David Jones is a policy analyst and economist. He is a fellow at the Canadian Centre for Health Economics, a Telus research fellow and is studying public policy at the Munk School of Global Affairs & Public Policy, University of Toronto.
Uber Technologies Inc. only recently announced its first ever quarterly profit. That it took so long may surprise some people – such is Uber’s international dominance.
The company’s growing ascendency in the 21st century mirrors a pattern played out by a handful of other tech platform giants, including Instagram, Facebook, X (formerly known as Twitter) and Airbnb.
Having established significant market power, can these tech giants maintain their influence in the years ahead? And specifically, can Uber post profits on a consistent basis? Yes, it can.
The starting point is to understand that these tech platforms are able to acquire and retain market power using different routes than traditional monopolies.
First, there are traditional industries that have economies of scale such as infrastructure networks for electricity or water. Such pure monopolies can occur naturally owing to high fixed costs, and may lead to a single operator, government ownership and/or exclusive privileges – Canada Post, for example. In Ontario, Hydro One is the monopoly operator of the electricity grid, but because it is partly privatized, an independent regulator limits prices to protect customers.
Second, governments may grant patents, which permit a time-limited monopoly for a specific product. For example, patents are granted to pharmaceutical companies to incentivize innovation and indirectly remunerate research and development.
Third, companies may attempt to foster and/or maintain market power through strategic actions. De Beers, for example, developed a monopoly in diamonds during the 20th century by persuading suppliers to sell through its channels.
But the tech platforms are an entirely different game. These firms use technology – typically in an efficient and engaging manner – to develop networks and markets. For example, Uber brings together buyers and sellers – riders and drivers. Crucially, the real value of its platform is people: you and me. Uber may be selling journeys, but more fundamentally than that, it has created a market-based network of people.
Imagine starting your own ride-hailing business from scratch. Initially, with few drivers on the platform, there is little benefit for potential passengers because waiting times are long. Similarly, there are not enough customers to attract drivers. Without this critical mass of people, the entry barriers for potential competitors are high.
Uber arrived early to the tech party in 2009, and benefited from a first-mover advantage. Initially, Uber’s attractive prices incentivized new riders and drivers. Then, as more people signed up, the platform became more valuable to other riders and drivers, and so on. Fast forward to 2023, our collective voluntary participation in sustaining this critical mass fuels Uber’s market dominance.
If people are the fuel, technology was the spark. Apps are a relatively low-cost means of bringing together buyers and sellers, facilitating rapid mass mobilization. Uber’s use of technology has been extremely intelligent: Its app is informative, attractive and user-friendly, while its journey algorithm optimizes drivers’ routes, which minimizes driver downtime and increases their earnings.
Uber has its challenges, to be sure. Using Uber or another transport app is largely a one-off decision, whereas your Facebook profile accumulates memories and messages over many years, making it more costly to switch away.
Government policy also plays a role such as through competition policy and regulations. At a minimum, Uber needs to proactively meet societal expectations around corporate social responsibility.
New technologies, as well, pose a potential risk to Uber’s future profitability. San Francisco recently approved commercially operated autonomous vehicles, and technological disruption inevitably offers opportunities for new entrants.
Arguably, Uber’s greatest challenge is that it faces a fine balancing act: It needs to raise prices enough to satisfy shareholder expectations following the billions in capital it raised and its annual losses in the past, but it has to do that without harming future profitability by setting prices too high for customers.
However, even though Uber’s prices rose at four times the rate of inflation from 2018 to 2022, it is still typically cheaper than traditional taxis.
On the tech side, Uber is well-placed for the transition to autonomous driving, as it already partners with Waymo in San Francisco. It is also in discussions with governments in Canada about strengthening drivers’ pay – a sign that it is aware of the importance of meeting societal expectations.
Uber’s profit streak should continue, assuming it can implement a balanced pricing strategy, a responsible corporate approach and remains at the forefront of technological innovation. Perhaps the greater issue is whether these profits will be large enough to satisfy its stakeholders.