When both companies were inundated with venture capital funding in their first few years of operation, it wasn’t much of a problem. VC funding allowed Uber and Lyft to offer users extremely low rates while also paying their drivers.
Then they went public. Lyft made its market debut in March 2019; Uber followed suit in May with an IPO. Those IPOs meant that the two companies now had to prove to investors that they had viable business models and could make a profit.
That’s where advertising comes in.
Last week, Lyft announced the creation of Lyft Media, its advertising arm. Lyft, which acquired a company in 2020 that makes monitors to display digital ads on cars, wants to sell advertising space on in-car tablets that riders use, on digital display panels and the bike docking stations, and through in-app sponsorship. Lyft is competing with Uber, which got into the ad business in 2019 and sells ads through both its primary app and Uber Eats, as well as offering ad servings on top of its cars.
The fact that Lyft and Uber are both putting so much resources into advertising suggests the companies are entering a new phase in their path to profitability.
“We’ve seen rideshares depart from [just] rideshares like Uber Eats and delivery mechanisms, to perhaps now deliver more than just food,” Arjun KapuraChief Executive Officer and Founder of Comcast’s Venture Group Forecast Labstells londonbusinessblog.com.
“But you know,” Kapur adds, “there are only so many things you can do with delivery. The question is, how do you create the next multi-billion dollar revenue stream for the company that would leverage the assets and capabilities? of the existing company?”
For the two largest US rideshare companies, the answer seems to be advertising. Makes sense, since millions of users look at their phones when they book trips. Uber and Lyft have a captive audience in their drivers, who either watch their devices while being driven around or sit in cars that have plenty of room for digital ads.
“Essentially, it’s a ‘we have it, so why not use it,'” says Randy Nelsonhead of mobile insights at Sensor Tower, a market research firm for mobile apps.
It also helps that the two companies have unique access to their users. Uber and Lyft were able to boast to advertisers that they have the ability to target ads to certain customers based on things like travel history or food orders.
“They probably know a little bit about the person and they can get more data access and try to make them a little bit more sophisticated than your general taxi ads,” Kapur says. “Even the tiniest layer of data can be the deciding factor for brand advertisers who want to put a lot more of their dollars into this.”
This could be an extremely lucrative opportunity for the rideshare giants. Uber’s advertising division generated $141 million in revenue in 2021, up from $11 million in 2020; Uber manager Mark Grether said to a investor day earlier this year that the company could reach $1 billion in ad revenue by 2024. Lyft has not commented on what it expects from ad revenue with its new unit.
“The generation that is coming to its peak as consumers have remarkably different perceptions of contemporary advertising, so advertisers are rethinking their strategies to engage with them, and that’s where these in-vehicle ads can seem appealing,” said Sensor Tower’s Nelson.
It’s unclear where drivers fit into all of this. Lyft said some of the revenue from its display and tablet ads will go to its drivers, though it didn’t specify how much. Grether said on Uber Investor Day that some drivers who installed ad screens on top of their cars increased their earnings by an average of about 20%.
Still, the advertising windfall probably won’t be significant for drivers in the beginning, says Jeremy Goldmandirector of marketing and trade briefings at Insider Intelligence, noting that as ad sales skyrocket (giving drivers a new source of income), companies could use that growth as a rationale for keeping wages down.
“I don’t even expect it to happen that quickly,” said Goldman, recognizing that it takes time to build market share and develop the technology. “It’s much more of a tactic to say, ‘Look what we’re doing for you, we’re buying you into this whole program.'”
Kapur argues that ads can do just the opposite, providing another mechanism by which rideshare companies are forced to compete for drivers.
“There will be a supply-demand problem between the two [companies] that they should fight,” Kapur says, “so I imagine if someone does it and it works and makes more income for the drivers, everyone will rush there because they don’t want to be the only place the drivers don’t want to use anymore. . . . That could paralyze the entire core business.”