Ridesharing in US: A Two-Horse Race of Uber, Lyft

The entry of app-enabled ride-sharing services, such as Uber and Lyft, has solved several pain-points for us – the consumers. I often feel, consumers have gained significantly not just on reduced cost of mobility but also on a better customer experience – friendly drivers, better and cleaner cars, removed hassle to carry cash or credit cards, and most importantly, complete control over when and where the service is needed. As my billing statements suggest, since Mar ‘14, I have taken 98 Uber and 20 Lyft rides (excludes rides paid for by friends) spending over $1,200 on transportation. Almost on every ride, I have loved to chat with the drivers on why they work for a particular player, whether they work full-time or part-time, what they like about the job, how they are being poached by competitor, which company helps them make more money, what it would take for them to switch, what they think about the customer ratings, about the taxi union strikes against Uber etc.

After talking to 100+ drivers and doing some secondary research, I have come to a conclusion that, at best, this category will be a two-horse race (Uber, Lyft) in US, leaving almost no significant room for other players or building pressure on them for consolidation. Here are a few reasons:

Network Effects: Being a marketplace-oriented business, ridesharing has strong network effects – Firstly, more drivers lead to more active users and vice versa. More active users imply more demand per hour and hence more drivers willing to be on the platform. More drivers on the platform means greater likelihood of free cars in user’s vicinity and hence lower wait time. I feel, pricing and wait time are two most critical decision-making parameters for users. Secondly, the new popular car-pooling derivatives – UberPool and LyftLine – that have been launched in San Francisco, rely even more heavily on network effects. Having shared liquidity along shared routes is critical for the pooling to work. My friends and I love these services as it reduces per passenger fare; I am sure, drivers love it too as they could make more money per ride. Thirdly, although, there could be room for existence of localized players who stay focused on certain cities, their existence is not sustainable for two reasons – 1. The two giants will enter those markets soon, if they haven’t already, in the next wave of growth 2. Customers who travel between cities tend to use the service that has omni-presence in all the cities (after all, we tend to use a limited number of mobile apps at a time), e.g., if I am an Uber-user in Boston (where Sidecar entered only recently), chances are high that I would not even think of using Sidecar when I am in SF.

War for Drivers: Drivers want to maximize dollar income per hour. I hear this number averages ~$25 /hour on a regular day. My interactions with full-time drivers reinforce that there is no barrier for them to use Uber, Lyft, Sidecar simultaneously. In fact, in most toughly contested cities (e.g., SF), we could see at least two smartphones next to the vehicle steering. They just care about higher ride time and minimal idle time. Switching cost is literally zero. All it takes is to click “offline” on Uber’s smartphone and hit “online” on Lyft’s (and vice versa) to make a switch. Moreover, there is a war over commission incentives. One driver shared, “If I complete 50 hours per week per month with Lyft, I don’t pay any commission to Lyft, basically, entire 20% is waived off”. In addition, there are sign-on bonuses of up to $1000 for switching. According to these drivers, both Uber and Lyft have access to each other’s driver databases. When asked how that becomes possible, they mention, there is strong employee attrition at these companies and poaching between the two is very common. This leads to drift of talent from one company to the other and data gets transferred as a result. Another driver also mentioned, both Uber and Lyft have fake users who would just book and cancel competitors’ cabs all day to confuse the network and make competitors’ cars unavailable.

Depth of pockets: Drivers admit that it doesn’t impact them even if they end up getting only one passenger in a LyftLine ride. The customer ends up paying only 50% of the actual price; Lyft compensates the remaining 50% to the drivers. There are rides, for which only paid $3, when otherwise I would be paying at least $10 for a regular cab. Essentially, these companies are underwriting, at their investors’ expense, to continue building up network effects and get customers to ramp up usage and become stickier. Both Uber and Lyft are venture-backed and are burning cash on such rides. The business needs deep pockets to survive in a game that is more about “who can outlast the other”. In future, the need for cash will only intensify, as Uber and Lyft will fight to convert car-owners to switch to ridesharing, enter and grow in sparsely populated and tier-2 cities, and spread wings in more international markets. Hence, even though ridesharing marketplace business model is perceived to be asset-light, the competition will continue to overheat the price wars and escalate the asset intensity. It will be increasingly less fruitful and more frustrating for a VC to continue backing distant number “3 and beyond” in this market.

Size and Scale: By now, going by user behavior, one thing is evident that positioning alone is not a key differentiator. Pink moustache or not, fist bump or not, front seating or not, users don’t care much. Pricing and instant availability are critical. At the same time, drivers don’t like to drive for 5 minutes to get their next pick-up. “INSTANT” is important. That will come only with scale and size. Going by latest valuation data, Uber is valued ~20x its nearest competitor in the US market, Lyft. Even going by the amount of money raised, Uber stands at $1.5B, Lyft at ~$330M, and Sidecar a remote third at ~$35M.

Note:

1. Please note that the article largely focuses on consumer mobility and ridesharing. Uber and Lyft have given indications to launch more transportation derivatives in future, such as flu-shot delivery, grocery and delivery, and Point AtoB logistics solutions. In these categories, the two horses will attract more competition from other diverse incumbents, such as Google, Amazon, Instacart.
2. The aforementioned views and inferences are based on conversations with drivers of Uber and Lyft.