Uber had a terrible 2017. It's kicked off 2018 by settling what was shaping up as a nasty legal fight, but that doesn't mean its troubles are over. On Feb. 9, there was a settlement in a trial in which Alphabet's (NASDAQ:GOOG)(NASDAQ:GOOGL) self-driving unit, Waymo, accused Uber of stealing trade secrets. The sides agreed that Alphabet will get a 0.34% stake in Uber -- valued at roughly a quarter-billion dollars -- and Uber promises that none of Waymo's confidential information will show up in its future self-driving vehicle hardware or software.
While reaching a settlement with Waymo is a positive that takes away some uncertainty and gives a big company a stake in Uber's success, it may end up a moot point for Uber. There are fundamental problems with the business model that put it at a disadvantage to some of its ridesharing competitors around the globe.
What's wrong with its operating model?
Uber's business model can't run as-is forever. Since its founding about a decade ago, the strategy has been to undercharge customers to take market share. The company does continue to grow, but so do the losses. According to an anonymous source quoted by Reuters, during the third quarter of 2017, revenue was $2 billion, a 14% increase from the previous quarter. But losses grew to $1.46 billion, a 38% increase quarter over quarter, according to the source, whom Reuters said was "familiar with the matter."
Not only does Uber reportedly operate at a loss, but it also has single-handedly created an industry with the same problem. Lyft, the second-largest service in the U.S., also reportedly takes steep losses every quarter. The problem has become pervasive as these ridesharing apps have gone global, and the fierce competition could make it difficult for them to raise prices in the future.
To kill a unicorn
The name of the game has thus become "last man standing," and there are quite a few still standing. In the wake of Uber's quick rise to power, many ridesharing start-ups are popping up all over the world. Some are taking a slightly different approach, like bicycle-sharing start-ups LimeBike and ofo. Many existing taxi services have also adapted and taken services online.
Then there are the hyper-local and regional services. Cities throughout the U.S. have had various local ridesharing start-ups successfully raise cash from private investors. Internationally, lots of other apps have focused on specific countries or regions -- like Didi Chuxing in China, Grab in Southeast Asia, and BlaBlaCar in India. One of them, run by Russia's largest internet company, Yandex, entered into a joint venture with Uber in Eastern Europe, but Uber had to contribute its business there and is now the minority owner.
The competition is mounting, and with smaller operations, many of these competitors have the ability to better control driver pay because of lower average wages in local emerging markets.
What it means for this new industry
Though technology-based transportation is still growing, there will eventually need to be a shakeout, where ill-equipped companies fail and make room for their stronger peers. For Uber, the race to develop self-driving cars is a key to eventual profitability and survival, but it is by no means alone in that department.
It's too soon to say for sure, but Uber may end up one of the largest successful start-ups that couldn't make it. That doesn't mean the ridesharing industry is toast. However, investors are probably better off with a profitable technology company like Alphabet, or even an automaker like Ford or General Motors that is developing the industry without so much riding on charging customers less than it costs to provide a service.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Nicholas Rossolillo owns shares of Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Ford. The Motley Fool recommends Yandex. The Motley Fool has a disclosure policy.