Uber Isn't Going to Conquer the World
Travis Kalanick takes on the world one city at a time. “My company, we’re all about serving cities,” Uber’s co-founder and chief executive said Sunday. “We don’t have the macro view; we are in cities,” he added the next day. A little while later he mused, “People live differently in different cities.”
Kalanick said these things at a World Economic Forum meeting in Tianjin, one of the 60 Chinese cities where Uber now offers rides. To me, they sounded like an acknowledgement that the business of driving people around is for the most part metropolitan, not national or global. Which is interesting to hear from the CEO of a company that has tapped investors for up to $15 billion to finance a breakneck global expansion.
“These markets are contestable, and they’re contestable city-by-city,” Arun Sundararajan, a professor at New York University’s Stern School of Business, told me a few weeks ago. “There are network effects that are local to a particular market, but these are not like Facebook’s network effects. They don’t give you a multiyear advantage.”
Network effects are generated when a service becomes more valuable as more people use it. They can give huge competitive advantages to successful builders of networks, so huge that some such businesses appear to be natural monopolies.
In the ride-hailing business, more customers in a city lead more drivers to start offering their services. More drivers bring shorter wait times, which lure in more customers, who lure in more drivers -- and the virtuous cycle continues. That’s the network effect, which seemingly gives a huge advantage to the ride-hailing company that builds the leading network in a city.
There’s only limited spillover from city to city, though. Yes, tourists and business travelers are going to be more likely to use a ride-hailing service that’s in lots of cities, but in most places they’re just a small part of the overall customer base.
National borders can add another barrier. After a visit to a tech company on the north side of Beijing Tuesday, I wanted to use Uber to get back to my hotel -- the app showed only a two-minute wait for a car -- but my host advised against it. Uber drivers in China always call to discuss exactly where you are, she said, and because my mobile number was foreign she didn’t know what would happen. Chinese market leader Didi -- which started as a taxi-hailing app but expanded into private cars in response to Uber -- was better anyway, she added, then used it to order me a taxi that turned out to be already waiting on the street outside in hopes that someone would need a ride.
On a visit to yet another tech company on the north side of Beijing today I learned of one more hurdle faced in China by Uber and by Didi’s private-car service. For business travelers in the U.S., the digital receipt provided by a ride-hailing service is adequate for claiming expense reimbursement -- and unlike a paper receipt, it’s really hard to lose. In China, though, businesses can’t get a tax deduction for employee expenses without an official paper “fapiao” invoice. Taxi meters usually print them out automatically. If you pay a non-taxi driver through Didi or Uber, you have to request that the fapiao be mailed to you. Which is kind of a pain.
So driving-for-hire is a quirky business, with lots of differences between cities and between nations. And even when a ride-hailing service achieves a dominant position in one city, with all the attendant network effects, it’s still not invulnerable. That’s partly because, for reasons both regulatory and technological, it’s generally pretty easy for drivers and customers to toggle among multiple apps.
In New York City, where Uber is the market leader among ride-hailing services (although taxis still provide far more rides), Sundararajan is intrigued by a new competitor called Juno, which not only charges much lower commissions than Uber but plans to start giving equity in the company to regular drivers. “It has identified that one of Uber’s weaknesses is how its drivers perceive it,” Sundararajan said, “and it’s leveraging that as its positioning: we are for the drivers.” He added:
Will someone else come along that will raise the kind of capital that Uber did and be able to beat them in every market? Probably not. But I can certainly see high-revenue pockets being taken on by competitors in a way that will drive down margins.
There are some good things about being the global No. 1. It brings scale advantages in terms of advertising, technological infrastructure and analytics. Uber’s experience in building up networks in city after city has to count for something too. Also, as Andrew Ross Sorkin speculated in the New York Times last week:
Every time Uber raises another $1 billion, venture capital investors and others may find it less attractive to back one of Uber’s many rivals: Didi Chuxing, Lyft, Gett, Halo, Juno. In other words, Uber’s fund-raising efforts have seemingly become part of the contest: It’s not just a rivalry over customers and drivers; it’s a war of attrition, a mad scramble to starve the competition of cash.
Still, overall, I’m not getting the sense that this new business of ordering up rides with our smartphones is inevitably tending toward global monopoly. As a customer, I find this encouraging. If I were an investor in Uber, though --- particularly a recent investor -- it might make me a little queasy.
This was in a part of the interview I did with him early this month that we edited out of the published version.
There’s a reddit thread about this.
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