How can dockless bike and scooter companies make money?

Dockless rental bikes at the corner of Grape and India Streets in San Diego's Little Italy on March 8, 2018. Merchants are not happy with the bikes cluttering sidewalks. (Eduardo Contreras/San Diego Union-Tribune/TNS)

SAN DIEGO: In just a matter of a few months, hundreds of dockless bicycles and scooters have appeared on the streets and sidewalks of San Diego. 

Some have praised them as effective ways to get around town and reduce traffic congestion. Others have complained they clutter sidewalks and that too many riders don't follow the rules of the road, posing safety hazards to pedestrians. 

But from a business perspective, the nascent industry raises a basic economic question: How do these companies expect to make a profit? 

By last count, there are at least five dockless bike and scooter companies operating on San Diego streets and campuses and they offer their services at a deep discount. 

Bike users can expect to pay just US$1 (RM3.90) per 30 minutes. Electric scooter company Bird charges US$1 to start each ride and 15 cents per minute from there. 

While that's great for consumers, can these companies make any money at such prices?

TMobikes and LimeBikes bikes parked along Broadway Street in downtown San Diego on March 1, 2018. (Eduardo Contreras/San Diego Union-Tribune/TNS)
TMobikes and LimeBikes bikes parked along Broadway Street in downtown San Diego. — San Diego Union-Tribune/TNS

The firms say their costs are low and economies of scale help them slash the price of the bikes and scooters they purchase. One executive pointed out that if car-sharing services like Zipcar can make a go of it by offering driving rates at about US$10 (RM39) to US$12 (RM47) an hour, they can turn a profit at US$1 for a half-hour. 

Like Uber and Lyft, riders activate dockless bikes and scooters through their smartphones after downloading an app and get billed by credit card. 

When they're done, riders either push down a locking arm or tap “End Ride” on the app and the devices lock up. Users don't have to return the bikes or scooters to docking bays; instead, they leave them on the sidewalk where other riders can use them. 

Venture capital firms have hopped on for a ride. 

Silicon Valley's Andreessen Horowitz and Section 32, the San Diego-based firm led by ex-CEO of Google Ventures Bill Maris, are among the investors who have put US$132mil (RM513.41mil) into LimeBike, one of the companies operating locally. 

In a 1,450-word post on the Andreessen Horowitz website, company partner Jeff Jordan noted there are 8 million to 10 million shared bikes in China. “This kind of widespread, ubiquitous adoption has the potential to change human behaviours,” Jordan said, “not to mention the face of the urban landscape.”

But in China, where the dockless bike industry began from practically zero two years ago, at least two companies have gone broke in the past nine months. 

Neither Ofo nor Mobike, China's two dominant dockless bike-sharing companies, are reported to be turning a profit. 

The market has been so flooded that mountains of abandoned bicycles have formed on the city streets in China. 

“To me, that's a powerful photo,” said Sarah Catz, a lecturer at the Institute of Transportation Studies at UC Irvine. “I think when you talk in terms of can (companies) make money, the lesson there is you can't have a proliferation of these services. 

“If in very dense areas in China it can't work, then how's it going to work in San Diego and LA and other such places? So I think cities need to be very mindful of not over-saturating the market.” 

What's the business plan? 

The basic business model for these companies is simple – get people to rent their bikes and scooters. 

“It's pretty much ridership,” said Sam Dreiman, Director of Strategic Development in San Diego for LimeBike, based in San Mateo. 

Costs for bikes that are checked out and then returned at docking stations are expensive, estimated to be as high as US$5,000 (RM19,447) per bike, Jordan said. 

Since dockless bikes and scooters skip that step, companies can trim expenses. “Our business costs are different,” Dreiman said, “so we're able to offer our products at a more affordable rate. And because of their convenience, they're ridden more frequently.” 

With an eye on their competitors, companies are reluctant to discuss the numbers of bikes they have in circulation in San Diego – as well as how many rides they have recorded so far and the number of users they need to rack up each month to survive.

There is no requirement the companies report their ridership numbers to the city since they are under the same requirements as any other private company with a business license.

LimeBike scooters for rent on the corner of F Street and Front Street in downtown San Diego on March 1, 2018. (Eduardo Contreras/San Diego Union-Tribune/TNS)
LimeBike scooters for rent on the corner of F Street and Front Street in downtown San Diego. — The San Diego Union-Tribune/TNS

LimeBike, however, did submit a report to the city in March that said it recorded more than 21,000 riders who took more than 55,000 trips in their first three weeks in the San Diego market. 

