21 July 2014

Uber, the Amazon of personal transportation?

In its relentless drive for the ‘next big thing’, Silicon Valley discovered a new area of every-day life to disrupt through technology: personal transportation, and the agents of change this time around are Uber, Lyft and other start-ups focused on ride-sharing. I must admit from the start I am far from an expert on the subject; my closest encounter (if you can call it that) with Uber was a couple of months ago, when I checked on their site how much would a ride with Uber from the airport to Paris cost. It turned out it was basically identical to the standard taxi fare, around 50 €, so I immediately discarded the idea. What’s the point of new competition if not to drive prices down or to improve quality of service? Overall I was satisfied with my previous taxi rides from CDG airport, so I saw little reason to try out Uber for the same price. But everywhere around the world the idea is stirring up on one side excitement at the new model of transportation and the prospect of large returns on investment, on the other fierce resistance from existing providers and regulators. So what is the big deal actually?

Reading some of the many recent articles on the subject, I can see there is much to be improved about taxi services in many cities, anything from ordering and paying online to rating your experience to more efficient allocation of cars during peak hours. But these are all problems that can be solved with current technology, as long as the taxi companies are willing to invest and embrace change. There are some examples right here in Bucharest: many taxi providers released smartphone apps for iOS, Android and Windows Phone where customers can order a car, have it pick them up in a matter of minutes, and track the costs live while travelling to the destination. Cars are fitted with cheap Android tablets with GPS systems and customized apps to route drivers to the nearest client. There’s no payment system built into the apps, but that’s mainly because people around here still prefer cash to cards and other more exotic payment options are not available. The prices are also pretty low compared to the Western market, so I very much doubt we will see Uber trying to ‘disrupt’ this market anytime soon.

It’s tempting to compare Uber with Google based on their focus on big data and on their projected growth, but I think this analogy is forced and somewhat misplaced. Google started and expanded as an online-first company, growing in tandem with the Internet and expanding into this new digital playground. Uber on the other hand acts in the physical world and needs to constantly come up with new solutions to the constraints and limitations imposed on it. Instead of heading into uncharted territory and bringing a single solution – their web crawler and ranking system – to global scale like Google has done over the years, Uber has to deal with regulations and local authorities, with the animosity of competitors, with the limited supply of suitable drivers and their shifting loyalty. This could slow their advance to a halt, preventing them from scaling the business fast enough. By expanding gradually into new cities, local companies might find the time and resources to react and adapt, reducing the impact of Uber once it makes its way there.

If you want to compare Uber with an existing tech giant, the closest match would surely be Amazon. As a retailer, Amazon deals primarily with the transportation of goods; Uber addresses similar logistic problems for the transportation of people, so it’s only natural that some of their solutions are similar. Uber’s path will be more challenging though due to the fragmentation of the market; every city has its own rules and authorities and each battle needs to be fought and won on their ground. Like Amazon with Prime, Uber offers a ‘vanity’ service, Uber black, to gain and hold a loyal customer core, their most profitable line of business. The low-cost UberX taxi/ridesharing line is aimed at the mass market and the company is willing to operate at loss here to starve out competition and secure the biggest market share possible. Their latest tactic in New York shows just that: dropping prices below the competition in an effort to push their market share – a risky move, made possible by the recent investor influx, and reminiscent of Amazon’s way of doing business. Google also frequently offers services for free, but it does so because it has basically zero variable costs after building the infrastructure; which is not the case for Amazon and even less for Uber. At this point, I think the best strategy for Uber would be to use its capital inflow to keep their prices as low as possible in a few key cities, grow their market share there as fast as possible to secure more drivers and revenue and, as those cities become profitable, use those profits to expand in other areas, while keeping the cash flow overall in balance. On the other hand, do we really want a single company, with their questionable price surges in times of high demand, controlling the transportation business in any city?

