Part one in a series on ridesharing
My newsletter has alluded to a long-gestating post about Uber for a number of months now, and to be quite honest, its content has changed often as the company continues to aggressively: fundraise, skirt laws, interact with journalists, and subsidize its service. Uber is special among recent tech companies that have risen to prominence in that it has deep links to the physical world: at present, its chief business model is hiring out human contractors to drive their vehicles to transport other humans. The simple fact of this tech company's outsize presence in our physical world lends weight to the notion that our society must contemplate it, and its implications, carefully. Uber, already valued at a mammoth forty billion dollars, is only poised to grow. The import of how we assess and react to Uber stretches far beyond taxis; Uber offers alternative models for infrastructure, public policy, retail, economics, and the very organization of human labor.
Uber offers alternative models for: infrastructure, public policy, retail, economics, and the very organization of human labor.
In order to understand Uber, it is important to understand the competitive landscape in which the company operates. Its chief rival, Lyft, is considerably smaller, but has prestigious backers, including Andreessen-Horowitz, and is still in some five dozen cities in the United States. There are other players, such as Sidecar, but Uber and Lyft are far and away the largest players here (and for now, the only relevant ones). At least on a city-by-city basis, the competition between the two companies exists on a winner-take-all basis. There is a finite number of drivers serving a finite number of passengers, and either of those pools is strengthened in a virtuous cycle by increasing the number of the other. That is to say, encouraging drivers to join one service inherently removes them from the market for the other (of course, this isn't quite true, as many drivers simply carry two phones and use both services simultaneous, but Lyft Line and Uber Pool are designed to keep drivers constantly within the same network). And of course, a lower pool of drivers for one service leads to longer waits for customers, which encourages them to try the competing service. Given these dynamics, there are three likely ways for conflict to play out in the near term (think a horizon of three to five years).
In the past six months, two definitive documents have been created around Uber:
- "It’s Already Over And Uber Has Won" by Johana Bhuiyan for BuzzFeed
- "Why Uber Fights" by Ben Thompson for Stratechery
The articles, excellent reads them both, provide some of the undergirding for my series. Bhuiyan's article, obviously by its title, is not even the bull case for Uber, and more a matter-of-fact statement of the company's victory. Thompson's article explains the winner-take-all dynamics of the ridesharing market and is drawn on more heavily in Part II. This series operates under the assumption of a (mostly) winner-take-all market, and suggests new areas for discussion and consideration around a business model that is helping reshape our society. To that end, this first piece situates the reader in the ridesharing space and frames the three most likely outcomes concerning victory there. Further writing in the series will build on these assumptions.
Possibility #1: Uber beats Lyft
This is, by most people's estimation, the scenario with the highest probability of actually taking place. But what does a victory in this context look like?
Uber beating Lyft plays out like this: Uber, funded to the gills and relentless in its execution, achieves dominant market share in significant municipalities from which Lyft will slowly retreat. In the areas where Lyft remains strong, Uber, no longer squeezed by those tougher battles, will be able to devote its full attention to the Lyft cities. And then it will crush them by fighting a price war that it can afford to wait out. Lyft doesn't go out in a bang, but gradually, suffocated city-by-city much the same way Facebook did to its competitors a decade ago. There may be a handful of Lyft cities that remain (perhaps in cities large enough to have anti-Uber populations sufficient to sustain it), but for most markets, it will be irrelevant.
The other possibility is that Lyft retreats to a different segment of the market. Lyft originally entered ridesharing as "your friend with a car," promising friendly drivers taking you places in ordinary cars. Around the same time, Uber launched UberX, a directly competitive service different from its original Uber service that brought black cars to your door. UberX is now Uber's most competitive product. If it can segment the market in a way that Uber, for reasons of brand preservation or otherwise, cannot enter, Lyft will continue to operate, just at a greatly diminished scale.
Possibility #2: Lyft beats Uber
The bull case for Lyft depends on a herculean misstep in Uber's execution. Thus far, the company has proven willing to copy any novel ideas that Lyft puts forth, and to burn money in any cities where Lyft competes. Uber is a formidable opponent, and ruthless, but without much regard for social conventions.
Lyft's chance for real survival exists in Uber's tone-deafness. Uber has flubbed on privacy issues multiple times (revealing its "God Mode" feature that it used to map people who hadn't slept at home the night before), had a member of its executive team suggest doing opposition research on journalists, has at various points engaged in grotesque price gouging (including during Hurricane Sandy on the East Coast) and in many municipalities, continues to operate a service that is acknowledged by lawmakers and enforcers as illegal. Lyft needs Uber to do something so bad users refuse to return to it, and in massive numbers. Uber has recklessly fostered a corporate persona of arrogance and petulance, while Lyft has mostly escaped harsh press scrutiny and maintained its friend-with-a-car image—if Uber is mean, well, then Lyft is nice. But you know where they say nice guys finish.
