Why is Uber sweeping all before it? Because it understands economies of scale

The reason Uber, a company whose disruptive business model I have written much about recently, is one of the world’s most valuable companies not because it has replaced taxi drivers with freelancers, but because of the scale of its operations. If we had to value Uber purely on the basis of its activities, we would never get remotely close to the $60 billion or so it is currently valued at.

The reason is because, contrary to popular perceptions, Uber is not a transport company, it’s a tech company. Transport companies can think locally, designing systems that allow them to grow their fleets based on the needs of the markets they operate in and trying to balance the costs of those markets. Throughout history, transport operators have always been intrinsically local players: it’s the nature of the business of moving people from one place to another.

But technology companies are intrinsically global, because their product developments require global markets to bring out their value proposition and for their business models to really come into their own.

If a company designs and develops a platform like Uber’s, one that goes beyond simply bringing supply and demand together, but that also builds in sustainability through measures such as encouraging passengers to rate drivers, as well as providing water, phone chargers or free Wi-Fi connections and also requiring drivers to attend retraining courses if that rating falls below a certain level, or implanting a color-code to allow passengers to identify drivers, and even using smartphone technology to monitor their driving, then it’s pretty clear that this has to be done on a huge scale if the costs involved are going to create value.

Furthermore, Uber’s approach requires it to constantly innovate and try to improve its system.

The competitive dynamics of a local company are very different to those of a global player. A local company can try to innovate to meet the needs of a sub-group of clients, but keeping them happy doesn’t require anything particularly innovative. A global company is obliged to meet the needs of different subgroups in different places around the world, all with different needs and requirements, which means addressing specific problematics.

If there’s a problem with drunk driving in Bogota that leads Uber to design Uber Angel, whereby a driver picks up a customer who is drunk and who shouldn’t be behind the wheel, then why not roll that service out in other cities? If in a city like Barcelona the local authorities do all they can to prevent its drivers working, then why not put them to use delivering meals from restaurants to clients? In which case, why not design a service called Uber Eats and then roll that out in other cities? If the company has a problem with drivers with criminal records that you cannot check up on, as has happened in India, and it turns out some of them have been convicted for rape, then as technology company, Uber is able to develop a panic button for its app that female customers can use in an emergency.

Can a purely local operator compete with Uber’s pace and scale of innovation? The short answer is no, but local companies can aspire to copy Uber reasonably quickly: the last time I took a taxi in Paris, there was a phone charger, it was possible to pay by credit card or through an app, and there was a small bottle of water. But this clear improvement is obviously driven by an attempt to compete with Uber, which is cleaning up in the French capital.

But such developments are not homogeneous: a few days ago, in the Canary Islands, I had to try 10 taxis before I found one that accepted credit card payment. The reason: Uber has yet to turn its sights on the small island of Lanzarote, but when it does, it will conquer all before it: the local players will simply not be able to compete.

And then there’s globalization. An Uber user in one country can travel to another and find exactly the same level of service, except of course here in Spain, where it’s been banned, and that must give a terrible impression to visitors from abroad.

In a world in which people travel more than they ever did, the idea that local competitors can stand up to rivals working on a global scale is absurd. And that do manage to hold their own will simply be bought up by global players, as will surely happen with Cabify.

Otherwise, they are destined to disappear. What’s more, if the competition authorities decide, logically, that the taxi licensing system doesn’t benefit customers, many drivers who forked out large sums of money to buy a taxi license will find themselves sitting on negative equity, so to speak. In Australia, it was decided to compensate license owners when ridesharing apps were introduced, although this came nowhere near to the amounts many drivers had paid out for those licenses on what amounts to a black market.

When a sector like transport globalizes and takes on a significant technological component, it is no longer possible to compete at the local level. Furthermore, it’s not just small-time companies who are unable to compete, but apps such as Cabify, which are unable to innovate at the same speed as the global apps. Players such as Lyft, Didi Kuaidi, or MyTaxi may hang in there, but few others will be able to withstand the pressure from Uber. In short, the reason the company is so highly valued is because investors see the importance of its economy of scale approach.

Uber’s valuation is not based on what it can do by itself, but on its ability to gobble up smaller competitors around the world. Before Uber came along, we didn’t even talk about taxi services as a global industry: it was simply a bunch of guys trying to earn a living every day. And however tough it sounds, in global terms, there is nothing wrong with the change that is sweeping the transport industry. And trying to resist that change through subsidies, restrictions, bans and other measures is only going to make the change that much more painful.

And to put the whole thing in perspective, when Uber finally wins out, and the market is reduced to a few players globally, their drivers will be laid off, because the future of transportation is obviously driverless vehicles, a transformation that will once again highlight the importance of economies of scale. But that’s another story…


(En español, aquí)