Electric Scooters: The Unit Economics May Spell Trouble
Last October, pedestrians, vandals, and perhaps shopkeepers dumped 60 electric scooters into a lake in Oakland, California. While electric scooters and other forms of micromobility have the potential to transform city landscapes and urban transportation, ARK wouldn’t be surprised to see a number of scooter companies go bankrupt first.
ARK’s research suggests that dockless electric scooter companies are not profitable today, primarily because of short-term growing pains that should ameliorate over time. Charging $1 to unlock scooters and then $0.15 per minute to ride, companies like Bird are generating a healthy $2.43 in revenue per mile, but their costs are roughly $2.55 per mile, well above the $0.53 that we believe will be possible as they scale, as shown below. Lower costs, in turn, could translate either into lower prices for the rider or better margins for the electric scooter companies, perhaps both, sustaining growth and the business model.
Will electric scooter companies actually cut costs while venture capitalists and companies like Uber are subsidizing public joyrides? They will have many ways to contain unit costs, among them: the cost of the scooter hardware, the cost of charging/relocating them, maintenance costs, and credit card fees, as well as higher utilization rates and longer lifespans. The survivors and ultimate winners will cut these costs aggressively, as shown below.
The Information reports that Bird pays roughly $550 per scooter, a surprisingly high price given its scale. Amazon sells the same scooter, sans Bird’s branding and hardware, for $500 to the average Joe. ARK anticipates that over time electric scooter companies will be able to source or manufacture their own scooters for $250, saving $0.34 per mile, as shown above.
Charging/relocation costs offer even more potential for cost savings. Thanks to the small size of its battery and low electricity prices, the cost to charge a scooter is well below $0.10. Consequently, the “charging” fee effectively is a “relocation” fee, which should drop precipitously once the scooter companies stop their land grabs, consolidate, and scale. Uber drivers looking for a fare, for example, could supplement their income with relocation fees, saving scooter companies up to $1.03 per mile, as shown above. Moreover, as scooters move from consumer to commercial quality, maintenance costs should decline, saving roughly $0.19 per mile, while payment aggregation and batching should lower transaction fees for another $0.22 per mile in savings, as shown above.
Longer lifespans and higher utilization round out the sources, with utilization perhaps throwing entrepreneurial expectations for a loop. While headlines feature scooters dumped into lakes or strewn on sidewalks, the cost savings associated with extending the life of a scooter from the current four months to a year yields only $0.24 per mile in savings.
As for utilization, scooters average roughly five rides per day today which, in theory, could increase substantially, impacting the unit economics favorably. Scooter companies are flooding cities with scooters, perhaps with the assumption that their ubiquity will increase utilization. Citi Bike data, however, does not support that assumption.
As shown below, from mid 2013 to the fourth quarter of 2018, while the total number of Citi Bike trips per month and the size of the bike fleet roughly doubled, the number of trips per bike only increased ever so slightly (the latter relationship shown in the last chart). Without a significant lift in utilization, early stage companies hoping to become the next scooter Uber or Lyft, gunning for market share with more scooters, are doing nothing but adding to their losses.
Electric scooter companies and ridesharing companies are built on different business models. Facilitating a two-sided market in which it was the bridge between supply and demand, Uber had to scale quickly to make its business model work. Scooter companies, however, control the supply side of the market and must focus on scaling efficiently. In other words, while scooter sharing is a capital-intensive business, ride-sharing is not. Uber hires managers and offers its drivers incentives but does not own its fleet, while Bird has to finance and seed the market continuously with scooters. Not surprisingly, Bird now wants to franchise its business, putting the scooter investment on balance sheets other than its own.
Although our research suggests that its unit economics could improve markedly, scooter sharing could flail until the excesses in the market dissipate. Perhaps flooding the streets with scooters is a good short-term strategy to increase revenues and attract funding, but it is a poor strategy for the longer term. As scooters invade more public spaces, pedestrians, retail store owners, and others are pushing them out of the way, if not dumping them. If scooter destruction leads to shorter lifespans, the unit economics never will work: our research shows that if the average lifespan of a scooter were to shrink from four months to one, the cost per mile would shoot up to $4.40 per mile.