That also explains why people tend to ignore the company’s missteps and privacy violations. It has a killer and convenient product, morals be damned. - Johana Bhuiyan
Possibility #3: Wildcard beats Everybody
It's tough to say what an Uber-killer will look like, but it's unlikely to resemble Uber.
Just last month, rumors flew that Google was preparing its own Uber competitor. This, in spite of the quarter-billion dollar investment Google's venture capital organization invested last year, incited chatter across the Valley. While Google issued a denial of the claims, many prominent industry analysts continue to believe that Google will indeed launch its own ride-sharing service. Reports even say that the service will build on the company's famous self-driving car project. Hoo, boy.
- Google has not released a successful commercial product that it has grown in-house since Gmail. All of its other hits, YouTube and Android among them, have blossomed via acquisition. No Google product holds a candle, revenue- or profit-wise, to AdWords. This isn't to say that there's no possible way Google could be successful in this market, but merely to establish that despite prognostications otherwise, Google has historically been unsuccessful barging into new markets.
- Reporting on the self-driving car project suggests that it is nowhere near ready to be used widely. According to Alexis Madrigal's article, the company has only mapped 2,000 of the four million miles of road in the United States. These maps aren't like Google Maps; they are hugely data-intensive, environment-contingent, detailed 3-D maps that these self-driving cars need to really work. Moore's Law would tell us that progress should come quickly, but other issues abound.
If Google launches a ride-sharing service, I do not expect that it will be commercially successful unless the company can suddenly right its core incompetencies, like customer service and paid products. The company's cash-on-hand is a massive sum (some $59 billion as of April 2014, and it's only grown) that it could readily use to battle a pre-IPO Uber. Google certainly has the money to wage such a fight, but analysts have a historical tendency to cite Google victories as preordained, whereas point 1 above demonstrates their hit rate is not as great as some would suggest. Even if Google enters this space, their victory is not guaranteed. A full-hearted entrance by Google could of course be formidable (and fascinating), but each additional front on which the company does business necessarily means there is a smaller pool of resources for each of the others.
There is another possibility within the wildcard victory bracket, and the history of business states that it's likely to happen within the next couple of decades at most: a company emerges that changes the basis of competition such that players like Uber and Lyft are structurally prohibited from competing. Such distruption would require some technology with significant advantages over Lyft and Uber to emerge, including one of the following (initially, at the expense of at least one of the other two):
- It is far cheaper
- It is far more convenient
- It is far faster
By necessity, this won't just be a slightly better ridesharing experience, for Uber and/or Lyft will be able to use their resources to copy whatever innovations make those improvements possible. Instead, the new entrant will perform along some other axis that isn't easily copied by a large firm: perhaps convenient transportation is made free with a subscription to some other, orthogonal service (or is ad-supported), or municipal rideshares are given access to special fast lanes that commercial ones are not, while retaining most of contemporary ridesharing's other advantages. Or, most likely, the next model will emerge and not yet seem competitive to the "real thing," only to make the "real thing" quite scared in short order, just as BuzzFeed went from a mocked organization to one worthy of citation in just a matter of years,1 or Snapchat went from silly distraction for sexting millennials to prospective advertising and social networking powerhouse even more quickly. It's tough to say what an Uber-killer will look like, but it's unlikely to resemble Uber.
BUT WHICH SCENARIO IS IT?!?!
In the short term, the first scenario I described is most likely, with Uber winning what will be most easily recognized as victory. Lyft will scrape by in some kind of niche or only in cities large enough to sustain both services, but it will not be surprising to hear the company wind down some of its smaller operations and indeed, downsize its staff. In the longer term, I also expect to see scenario #3 take place. At that point, Uber (or the ridesharing service du jour) will continue to operate at a large scale (particularly if it has built a successful logistics business atop its platform), but it will hit a ceiling and no longer captivate our hearts and minds.2 You can look to current-day Microsoft for a model of a company that remains incomprehensibly profitable yet no longer issues the dictums of the industry.
Until then, we have to contend with the world Uber and its ridesharing kin have wrought. I explore the questions that new order raises—and whether they really matter—in Part II: Networks & God Modes.
1 This is a strange thing to assert in this particular article, but I'm pretty sure BuzzFeed wins a Pulitzer by 2020. Welcome to the new world order.
2 The other option is: Uber displays a Facebook-like level of acumen in acquiring potential competitors, thus staving off disruption. In any case it's unlikely the core Uber team will itself be developing the disruptive technology.