04 January 2016

The New Yorker: “In Silicon Valley now, it’s almost always Winner Takes All”

As someone who has felt, first-hand, the agony of shuttering the doors of his startup, I feel Paul’s pain. But I want to focus on what Branson, a self-made billionaire, who is more often right than wrong, said about ride-sharing not being a “winner-takes-all” market. What Branson says is generally true for companies that sell analog products, such as packaged goods or soda, or analog services, such as air travel. Coke isn’t going to drive Pepsi out of business, and Toyota isn’t going to eliminate Honda. But in today’s Internet-always-on world, that maxim increasingly doesn’t hold true. Most competition in Silicon Valley now heads toward there being one monopolistic winner. And that is why it is hard not to see that, right now, the only competition that matters in ride-sharing is between the two largest companies: Uber and Lyft.

In the course of nearly two decades of closely following (and writing about) Silicon Valley, I have seen products and markets go through three distinct phases. The first is when there is a new idea, product, service, or technology dreamed up by a clever person or group of people. For a brief while, that idea becomes popular, which leads to the emergence of dozens of imitators, funded in part by the venture community. Most of these companies die. When the dust settles, there are one or two or three players left standing. Rarely do you end up with true competition.

Om Malik

While the conclusion sounds true at first, especially after the news of one competitor closing doors at the end of 2015, I think it’s a bit early to call win for the ride sharing market. Every example mentioned in the post as dominant, monopolistic winner is a mature public company, with a steady flow on revenues and profit – none of the startups operating in ride-sharing are at this point yet. The way I see it, Uber and co. do qualify as ‘analog’ services more than digital: while there’s an algorithm behind it optimizing rides and fares, the actual transaction with the customer involves a person driving a car, not on-screen interactions like Google, Facebook and Amazon. The real point of failure for Uber is the driver, and, if repeated reports are to be believed, drivers are not happy with the company, so Uber has high attrition and this could hurt customer satisfaction in the long run. 

There are other possible scenarios for this market along ‘winner-takes-all’, as highlighted in the article below:

The Game Changer: I believe that the existing ride sharing model is an unstable one. As I argued in my post on Uber, the very strengths of the models (bare bones infrastructure, drivers as independent contracts and no car ownership) makes it unsustainable in the long term, since ride sharing companies have to compete for drivers on a continuous basis, offering them incentives to switch from competitors, and customers, with special deals. It is therefore likely that a new model will emerge, though it remains an open question of whether it will come from one of the players in the game, or from an outsider. Thus, Uber’s hiring of robotics engineers may be a precursor of a different ride sharing game, with driverless cars and infrastructure investments, or it may be Google or Tesla who enter the picture with a different way of operating this business.

Aswath Damodaran

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