How much does transportation cost you?
In most cities, bus or subway fare might set you back $3 or so. A tank of gas, maybe $30 or $40 depending on your car. An hour of street parking? Sometimes it’s free, sometimes it’s a few bucks. And you can usually snag an economy seat on a round-trip U.S. domestic flight for less than $300.
These numbers probably ring true for most people. There’s just one problem: Everything you know about the cost of transportation is wrong.
Despite a massive infusion of venture capital into the transportation sector over the past few years, mobility startups are starting to learn what every transportation business has known for generations: transportation profits are elusive, and the system is mainly held together by subsidies. Will this be the first generation of transportation businesses to escape history?
New mobility is on fire
First, let’s set the table. Since last year, multi-million and even billion-dollar investments in new mobility have become so commonplace we almost don’t notice them in the rush of headlines.
Automakers are planning to spend more than $300 billion on electric vehicles in the next five to seven years. Just one self-driving-car company raised $5 billion in 2018 alone. Scooter company Bird, not even two years old, is valued at $2.3 billion. Uber is shooting for an IPO with a valuation of at least $70 billion, and perhaps as high as $120 billion.
Speculation, largely fueled by the promise of autonomous vehicles happening sooner rather than later, has the mobility market in overdrive.
Dan Hoffer, a founder of Couchsurfing and presently an investor with Autotech Ventures, is focused on the mobility marketplace. In an interview, he summed up the VC firm’s raison d’être:
“We believe that ground transportation is going through the biggest disruption right now than it has in the last century, and the rate of innovation is increasing faster than ever before and the changes that impact consumers are taking place faster than ever before,” Hoffer says.
“And when there’s massive transformation and disruption,” he adds, “there’s also the potential for massive returns to shareholders.”
But is that really true, specifically when it comes to transportation?
Subsidies make transportation go ’round
New mobility companies are entering a game with a deeply uneven playing field. A big reason for the disparity is subsidies.
People often think of subsidies in terms of public transit, but in reality almost everything that touches transportation is partly funded by public money.
“The big distinction is that public transportation is overtly subsidized — it shows up as a dollar figure, whereas automobile transportation is subsidized in a hidden way, by having all these unpriced roads and a bunch of subsidized parking,” says Todd Litman, the founder and executive director of the Victoria Transport Policy Institute in Canada.
If we zoom out, we can see that intercity buses, airlines, automakers, transportation manufacturers, railways, energy companies, freight transportation and the entire road network are all subsidized to some extent. It may surprise you to know that only half of the money spent on the U.S. road network comes from gas taxes and other user fees, and that global subsidies to fossil fuel companies reach into the trillions of dollars.
These subsidies conspire to keep the cost of delivering transportation artificially low — and that’s not all bad news. We subsidize transportation and its auxiliaries for valid reasons. In some instances, subsidies exist to promote job growth and stimulate the economy. In others, it’s to support equitable access to mobility.
“At a very, very high level, most governments — especially in advanced economies — view transportation as a necessity,” says Regina Clewlow, a leading transportation researcher and the founder of Populus, a technology company that facilitates relationships between cities and private mobility operators.
Many subsidies are accompanied by rules that promote equitable access, she continues. “Public transit authorities are required to meet certain accessibility measures. They need to deliver it in neighborhoods and during times of day where there’s basically no way to make a profit.”
Meanwhile, new mobility companies — many of which are subsidized by investors, and not governments — aren’t beholden to rules about accessibility. In fact, they’re built on the premise that people who can pay more for premium services, will. They’re not wrong; it’s just that they’ve made some miscalculations about what “more” means to consumers who’ve only ever been exposed to artificially low pricing.
The great convergence
Providing transportation is capital-intensive and low-margin by design.
Because the cost of buying, maintaining and operating equipment — trains, buses, airplanes, car-sharing fleets, dockless bikes, scooters — is so high, and because people are sensitive to transportation pricing in general, it’s not uncommon for transportation providers to operate on razor-thin profits, or even at a loss.
The so-called “sharing economy” was supposed to alleviate some of that. The thinking was that companies like Uber and Lyft could circumvent equipment costs by using people’s private vehicles as for-hire cars. They passed the lower costs on to consumers, destroying the taxi industry in the process and creating a new pricing norm that was pegged far below the actual cost of delivering the service.
