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Uber Prices at $45, Drivers Demand a Share

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Unlike rival Lyft (LYFT - Free Report) , Uber UBER priced its shares conservatively at $45, the low end of its targeted range of $44-50.

That’s because the company ultimately chose a relatively unfavorable time to go public, when the U.S.-China trade talks are about to yield a deal, or not. The markets are showing signs of nervousness and any negative news could push the shares into a rut it might be difficult to get out of.

Moreover, it may be learning from Lyft’s experience, since the market has now digested just what kind of business ridesharing is and come to terms with the fact that the road to profitability is decidedly cloudy.

But while one aspect of the business remains the same, it’s worth noting that Uber is far more diversified both in terms of geography and the market adjacencies it’s targeting. Yes, all those markets are horribly crowded, but there are proven models because some of those competitors are making money. Moreover, Uber Eats is already pulling customers in droves. Uber needs cash to keep building market share before it can increase rates and benefit from scale. Its trucking and logistics bets are other levers that can generate profits at scale.

Lyft’s narrow focus on ridesharing in the U.S. isn’t a total negative either because its resources are better applied.

Lyft is also in a relationship with Alphabet’s (GOOGL - Free Report) Waymo, which is the furthest along in the self-driving car race. So, according to a deal they recently signed, customers in the Phoenix area will be able to hail one out of ten driverless Waymos although initially, a safety driver will ride in the cars.

Waymo is repurposing a Detroit factory on American Axle & Manufacturing’s campus to make its level 4 driverless cars. This is a big deal for Waymo no doubt as it validates a business proposition, but it’s also a big deal for Lyft, because if all goes well, it can at least partially solve its driver problem (over the next few years). It can then profitably expand in some of the other market adjacencies like food delivery. Uber’s prospectus indicates its driverless goals are still somewhere in the more distant future.  

Drivers of course are extremely concerned about the automation in the space, a big factor in their ongoing strikes. They are demanding job security, minimum wages of $20 an hour and more while comparing their pay to the CEO’s. Uber’s marketing pitch to drivers has been that they are in a partnership, so they feel they are entitled. Some drivers want 80% of the proceeds, which Uber is apparently already paying in some cases.

A Yahoo Finance report quotes an Economic Policy Institute (EPI) report from last year that says  that Uber driver pay averages only $9.21 an hour after deductions for Uber fees, vehicle expenses, payroll taxes, and the cost of a “modest benefits package” (whatever that package is).

The point is, if $9.21 is the hourly rate, it’s below the minimum wage in some states, below the $13.51 average hourly rate for service workers and below the $27.77 earned by private sector workers. Uber says its drivers are contract labor, which is another thing that may be contested in the courts.

All said and done, this remains a market in the making and it’s very unlikely to be a winner-take-all kind of thing. Competition is likely to be fierce and regulatory frameworks are not available, so margins are likely to remain low, if and when the companies see profits.

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