Is Ride-Sharing a Winner-Takes-All Market?
*Note: Special thanks to The Atlantic for referencing this post in their article titled “Will Uber and Lyft Become Different Things?”
Investors have poured billions of dollars into Uber, Lyft, and other ride-sharing startups in hopes of capturing a large percentage of a massive market. While there is no doubt that a lot of revenue is up for grabs, the question remains as to whether a single player will capture all of the associated value. My determination is that this is not a winner-takes-all market, and below are the reasons why I have come to that conclusion.
Multi-sided marketplaces build advantages through network effects gained from building liquidity. Uber did this exceptionally well by subsidizing its acquisition of both drivers and riders — an expensive feat that the company was able to achieve because of the massive capital it had raised. Uber used cash as an advantage to drive growth quickly, moving it ahead of its competitors and kicking off its continuous network effects; more drivers attracted more users because of the quicker times and lower costs, and more users attracted more drivers because of the increase in potential earnings. Now, however, one side of this market — and Uber’s competitive advantage — is at risk.
Specifically, this may not even be a multi-sided market with the introduction of autonomous vehicles. If self-driving technology becomes a commodity, then what gives Uber a supply-side advantage? Couldn’t other companies, perhaps even car manufactures such as Tesla, decide to launch a ride sharing service at even lower costs than Uber because they would have no need to contract for vehicles? Even if Uber is able to efficiently generate supply, could a commodity market ever really become winner-takes-all? Without a supply advantage, how would Uber sustain a demand advantage? Clearly, the implications of this technology are vast, but even if self-driving cars don’t come to fruition in the way that many technologists ardently believe, Uber still won’t be able to capture the entire market.
Let’s take a look at the strength of Uber’s network effects, and specifically, the diminishing returns of those network effects. A monopolistic player in a winner-takes-all market has the ability to leverage network effects to continuously expand its moat against competitors, thereby deterring new entrants and increasing its competitive advantage. Unfortunately for Uber, however, there is a ceiling in ride-sharing as to just how much better a company can be compared to competitors. Sure, Uber can provide lower costs and faster pickups compared to Lyft, but just how much lower and how much faster? Uber is constrained by the cost of gas and the cost of drivers — two variables that are hard for the company to control.
True, Uber could lower its wages paid to drivers, but these drivers have no switching costs and many already practice multi-homing between multiple applications. If they alienate drivers further and risk them leaving altogether, then Uber could lose ground on the “faster service” component of their advantage. Autonomous vehicles provide a way to lower costs, but we’ve already discussed the significant issues that would come with this false solution.
So what is the result of the ceiling? It means that while Uber can be better than the competition, it may not be better enough to drive out the competition and capture the market. Do people really care whether the ride arrives in one minute or thirty seconds? Do they really care if the cost is $5 or $5.50? This cap on the strength of Uber’s — or any ride-sharing company’s — network effects is another reason why this is not a winner-takes-all market. The higher likelihood is that ride-sharing turns into an airlines-esque market in which there is fierce competition, local winners, and low profits.
Potential Counterarguments:
- Self-driving technology does not become commoditized soon after it is achieved and the relevant single player thus develops a significant competitive advantage that will help drive out competition.
- Ride-sharing companies, which have massive amounts of capital and regulatory know-how, successfully lobby for regulation that prevents certain stakeholders from operating self-driving technology (thanks to Mike Dudas for this thought).
- Appealing tangential services are developed by a single player and offered for free, or at a deep discount, in exchange for loyalty through subscription lock-in, similar to Amazon Prime. Even in this instance, however, it is still unlikely that this would develop into a winner-takes-all market.
- What else?
*Your feedback means a lot so please leave a comment if you agree, disagree, or believe that I missed something altogether.
