One of the key microeconomic concepts of companies that operate in a juicy-margin, monopolistic competition environment is that it doesn't take too long for others to move in and take away those fat profits. Uber is fast becoming a textbook case, and its experience in Singapore is a good example.
The ride-hailing app reduced its prices in the city-state by about 15 percent this week amid fierce competition from local startup Grab and more aggressive strategies from existing taxi companies. From April 13, Uber's private car service, UberX, will charge S$3.00 ($2.20) as its base fare, lower than the cheapest flag-down rate of S$3.20 for local taxis. Subsequent per kilometer charges have also been revised downward. Uber may be forced to do the same in other parts of the world, where outfits such as Lyft and Gett are nipping at its heels.
The situation facing Uber is much the same as many Internet startups that thrive from breaking into industries that are dominated by a handful of companies thanks to entrenched regulation or legacy infrastructure. Uber CEO Travis Kalanick said in March that the San Francisco-based company was generating about $1 billion in annual income from its 30 largest cities, allowing it to invest in markets like China.
If Uber wants to maintain that level of profitability, it may need to change tack.
In the open economy of Singapore, Uber didn't face the same regulatory backlash as it did, for example, in Jakarta. Incentives for drivers to sign up, along with discounts for referrals and frequent riders, were gradually reduced as it became an established option for Singaporeans.
But 16 months after Uber's launch in January 2013, Singapore-based GrabTaxi introduced a similar service, GrabCar. GrabTaxi, which now operates under Grab, has been stepping up incentives for riders and drivers, and gaining on Uber. Its CEO Anthony Tan said in January he expects the company, present in 30 cities around Southeast Asia, to break even this year.
Like Airbnb, Uber and others in the new shared economy can make a lot of money initially, but often, it doesn't last. Unlike their forebears, which had to make large and expensive investments building hotels or buying and maintaining car fleets, creators of apps need only technology. It means their costs can be very low, and their profits high. It also means pretty much anyone else can do the same.
Uber's experience in Singapore serves as a timely reminder to those startups disrupting traditional industries. All too quickly, they too may be on the receiving end.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Christopher Langner in Singapore at email@example.com
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