The business plan for ride-sharing services needs a ... Lyft.

Photographer: Justin Sullivan/Getty Images

Uber and Lyft Won't Kill Your Car

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
Read More.
a | A

I'm running into more and more people here in Washington who are using UberX as a substitute for owning a car. They use Uber to get to Costco, take the pet to the vet, or do any number of other far-flung errands that used to mandate the ownership of a personal automobile, unless you were willing to spend lots and lots of time on public transit, or lots of time and money calling a cab.

If it works, this is going to be a game changer for urban dwellers, a taste of the utopian future when self-driving cars finally arrive. But to be honest, I find myself wondering if it is going to work.

To see why, read Tim Lee's terrific account of the week he spent driving for Lyft, and the economics of the networks that are critical to the success of these services:

The average time it takes for a car to reach a customer is an inverse function of the number of cars a network has on the road. Quadruple the number of cars in an area and you halve the average time it takes for a car to reach you. As Lyft's fleet grows, the service will become attractive in areas where people rarely took conventional taxicabs. And that, of course, creates a positive feedback loop: more cars on the road means shorter wait times, which leads to a better customer experience, higher demand, and even more cars on the road.

So one way to look at this is "Great! Huge network effects!" But there's a big fly in the ointment: Does the number of passengers scale with the number of drivers? Or does the average income of drivers fall? More important, does the average income of the drivers fall to the point where it no longer makes sense to drive?

In his week as a Lyft driver, Lee took in about $600 worth of fares in 50 hours of driving. That works out to $12 per hour on the road. But that's before you add in the cost of gas, maintenance, and wear and tear on the car. Once you factor those things in, he wasn't really doing that much better than minimum wage.

Right now Lyft is subsidizing drivers in order to build its network. But when the VC money runs out, drivers will have to be paid out of fares. Moreover, at that point, many drivers will realize what many right now probably do not -- that the mileage they are putting on their cars is in fact quite costly, because it means that the car will need to be replaced sooner. At that point, some of the drivers will probably drop out.

The economics of Uber might be different, of course. But Slate's reporting on the subject suggests that successful full-time drivers aren't exactly raking in the cash, either. And there's going to be some selection bias in the reporting -- people who didn't do so well will have stopped driving for Uber.

To be clear, I'm not predicting the demise of Uber and Lyft. I'm just suggesting that right now, we may be in a pricing anomaly -- when the short-term cost of using the service looks lower, to both passengers and drivers, than the long-term cost will actually be. As drivers learn to factor in the cost of car replacement and investors stop subsidizing various aspects of the service, a market-clearing price will emerge -- and that market-clearing price may ultimately mean fewer drivers and passengers than many people currently expect will be the case. Waits will be longer, and perhaps prices higher, especially off peak, when drivers will find it harder to pick up fares. Which is still fine for the traditional uses of a taxi, such as going to the airport or heading out for a night on the town. But it might be less than optimal for someone who's standing at the entrance of the grocery store, waiting for their ride home.

I still think these services will prove revolutionary. But I'm not sure they're ready to revolutionize the personal automobile out of urban life.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net