Why Uber Fights
Why Uber Fights
In his, to my mind, fair defense of Uber , Mark Suster made a very important observation about the reality of business:
Let’s put this into perspective. As somebody who has to rub shoulders with big tech companies often I can tell you that there is much blood spilled in the competitive trenches of Apple, Twitter, Facebook, Google and so on. Changes to algorithms. Clamping down on app ecosystems. Changing how third-parties monetize. Kicking ecosystem partners in the nuts.
Be real.
It’s a brutally competitive world out there because there are extreme amounts of money at stake. I’ve been on the sharp end of it and it doesn’t feel nice. And I pick myself back up, dust off and think to myself that I need to think through the realpolitik of power and money and competition and no matter how unpleasant it is – it’s a Hobbesian world out there. It ain’t pretty – but it’s all around us.
This is particularly relevant to Uber: the company is looking to raise another $1 billion at a valuation of over $30 billion, and, as I wrote when the company raised its last billion , they are likely worth far more than that. Still, though, skeptics about both the size of the potential market and the prospects of Uber in particular are widespread, so consider this post my stake in the ground 1 for why Uber – and their market – is worthy of so many sharp elbows. I expect to link to it often!
There are three perspectives with which to examine the competitive dynamics of ride-sharing:
- Ride-sharing in a single city
- Ride-sharing in multiple cities
- Tipping points
I will build up the model that I believe governs this market in this order; ultimately, though, they all interact extensively. In addition, for these models I am going to act as if there are only two players: Uber and Lyft. However, the same principles apply no matter how many competitors are in a given market.
Ride Sharing in a Single City
Consider a single market: Riderville. Uber and Lyft are competing for two markets: drivers and riders.
There are a few immediate takeaways here:
- The number of riders is far greater than the number of drivers (far greater, in fact, than the percentage difference depicted by this not-to-scale sketch)
- On the flip side, drivers engage with Uber and Lyft far more frequently than do riders
- Ride-sharing is a two-sided market, which means there are two places for Uber and Lyft to compete – and two potential opportunities for winner-take-all dynamics to emerge
It’s important to note that drivers in-and-of-themselves do not have network dynamics, nor do riders: Metcalfe’s Law , which states that the value of a network is proportional to the square of the number of connected users, does not apply. In other words, Uber having more drivers does not increase the value of Uber to other drivers, nor does Lyft having more riders increase the value of Lyft to other riders, at least not directly.
However, the driver and rider markets do interact, and it’s that interaction that creates a winner-take-all dynamic. Consider the case in which one of the two services – let’s say Uber – gains a majority share of riders (we’ll talk about how that might occur in the next section):
- Uber has a majority of riders (i.e. more demand)
- Drivers will increasingly serve Uber customers (i.e. more supply)
- More drivers means that Uber’s service level (i.e. car liquidity) will improve
- Higher liquidity means that Uber has a better service, which will gain them more riders
In this scenario Lyft by necessity moves in the opposite direction:
- Lyft has fewer riders (i.e. less demand)
- Drivers will face increasing costs to serve Lyft riders:
- If there are fewer Lyft riders, than the average distance to pick up a Lyft rider will be greater than the average distance to pick up an Uber driver; drivers may be better off ignoring Lyft pickups and waiting for closer Uber pickups
- Every time a driver picks up a rider on one service, they need to sign out on the other; if the vast majority of rides are with one service, this, combined with the previous point, may make the costs associated with working for multiple services too high 2
- Drivers will increasingly be occupied serving Uber customers and be unavailable to serve Lyft customers (i.e. less supply)
- Fewer drivers means that Lyft’s service level (i.e. car liquidity) will decrease
- Lower liquidity means that Lyft has an inferior service, which will cause them to lose more riders
The end result of this cycle, repeated over months, looks something like this:
There are three additional points to make:
- It doesn’t matter that drivers may work for both Uber and Lyft. If the majority of the ride requests are coming from Uber, they are going to be taking a significantly greater percentage of driver time, and every minute a driver spends on a rider job is a minute that driver is unavailable to the other service. Moreover, this monopolization of driver time accelerates as one platform becomes ever more popular with riders. Unless there is a massive supply of drivers, it is very difficult for the 2nd-place car service to ever get its liquidity to the same level as the market leader (much less the 3rd or 4th entrants in a market)
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