it sees potential with its nascent, high-margin advertising business.

Uber is also using its broader range of services to push Uber One, a discount subscription for savings on rides and delivery. “Uber One members spend 4x more than non-members,” Khosrowshahi told investors.

Lyft, lacking a delivery unit, can’t come close to offering the same. Indeed, it was Lyft’s inability to bring any meaningful diversity to its business that ultimately cost its co-founders their jobs. Their delivery plans never materialized. Health-care aspirations vanished. A car rental service has been canceled.

For these reasons, Uber’s profitability push doesn’t have to rely on squeezing driver earnings or inflating passenger fares. Uber has made an adjusted profit for the past seven quarters. It is cash flow positive and expected to remain so (though it could be argued that Uber’s accounting paints a rosier picture than it should). Net income is muddied by the impact of Uber’s outside investments, but the company said it is on a “path” to sustained GAAP net income, and analysts have seen no reason to doubt it.

San Francisco’s fiercest start-up rivalry is over. While the share prices of both Uber and Lyft used to move largely in tandem, ebbing and flowing with consumer trends and regulatory threats, the companies’ fortunes have started to drift well apart. At the end of their earnings week, Lyft was trading 22% down on the start of 2023. Uber was up 47%.

But Uber knows the value of competition, especially when it’s seen as the 800-pound gorilla. For its own good, Uber needs Lyft to reverse its slide and remain a capable, albeit much smaller, rival.

Dave Lee is Bloomberg Opinion’s U.S. technology columnist. Previously, he was a San Francisco-based correspondent at the Financial Times and BBC News.