In a sense, the main promise of Uber overlaps with driverless cars, discovering a new way of travelling inside our increasingly busy cities. But, as I wrote in that article and many others pointed out, starting the revolution with cars will only get you so far. The large investments into car-sharing startups would be better put to use by extending and modernizing public transportation, which is much safer and environmentally friendly than introducing more cars on the roads. Instead of relying on big data to optimize travel times, technology and pervasive Internet connections could change the way people work, for example allowing for more flexible working hours, for some activities to be performed remotely, reducing or eliminating the need to routinely travel to work. I think this approach would have a much bigger impact on our quality of living than narrowly improving the time we spend waiting for a taxi…

Below a couple of quotes from what I think are the most relevant opinions on the subject. I have saved the best for last; that particular article goes into detailed calculations around the revenues of Uber drivers and talks extensively about the (adverse) effects of deregulation on the transportation market.

Uber’s larger vision, according to CEO Travis Kalanick, is to disrupt transportation and “make car ownership a thing of the past.”

That’s a worthy mission, but the wrinkle is that Uber is entering what is essentially a frictionless market (for both drivers and riders) in which its services are a commodity. The company’s phenomenal growth so far (we don’t know the actual numbers, but doubling in revenue every 6 months is what Kalanick claims) has been built on the back of low-hanging fruit — expansion into new cities, particularly where taxi availability is low — and levels of dissatisfaction among  taxi drivers that may be temporal. (When I asked drivers who had a particular loyalty to Lyft why they liked the company, they said they felt it treated them better in general.)

In both respects, Uber’s growth is reminiscent of Groupon, and we know what happened to them.

Christopher Mims

This is a relevant comparison today, but to my mind sells short Uber’s potential: the addition of technology to people driving cars does not make Uber a taxi competitor; rather, it makes Uber a taxi obsoleter1. Moving passengers around for money is but one small job that could be done by a nearly infinitely scalable logistics company, just as typing documents is one small job for a PC, or making phone calls one small job for a smartphone. In other words, to suggest that Uber’s ceiling is the size of the taxi industry is no different than suggesting typewriters are the ceiling for PCs2. If you’re considering upside it’s far better to look at the market caps of UPS ($95 billion), Fedex ($42 billion), or even Toyota ($182 billion)3.

Ben Thompson

Even an optimist on Uber will have to accept that the combination of regulatory restrictions protecting the status quo and the stream of me-too competitors will make it difficult for the company to dominate this market. Even in an optimistic scenario, the former will add costs to Uber's business model and the latter will put pressure on Uber (as it already seems to be doing in some markets) to reduce it's slice of the gross receipts from 20% to 10-15% or even lower. My estimate that Uber will get a 10% market share of the overall market is at the optimistic end of the spectrum, especially if you view it in conjunction with my assumption that Uber will continue to be able to keep its slice of these gross receipts at 20%.

Aswath Damodaran

So now let’s consider scenarios whereby Uber’s potential market could be 25 times higher than Damadoran’s original estimate. His original estimate was based on Uber topping out at 10% of a $100 billion market. We would argue, for the reasons included herein, that the features and functions of Uber’s new car-for-hire service significantly expands the core market. Based on San Francisco alone, it appears that that market is already potentially 3X the original. For two reasons, I would consider this 3X market multiplier the low end of the range. First, Uber is still growing aggressively in San Francisco, so this new market is far from saturated. Also, when you consider that these services are succeeding in areas where taxis were previously not prevalent, this would imply a higher multiplier as well. In our model below, we assume that the expanded car-for-hire market is 3-6X bigger than the historic market.

Bill Gurley

“Uber’s brand will support high margins” was a plausible story when the company was focused on the luxury segment, but clearly that focus has shifted to the lower end of the market. If Uber raised the price of uberX by 25%, do you honestly believe that its customers wouldn’t leave in droves? If drivers thought they could make more money on another dispatch network, do you honestly believe that they wouldn’t switch? Until a mass market taxi company demonstrates that it can raise fares over a sustained period without suffering an offsetting reduction in demand, I don’t see how it’s reasonable to believe that auto transport is any less a commodity than air travel. And yet, that’s exactly the assumption we’re making.

Justin Singer

1 comment:

  1. Most of my Paris postings are on my other blog, so if you're interested, mosey on over and have a read. http://www.privatecarserviceparis.com/