Investors hope Lyft and Uber will electrify markets with their upcoming public offerings, letting ordinary folks buy into the ride-hailing craze that’s transforming transportation. Lyft could be valued close to $25 billion when shares go public on March 29. Uber’s IPO, which could come in April, will be one of the biggest ever and could value the company at a whopping $120 billion. Both firms have enjoyed triple-digit growth during the last several years, fueling those lofty valuations.
But future growth could disappoint, as a competing form of mobility catches on: car subscription services. A car subscription lets people who want full-time access to a car pay one monthly fee that covers everything except gas, and keep the vehicle in their own garage. Unlike leasing, there’s no down payment or long-term commitment.
At the cheap end, car subscriptions will likely be cheaper than owning or leasing. For a higher monthly fee, drivers can swap vehicles based on their needs or interests—an electric compact for daily commuting, a bigger crossover for weekend excursions. And if car subscriptions pan out as some analysts expect, they could blind-side Uber and Lyft.
Tech upstarts typically target longstanding industries for disruption. But automakers and some dealerships realize they need to disrupt themselves by offering cheaper, more flexible transportation options. “Consumers need to spend less money on personal transportation,” says Jonathan Smoke, chief economist at Cox Automotive, owner of Kelley Blue Book and other services. “Subscription is really where the opportunity lies. Ride-hailing could still grow, it’s just going to reach a point where it’s a certain niche.”
BMW, Mercedes, Porsche, Volvo and Audi offer pricey subscription services featuring their own vehicles. Some dealer groups have subscription plans as well, such as DriveFlow in North Carolina, the Bernie Moreno group in Ohio and Park Place in Texas. General Motors canceled a Cadillac subscription service last year, but will reportedly relaunch it this year with dealers, rather than Cadillac itself, managing the cars.
Ford runs a subscription operation called Canvas in Los Angeles and San Francisco, with monthly prices starting at $369 plus tax for a 2016 Ford Focus. Offerings include virtually every type of vehicle, from sedans to pickups, from a range of manufacturers, through model year 2017. The price covers insurance, maintenance, repairs, roadside assistance, delivery to most addresses and 500 miles of driving per month. You can get a higher mileage limit for an added fee. The monthly cost drops the longer you commit to the service, for up to 12 months.
Cost per mile
The subscription model is a tiny portion of the transportation sector at the moment. Privately owned vehicles (including leases) account for 93% of all vehicle miles driven in the United States, according to Cox Automotive data. Public transportation accounts for 4%, ride-hailing 2% and subscription services less than 1%. But the portion of privately owned cars is likely to drop as new options emerge and affordability pinches consumers. Housing costs are rising faster than incomes, leaving less disposable income for cars and other things. Younger consumers with student loans face a particular crunch.
Americans still want a private ride, however. And ride-hailing, for its popularity, is a costly substitute for people who need regular access to a car, especially in suburbs and rural areas. Ride-hailing services such as Uber or Lyft cost the user about $1.30 per mile, on average, compared with 50 cents per mile for a privately owned vehicle. Subscription services now average about $1.50 per mile, but that’s high because of all the luxury automakers offering them. As the cost of a subscription approaches or undercuts the cost of owning, drivers are likely to switch from owning or leasing to subscribing.
Edmunds found that signing up for a fully loaded 2015 Ford Escape on Canvas would cost $555 a month with a 12-month commitment and a 15,000-mile allowance, everything included. Buying a comparable used Escape, with no money down, would cost about $665 per month in loan payments and insurance, plus additional costs for maintenance. The subscription model is substantially cheaper.
Cox thinks that as private ownership declines, subscription rentals—not ride-hailing—will grow to make up the balance. Ride-hailing market share could even decline, although total ride-hailing miles will likely continue to rise as more people move around.
Self-driving cars will arrive at some point, and be more transformative still. When cars can deliver themselves to your door, at the very moment you need them, it may no longer make sense to keep a car in the garage, unused most of the time. But that’s still years away, and until then most Americans will continue to shop for the most economical way to drive themselves around.
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman