Uber, the company rewriting the definition of disruption only three short years ago, is soon to list shares on the NYSE. Upon Lyft’s disappointing market entry, expectations are high regarding Uber’s future. Working with an exceptionally fragile model, it is questionable if the scale-up will be able to realize its ambitions. This article explains why.
In order to understand the model’s vulnerabilities, one should first be aware of the ingredients for the growth Uber experienced within the United States. The American model of Uber is based on the fact that many cars are idly parked in driveways (whereas fixed expenses continue), as well as high unemployment rates, an inefficient public transport network, growing smart phone adoption, ambiguous regulations, and an inefficient taxi market –which had deleted the word ‘service’ from its vocabulary long ago.
Under these conditions, Uber was able to offer an excelling customer experience at acceptable rates and hence grow exponentially. It won the clients’ and investors’ trust and started an international expansion. In less than a decade a multinational business with an office hosting over 18,000 employees has been established with 24.2 billion dollar venture capital.
Weak network effects
Platforms realize their growth by using network effects. I once switched from the the popular Dutch social network website Hyves to Facebook as I wanted to stay connected to my international friends Nederland. Facebook is a mighty platform, due to international network effects. Uber’s platform also works with network effects, but there are two important side notes to be made. Uber having thousands of taxi’s driving around London doesn’t influence pick-up times in any other city. As client and driver have to meet one another physically in a taxi, the company doesn’t benefit from international, but only from local network effects.
Secondly, transactions take place physically and locally, and a correct balance between supply and demand has to be created from city to city and sometimes from postal area to postal area. Uber has to deal with an asymptotic network effect. Growth in supply intrinsically shortens the waiting times before pickup and stabilizes the supply, yet a tipping point exists at which an additional taxi as supplier on the platform doesn’t add any value for the client. The arrival times will not shorten anymore, and the increase in service quality offered to the client will be brought to a halt, even when more taxis are added to the network. After this point, every newly applied taxi driver won’t benefit in competing against (local) competitors.
Because of weak local network effects, it is relatively easy to launch locally active competitors. Last week new steps in Sony’s announcement to launch its own taxi service app in Tokyo appeared. By cooperating with 5 established taxi companies the app will start out with about 10,000 taxi’s, according to their words.
The affiliation with self-owned shared bikes and scooters, another of Uber’s ambitions, is a long shot again. This new form of mobility will go hand in hand with other billion dollar funded start-ups (of which some are already on the brink of failure) in each and every city, and has to be discussed with the local government to let this new form of mobility ground within a city. Uber Taxi shows us that the enterprise has had to adopt a more collaborative approach to be allowed to operate in several cities. In order to succeed with its ambitions regarding bike and scooter sharing, these kinds of collaborations will need to intensify drastically. That in itself is contrary to an easily scalable model. Regardless the question if this could function as a viable business model. An interesting read is this interview with Tony Ho, vice-president of global business development at Segway-Ninebot, by the Financial Times. He is convinced that “Electric scooter sharing start-ups, including Bird and Lime, are not sustainable”.
Low switching costs
As long as a driver meets local requirements, the threshold to start working for any app is low. From the moment a competing app becomes available within a certain city, oftentimes we notice that a great amount of drivers switch from one app to another. The same applies to clients. After installing the the app and creating an account, it is extremely simple to switch between these apps to see which of the two offers you the best supply for the moment. Brand loyalty of users on both supply and demand side is utterly low. Many drivers are listed with several platforms at the same time. Combining this with local network effects, one can understand that there is much playing space for local or national competitors.
Of course, they won’t have the scale advantage of an internationally operating party, which can invest even more in the development of technology, but the local operating party may cooperate more easily with corporate clients like hospitals and residential homes. Yes, Uber’s technology has an advantage in ‘on demand’ orders, yet many orders could still be made and planned upfront.
National and institutional context
The added value of an app is strongly dependent on the national context in which it operates. In the United States the market offered room to scale up a service we know as ‘UberPop’, a service banned from almost all European countries. Furthermore, many European countries do have well-functioning, tight public transport networks, lowering the added value of the service Uber is offering.
One of the centerpieces of Uber is its reputation system which has to guarantee that the a trustworthy driver is behind the wheel. This is one of the main aspect of adding value in countries where the government lacks checking mechanisms, but in many countries such checks are solidly in place. The reputation system has become more or less an automated HR-manager filtering out the rotten apples, rather than a substantial improvement of the system.
The app to access your mobility
Considering the above, it isn’t striking to notice that Uber has changed its strategy in desiring to become app that is your access point to mobility. A taxi service is exchangeable, but the homepage to your mobility is a much stronger starting point.
Although Uber has a strong hand to play, and a great wealth in gathered data to work with, it will still be a huge challenge to realize its renewed ambitions. Whereas they entered a fragmented taxi market, being able to provide substantial added value to suppliers, it will now have to cooperate with the status quo and other newly entering players, which will stand their ground and most importantly: they won’t share their client contact and data with any other party.
Even if Uber will reach the point it has mind, it is still questionable whether it will develop sufficient scale to make the circle come round regarding its revenue model, let alone the fulfillment of promises made to its investors. In that respect, Uber still has a long road ahead and it could definitely happen that the greatest start-up adventure in history, as described by Adam Lashinsky in the book ‘Wild Ride’, ends as a deception.