Chris Taylor, Ofo's head of North America, told the Union-Tribune his company's bikes have logged more than 72,000 miles since launching its San Diego operations on March 12. 

But a look at the venture capitalists making investments in these companies may offer some hints at other revenue streams. 

It's been estimated Ofo has raised more than US$1.2bil (RM4.66bil) from backers such as China's e-commerce retail giant Alibaba and Coatue, a US-based hedge fund that invests in the tech sector. Mobike has reportedly attracted US$900mil (RM3.49mil) from investors like contract manufacturer Foxconn Technology Group in Taiwan and Tencent, the Chinese-based Internet conglomerate. 

That has led to speculation that customer data could be collected or shared, since the bikes and scooters are activated through riders' smartphones. 

Such a prospect has taken on added attention in light of the Facebook controversy involving Cambridge Analytica that prompted an appearance last week before Congress by Facebook founder and CEO Mark Zuckerberg. 

“I think that's very likely,” Catz said. “There's so much data there and it's collected on your cellphone.” 

But representatives of companies operating in San Diego who spoke to the Union-Tribune said they have no plans to go that route. 

“There are no other revenue streams we're interested in,” said Travis VanderZanden, CEO and founder of scooter company Bird. “We think our business model is renting the vehicle. We think that's the best way to monetize the service. We will never advertise on the Birds and we would never share or sell customer data or anything silly like that.” 

LimeBike's Dreiman said ridership is “our primary revenue stream right now. We are exploring other revenue streams through partnerships, whether it's advertising or partnering with other private companies. But right now because ridership is actually quite high, we're able to run a sustainable business.” 

Ofo's Taylor said revenue in San Diego is coming “100%” from bike rentals. As far as data sharing, Taylor said, “That's not something we're interested in at this point.” 

Who will be left standing? 

Dockless bike and scooter companies are not just a recent phenomenon in San Diego. They have suddenly popped up in cities across the country, mostly in densely populated urban areas and on college campuses. 

The companies will battle it out and analysts expect a handful to survive. 

The bigger companies will try to leverage lower per-unit costs to get an edge. Mobike, for example, says it operates more than 9 million bikes in 200 cities in 15 countries. 

Ofo says it has 10 million bicycles in its global fleet and Taylor said each bike costs the company a little more than US$200 (RM777) each. 

“The way I do the math is like this,” Taylor said. “Zipcar is a profitable, mature business. You pay about US$12 for a Zipcar. You pay US$1 for an Ofo and an Ofo bike costs a couple hundred dollars. The ratio of US$1 to a couple hundred dollars is way better than the ratio of US$12 to the cost of tens of thousands of dollars per car. And we're able to pay off that asset through rides much faster in the life cycle than a company that does shared-car ownership.” 

As the market contracts, can consumers expect to wave goodbye to the ultra-cheap prices now in place? 

“Absolutely,” said UC Irvine's Catz. How much prices may change is an open question but Catz said the companies could find long-range success by selling passes. 

“You could have a day pass or pay a monthly pass or something like that, and that's where they could make their money,” said Catz, who spent 10 years with the Orange County Transportation Authority. “I have a feeling you'll see some creativity and that kind of marketing.”

A person rides a LimeBike bike along Broadway in downtown San Diego on March 1, 2018. (Eduardo Contreras/San Diego Union-Tribune/TNS)
A person rides a LimeBike bike along Broadway in downtown San Diego. — San Diego Union-Tribune/TNS

So what do venture capital firms see that's so attractive? 

Jordan said smart bikes have “the potential to change user behaviour, in much the same way that people who would never have paid for a taxi or gotten into other strangers' cars now use ride-hailing and ride-pooling everywhere. Or in much the same way that people who would never have previously even ridden a bike might now consider riding one.” 

But if companies are struggling to make money in China – where bicycles are much more ubiquitous than in the car-centric North America – how do the companies expect to turn a profit in US markets? 

“I don't think it's an apt comparison,” said Dreiman of LimeBike. “The approach for instituting it in cities in the US is different from China.” 

Due to complaints, the companies say they are making a concerted effort to work with cities to round up abandoned, damaged or improperly parked bikes and scooters. 