Uber and Lyft are still struggling beneath the weight of that pricing scheme. Recently we learned that Lyft lost $1 billion in the year leading up to its IPO. Seven years after launching in earnest, the companies — or more aptly, their investors — are still subsidizing rides.
The hope was that autonomous cars would swoop in to save the day; that not having to pay a human to drive a car would be what finally brought these companies into the black. But despite the industry’s best efforts, fully driverless cars operating independently on public roads are still far off.
“The only time I get my back up is when somebody says, ‘We’re going to have fully autonomous cars in three years,’ ” says Grant Courville, head of product management for embedded and autonomous systems at BlackBerry QNX, which provides global automakers with mission-critical security software. “I don’t care who says that… I’ll look at them right between the eyes and say, ‘No they’re not. I guarantee they’re not. Give me any amount of money [and] I’ll bet you they’re not.’ Level 5 is still a few decades out.”
So these ride-hailing companies are now exploring multimodality solutions (among other revenue streams) as a stop-gap. A pessimist might say the goal of a multimodal offering is not to altruistically provide people with more service options, but rather to own transportation in a market outright and ideally gain greater control of pricing as a result.
If that’s true, the timing is right. Cities are already overwhelmed by the sudden influx of bike- and scooter-share companies. At city hall, administrators and representatives are trying to build regulatory frameworks to contain these new mobility companies and install better infrastructure to support them. As for residents, how many mobility apps and accounts can one person truly have?
The great convergence is coming. Rules will be established, RFPs issued and contracts signed — and only a few winners will come out on top.
“I think the way that most scooter and bike companies will be profitable is for there to be a regulated oligopoly,” says Clewlow. “What I mean by that is, you want to constrain the number of players in the market. You want to have more than one ideally, but you don’t want to have more than three or four depending on the size of the city. Then, you put in place reasonable and flexible constraints on the number of vehicles.”
Sound familiar?
It is perhaps a sad irony that this may ultimately look like the taxi industry once did.
There’s no business like the transportation business
Transportation is a market fraught with anxieties and inefficiencies, which have made it a prime target for disruption. As consumers themselves, entrepreneurs and VCs have personally experienced how frustrating bad transportation can be. You’re stuck in gridlock. The subway breaks down like clockwork. The 15-minute walk to the bus is annoying when you’re in a hurry.
More money and better technology feels like the right solution.
But making transportation better isn’t uniquely about being more profitable or more efficient; it’s also about being more equitable. That’s the pact our society made. We agreed to subsidize transportation because we believed it was a necessity, and even a right.
We still believe it, even if we’ve internalized a tiered system that promotes the idea that people who have more money get better service. Entrepreneurs and investors are all too willing to withhold equity on the roads in their pursuit of equity on the cap table.
Take the NYC subway. It moves more people in an hour than an Uber can in 100 years. But it has been neglected for years, and now it needs somewhere around $19 billion to be whole again. That’s a drop in the bucket considering the trillions being tossed around in the sector. Transportation investors could fund this in a heartbeat. But instead of fixing an existing system whose repair would benefit millions of people a day while generating a steady, moderate, long-term ROI, we’d rather play fast and loose on Hyperloops and high-speed sleds for rich people’s private cars.
So, can transportation actually generate the massive returns investors are hoping for?
Courville from BlackBerry QNX suggests the real money is in sensors, software, automation and other technologies that will power new mobility. “It will likely be about the services they can monetize by virtue of having that mobile platform,” he adds, offering car subscriptions as one example.
As for the vast majority of B2C transportation providers, the answer is “probably not.” Because of how resource-intensive it is to create and operate a customized solution and because of how price-sensitive consumers are, margins would probably always be thin — or non-existent.
As bike- and scooter-sharing companies learned the hard way, being decently profitable requires growing local ridership, especially in historically car-dependent markets. That takes time, education and major infrastructure investments in roads, bike lanes and better traffic signaling. It would take years, and maybe even decades, to pay off.
This probably won’t stop investors from believing there’s a magical multimodal unicorn in the mix, and throwing around billions to root them out. It’s no skin off their nose; as Litman notes, “Silicon Valley is used to companies going bankrupt.”
That’s the cost of the new mobility.
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