Peter Thiel is right. And that’s the problem for Uber, Didi, Ola & Grab.
Spoiler alert: If you’re expecting Gawker or Trump, stop reading now.
The first time I read Peter Thiel’s polarizing views in his book, Zero to One: Notes on Startups, or How to Build the Future, one view, in particular, struck me as highly provocative yet scarily true for all startups and the markets they operate in. Peter claims that monopolies are good, not just for businesses, but customers as well. (Excerpt in The Wall Street Journal: Competition is for Losers — WSJ). Many a punches have been thrown on this viewpoint from both sides of the table, so let me add to it — Peter Thiel is right. At least on this one.
But how does this relate to Uber, Didi & Ola? Of late, there’s been a lot of talk about Uber’s exit from China, sale of its business to Didi Chuxing and how this sets the stage for a monopolistic market in China. There have been several opinions on how this monopoly is good for Didi and the consumers because Uber can focus back on its profitable US market, Didi won’t lose money due to an aggressive price war and will be able to hike prices to start moving towards profitability. There have also been predictions about how this end-game will be repeated in all major on-demand taxi markets across the world, including India.
There’s just one problem, though.
In the taxi-aggregator market, there is no end-state monopoly.
The taxi-aggregation market is targeting the end-game where Ubers of the world become the primary mode of commute for majority of (if not all) people. Now, this can be achieved in 2 ways:
- By altering consumer behaviour, wherein consumers prefer on-demand taxis over other means of commute, including car ownership, or
- By altering the market itself, to the extent that regular taxis or auto-rickshaws cease to exist.
There’s a stark difference in these two end-games because that’s what determines a monopolistic market for taxi-aggregators.
The technology & convenience of on-demand taxis has definitely disrupted the transportation industry, but a lot of the growth has been built on the basis of discounted fares & corresponding driver subsidies, which are not sustainable. Let’s understand how these fares may evolve and how consumer behavior may change accordingly.
Scenario 1: Consumers prefer on-demand taxis over other modes of commute
In this scenario, other modes of commute continue to exist but a majority of consumers prefer to use on-demand taxis because they are more convenient, even though they may be more expensive in some cases.
Realistically, the discounted fares of the Ubers cannot continue forever, because it does not provide sustainable economics for the drivers. While estimates on the value of sustainable fares may vary, they broadly vary between Rs 14–17/km (in India, accounting for the efficiency-gain due to higher utilization of the cars and better demand-supply matching).
Now, we need to understand what these other modes of commute are. In the US, car ownership is close to 80%, hence Uber’s vision to eliminate car ownership presents a huge market opportunity. Moreover, when car maintenance, parking and other charges are accounted for, Uber turns out to be cheaper than owning a car (at current fares). If the fares become 2x (base fares, not surge pricing), this will no longer be the case. Fares are bound to increase if Uber wants to turn profitable in the US and go public (despite profitability claims, Uber lost at least $1.2B in the US in the the first haf of 2016 alone, mainly due to discounted fares and driver subsidies — source: Bloomberg).
In a country like India, car ownership is less than 2%, hence focusing on just taxi-commuters, car owners and potential car-owners does not present a sizeable market opportunity. A large majority of people travel by auto-rickshaws, local trains and buses. Hence, the lower than auto-rickshaw fares which attract auto, bus and local train/ metro commuters to shift to Uber/ Ola as well. In the long run, the on-demand taxi fares will be 2x the fares of these other modes of commute, which is a huge premium to pay for convenience. As soon as this happens, the common man is likely to fall back to the other mode of commute, which marginalizes the on-demand taxi market to taxi commuters, car owners and potential car owners.
In such a scenario, multiple taxi-aggregators will continue to exist in the same market, each offering its own convenience or business model and charging a fair sustainable fare for it — consumers will use all those services as and when required. Hence, there will be no end-state monopoly.
Scenario 2: On-demand taxis are the only mode of commute in the future
This is the scenario all taxi-aggregators (and their investors) are banking on (or shooting for). This obviously requires fares to be consistently low enough to drive other forms of commute out of the market & then increase fares to gradually move towards profitability.
While a cross-market monopoly may seem possible in such a scenario, taxi-aggregation (like most other marketplaces) has no proprietary lock-in for the taxi drivers (technology can make that happen — separate post on that coming soon) and hence, each player is equally placed to build a monopoly in its respective home market. That’s what Didi did in China before Uber could get there. Moreover, at the consumer end, there are minimal global network effects (only frequent inter-city/ international travellers would prefer the same taxi-aggregator across multiple markets), hence local commuters (who form the majority of the consumer base) have no reason to prefer Uber over Didi or the other way round.
So, each player will be able to build a monopoly in its respective home market then? Not really.
As soon as a monopolistic taxi-aggregator increases fares, it becomes the new target of disruption. A new player with another big chunk of funds from investors will restart the cycle with lower fares, driver subsidies and shift the market again (unless, of course, you’re indirectly backed by the country’s government which will create enough artificial barriers to sustain a monopoly).
In either scenario, no player will be able to build a monopoly in any market. And that’s the problem for Uber, Didi, Ola & Grab — with no end-state monopoly in sight and minimal network effects or lack-in mechanisms for taxi drivers, they have to fight a new battle every time they step out of their home market.
Of course, driverless/ autonomous cars are likely to disrupt the market again & new market leaders may emerge and be able to build a monopoly. Even Travis Kalanick admitted autonomous cars pose an ‘existential threat’ to Uber (source: Business Insider).