The smartphone technology attached to the bikes makes them easier to track and round up. That, Dreiman said, will “ensure that there aren't graveyards of bikes”. 

There has been resistance, though. Coronado recently impounded dockless bikes parked on public streets, citing a municipal code against using the public right-of-way without a permit. 

Dallas is one market in particular where complaints of bikes found littered, dismembered and tossed into trees, lakes and rivers have been acute. 

“We think the companies in the US that are going to be most successful are not the ones that dump bikes on the sidewalk,” said Bird's VanderZanden. “We think the most successful will be the ones that act responsibly.” 

Rounding up bikes and scooters – as well as repairing those that are damaged and vandalised – adds to the companies' costs. How much? The firms contacted by the Union-Tribune would not release figures, saying such details were proprietary and citing competitive concerns with their rivals. 

The ride-sharing connection 

Last week, the automobile ride-sharing giant Uber announced it is buying the electric-bike startup Jump Bikes for a reported price tag of more than US$100mil (RM388.68mil). 

It's not much of a surprise since many dockless bike companies look to Uber and Lyft as models for growth. Some executives in the e-bike and e-scooter segment used to work for the ride-sharing companies. 

Instead of considering the likes of Uber and Lyft as competitors, many of the dockless companies see them as complements to a larger, fundamental shift in transportation. 

“Our goal is to replace as many car trips as possible,” said scooter CEO VanderZanden. “And in order to do that, we want to be the most affordable electric vehicle option on the market. We kind of fancy ourselves as the Tesla for everyone.” 

Ofo's Taylor said the sector is taking on some of the biggest problems cities have faced for decades.

Two LimeBike bikes along 4th Avenue in downtown San Diego on March 1, 2018. (Eduardo Contreras/San Diego Union-Tribune/TNS)
Two LimeBike bikes along 4th Avenue in downtown San Diego. — San Diego Union-Tribune/TNS

“What are cities' primary issues? Congestion on the roads, wear and tear on the roads, lack of parking, pollution,” Taylor said. “We, along with the other companies in this space, are solving a very real problem. And that's exciting.” 

LimeBike rents scooters as well as bikes in the San Diego market. 

“We're taking cars off the road, we're alleviating congestion,” said Mary Caroline Pruitt, a marketing and communications official at LimeBike. “Our goal is really to not only provide an affordable, sustainable transportation option but to improve urban mobility and the future of transportation in cities.” 

The last mile 

Some see dockless bike and scooter companies helping to solve what transportation officials call “the last mile” problem. That is, getting commuters from one mode of transit to their final destination. 

If, for example, a worker lives in Chula Vista and works downtown, her “last mile” issue may be solved if she uses an MTS trolley that drops her off one block from her office. But if she works in, say, Coronado where the trolley does not go, the “last mile” question would probably lead her to skip public transit and drive her car to work each day. 

UC Irvine's Catz sees electric scooters as a promising market, perhaps more than dockless bicycles. Huffing and puffing on a bike can mean workers coming into the office covered in perspiration, especially on hot days. 

“If you have to go more than a mile, well that's sweat time,” Catz said. 

Scooters may also offer a more practical solution for women. “If you're wearing a skirt or a dress, you don't have to worry about it hiking up,” Catz said. 

But there are concerns the dockless movement may be promising more than it can deliver. 

The weather in San Diego is ideal but it does rain here. Will riders opt for bikes or scooters in wet weather, or on days with a thick marine layer? 

And San Diego's housing prices keep rising. 

That can make city living unaffordable – especially for young people and couples looking to raise a family – and that would hardly stem the desire to move to less expensive suburbs and, ergo, result in long commutes to work that would make people more reliant on automobiles, not less. 

On the other hand, dockless bikes and scooters may act as connection points that could make transit hubs, such as trolleys and buses and Amtrak trains, more attractive to commuters. 

Regardless how it shakes out, Catz said the transportation system in the coming years will be radically different. 

“Technology is changing our life, our world and it's changing the transportation system so much more rapidly than we ever thought possible,” Catz said. 

“Two to three years ago I was on panels talking about autonomous vehicles being 20 years in the future. Now we're talking five years, 10 years in the future ... Singapore is talking about having an entirely autonomous public transit system within a year. So it's happening so much quicker than we ever thought.” — The San Diego Union-Tribune/Tribune News Service

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