Why Uber Does Not Have a Sustainable Business Model

First off, allow me to say: I love Uber. Or, should I say, I lover Ubering.

Here in Dayton, Ohio, there are about three cabs for the entire market. The introduction of Uber and--finally--Lyft, have been a godsend for getting to the airport, meeting friends out for happy hour or, in my case, getting your kid to preschool when you can't find your car keys. It's a useful service that delivers a societal benefit. 

So, while Ubering will always be around, it's hard to see Uber being the dominant force Wall Street seems to think it will. Here's why: 

1. Lack of differentiation creating pricing pressure: Currently. there only seems to be two ways to differentiate ride-sharing services--brand and distribution. While Uber and Lyft are attempting to segment the market by types of car, ability to carpool, etc., each of these segmentation attempts is easily replicated. In fact, the lack of differentiation not only exists for customers, it also exists for drivers where many drivers drive for both Uber and Lyft, taking only the best fares. 

This lack of differentiation leaves you only to compete on price in a dreaded "race to the bottom." This is a key reason Uber exited China, joining Chinese ride-sharing giant Didi Chuxing rather than trying to beat it. Thus far, it seems the only way to profitably run a ride-sharing service is to monopolize markets and eliminate pricing pressure from both passengers and drivers. 

2. Uber fares are artificially low. The company spends a large portion of the funds it raises to subsidize fares and drivers as a means of promotion. Once, the promotional funds run dry--fares are going to come up.

To escape a lot of overhead, the company has been aggressive in maintaining the position that its drivers are not employees and do not require the same regulations as taxi drivers. They continue to lose court cases on this front. And, with drivers having to be treated as employees who are subject to the same regulations as taxi drivers, that represents a huge increase in overhead. Fares are going to come up. 

3. Ride-sharing technology is not hard to duplicate. What you needs to make this business run are passengers and drivers. To get either, you need name recognition and a workable app to connect the two parties and handle payments. At this point, name recognition is harder to achieve than having a workable app. Taxi companies have comparable apps to Uber.  You are going to see a lot more local players better local exposure and market knowledge private-labeling 3rd party apps and getting into this space.

If there is a business that reminds me of Uber, it's Groupon. A middleman service connecting buyers to sellers where the buyers are only loyal to the 'deal', or in the case of Uber, the lowest fare.