Mercenaries in the sharing economy
Acting rationally, drivers for services like Uber and Wheely may bring on an undesirable outcome for consumers and themselves
I recently read a post titled The Cost Of Loyalty by Fred Wilson. In his post, which is inspired by research carried out by Jonathan Goldman and Matthew Liu into the US transportation market, Fred highlights the staggering price differences that can affect customers that stay loyal to a single operator at all times, as can be seen in the chart below.
This got my thinking about the state of the London transportation market.
Let’s be clear: The establishment and inroads of companies like Hailo, Uber, GetTaxi, Wheely et al has, on the whole, resulted in a dramatic price decrease, increased overall quality of service and much greater supply of rides for London’s commuters. This is particularly welcome in a market where, previously, the idea of value creation for customers revolved around the taxi drivers’ knowledge of London’s landmarks and streets — a once clever parlour trick that required some serious exertion of the taxi drivers’ hippocampus, but one that looks increasingly trivial in the age of GPS and smartphones.
I’m a mercenary when it comes to booking rides
I’m completely unloyal and usually triage between availability and price, trying to find the best service at a given time. My informal research suggest that the majority of customers behave the same way. It’s rational behavior. (Also rational, is happily using each and every freebee or voucher these services dish out during their price wars. Thanks.)
In this type of environment, one could expect two clear market leaders to emerge — the one that is the cheapest and the one that has the best immediate availability. Other players, with less mindshare or smartphone screen real estate, will be increasingly relegated to the margins or even out of business.
My perception, based on pretty frequent use, is that Wheely tends to be the cheapest but with low immediate availability, particularly at peak times. Uber, on the other hand, has better availability but is pricier, especially at peak times, owing to its price surge feature. Black cab applications like GetTaxi and Hailo tend to be somewhat pricier — at least outside of peak times.
Assuming my perception is correct, we should expect to see a market increasingly dominated by Uber and Wheely. But that’s probably not exactly how things will play out. Two things may tip the balance in the favour of Uber.
The first one is the size of the user base. If an aspiring driver is choosing which service to pledge allegiance to, it would make sense to pick the one with the biggest user base as it’s likely to translate into the highest utilisation, and thus, commission. Even better would be to choose the service with the deepest pockets. The service that can spend agressively on marketing and customer acquisition. With that in mind, there are deep pockets and there are deep pockets.
But the drivers don’t seem to have allegiance to a single operator. It’s not uncommon to see a black cab driver with stickers from both Hailo and GetTaxi on the windshield. Similarly, drivers for Uber and Wheely are largely the same group of people. They own or lease their vehicle and they sign up to be drivers for both Uber and Wheely and probably for a whole host of other operators — and therein lies the problem.
You see, the drivers are mercenaries, too
The drivers are, by and large, rational people that respond to incentives. The reason for Uber’s greater availability lies in the fact that they pay their drivers better than the competition. So, given the choice, a driver will choose to drive for the company that pays the best. Sure, she may respond to a Wheely request when there isn’t a competing request coming through Uber, but ultimately it’s Uber that wins her contract. The trend is made even more pronounced with the price surge during peak hours.
It’s an ingenious play by Uber and one with wide ranging implications. Immediate availability at a high price sometimes trumps less immediate availability at a lower price — but immediate availability at a high price most certainly trumps no availability. Every time.
Putting it differently, if Uber is the only available option and you need a ride, you’ll probably use Uber. And accept the surcharge. Uber will get your business until the expected utility of chancing a black cab miraculously appearing or choosing a service with longer wait time, outstrips the utility of getting an Uber immediately and paying the surcharge.
That’s assuming these services can stay in business long enough to compete. The Uber strategy is incredibly lucrative and generates not only higher compensation for the drivers, but also greater profits for Uber.
All else equal, we’re therefore likely to see the emergence of not two market leaders, but one. Uber
Emergence of one dominant player in the transportation market leads to undesirable conditions, with the lack of competition translating into higher prices for consumers and reduced profit share for drivers.
One shouldn’t completely write of the competition though. Wheely is backed by Yuri Milner, the Russian investor of Mail.ru and Facebook fame. Yuri has deep pockets and he and his team have the smarts to take on Uber. Further, Hailo is backed by some serious VC powerhouses, including Atomico, Accel Partners, Forward Partners and aforementioned Fred Wilson and Union Square Ventures. Hailo may be weighted down by the pricing structure of London’s black cabs but they also have a few things going for them, including being allowed to use bus lanes during rush hour!
