Ditching Uber's playbook: Scooters, tech, and traditional transportation
Angels and demons and one for the Birds
Of course the age of abundant information is prone to beg, borrow, and steal your attention. Reading blogs, news, and research has always been an inefficient user experience — finding needles in haystacks — but now Annotote is the antidote, check it out: Don’t waste time or attention; get straight to the point.
The differences between scooter-sharing and ridesharing are the foundation of understanding how the scooter market, urban transportation, and online-to-offline technology will evolve…
Asset-lite vs real asset
In Stratechery, Ben Thompson recently wrote an update about the nascent dockless scooter industry:
“…think about self-driving cars: it makes sense that the most efficient way to spread self-driving car technology is through centralized fleets offering a ride-sharing service. However, that centralization makes it that much easier for governments in particular to exercise oversight; to put it another way, I don’t think it’s a surprise that the most aggressive attempts to bring self-driving cars to market have been through private cars, particularly Tesla.”
— Highlights courtesy of Annotote
Therein, he says it’s no surprise that the greatest proliferation of self-driving technology has been diffused via Tesla, given the distributed nature of its vehicles, which are owned by private citizens. On the other hand, he suggests, there’s Uber and Waymo, whose go-to-market strategies have (allegedly) been inhibited by the centralized nature of their wholly-owned and operated fleets. (There’s a logical fallacy in there, but that’s not the point I’m here to refute, so I digress.) He then extends that logic to scooter-sharing, implying that its centralized fleet ownership makes it, too, susceptible to regulation’s frictions.
But, that’s a bit of a semantic argument. Specifically, on the basis of those criteria, all of these businesses are similarly prone to regulation — whether scooter-sharing, traditional ridesharing, or automobile manufacturing. After all, Uber represents centralized coordination of ridesharing just as Tesla represents centralized deployment of self-driving. If regulation need be enforced one or both, then each is a nexus that regulators may inoculate to widely diffuse municipalities’ desired enforcement actions. Each is a bud to nip.
In this case, centralization’s regulatory risk is the wrong heuristic to epitomize the difference between scooter-sharing and its predecessors in the sharing economy, manufacturing, et al. Let’s just call it what it is: Scooter-sharing parent companies wholly-own and operate their vehicles, whereas Uber’s current drivers are independent contractors and Tesla’s cars are owned by independent buyers. The difference between real asset and asset-lite businesses has more of a financial consequence than political.
Uber’s current ridesharing business is an asset-lite model that outsources the supply-side of its marketplace to independent cars and drivers. Unlike scooter dispatchers, Uber can piggyback on the standardization enacted by preexisting automotive regulations to thwart systemic fraud and safety violations. Theoretically, Uber riders hailing a black car shouldn’t end up getting a Power Wheels (or those expecting a licensed driver shouldn’t end up getting a child). The scooter marketplace lacks any such lever to enable this kind of standardization. Were scooter-sharing to rely on independent scooter owners to provide supply — essentially peer-to-peer — then they’d be missing a transmission mechanism for administering quality assurance.
It’s important to get that straight before delving into the scooter market’s outlook. Given its different supply chain, competition here will be predicated on different factors than those of yesteryear’s technology businesses — which historical precedents are still, mistakenly, the basis of most analysts’ frameworks…
Perfect competition?
There’s a real question as to the market structure of this scooter business: Is it a perfectly competitive industry or does it lend more toward the winner-take-all, first-mover-advantage dynamics that characterize today’s tech pseudo-monopolies?
Intuitively, scooter startups are not operating two-sided marketplaces like those of unicorns past. For example, with scooters you theoretically step out the door and grab the nearest scooter regardless of its brand; but with ridesharing you choose a service based upon a number of factors, like marketplace liquidity (i.e. driver supply and rider demand).
The actual app a consumer needs to download seems like the biggest thing locking him/her in to one scooter brand or another. But, to create an end-around that app lock-in, new entrants can easily gatecrash the industry’s incumbents by allowing riders to merely swipe a credit card or wave their Apple Pay, obviating the need for even downloading a dedicated app, with little adverse effect upon the user experience. As such, the supply-side is pretty susceptible to competition. In fact, suppliers are somewhat commoditized and modularized — at least were we to control for the regulatory operating permits.
But hold on. In “The Scooter Economy”, Ben Thompson did mention a couple of features that lend to network and scale factors (emphasis mine):
“Absent two-sided network effects, the potential moats for, well, self-riding scooters and e-bikes are relatively weak: proprietary technology is likely to provide short-lived advantages at best, and Bird and Lime have plenty of access to capital. Both are experimenting with ‘charging-sharing’, wherein they pay people to charge the scooters in their homes, but both augment that with their own contractors to both charge vehicles and move them to areas with high demand.”
— Highlights courtesy of Annotote
The three points of differentiation mentioned therein are capital, charge-sharing, and what I’ll call reallocation. To appraise the sustainability of these moats, consider the following…
- Capital:
Uber itself used its access to capital as a scale advantage — although we can argue that the sun-has-set on the macro conditions enabling that strategy. - Charge-sharing:
Enlisting 3rd parties to harvest and charge scooters could potentially ascend into a virtuous cycle, since the bigger a scooter business grows its revenue base, the more it can afford to pay volunteers to charge its scooters — although the fixed marginal cost of this approach more closely resembles classic economies of scale (linear) than network effects (exponential). - Reallocation:
Someone needs to physically move scooters to meet demand. Whether this is accomplished via employees or independent contractors, it’s more conducive to the network/scale economics that are a much-needed point of supply-side differentiation — at least more so than #1 or #2.
So, in other words, there are graduated opportunities for differentiation, but that all said, from a strategic planning lens, it’s important to acknowledge that all of those are still weaker-form moats than Web 2.0 tech or ridesharing’s equivalents…
Sustainable vs ephemeral moats
That brings me around to a recent discussion about the scooter industry’s efforts toward sustainable differentiation. To wit, Stratechery analyzed one such scooter upstart named Skip (emphasis mine):
“…Skip’s primary competitive advantage will be its relationship with government officials… there may be no moats in scooters when it comes to the business model, but business models don’t exist in a vacuum, and having a government regulator create your moat certainly does the job.”
Again, I have to disagree. Winning an operating license to participate in a pilot program does not a sustainable moat make! More on that in a moment, but the point is, consensus seems to be overindexing to San Francisco, holding-out Skip as an odds-on favorite due to its recent victories in SF — both its permit win and government goodwill. Yet, a rival, Bird, has perhaps made even greater strides in both departments — with a nice permit win in its hometown of Santa Monica and an even bigger win for a new government-facing product rollout:
In a scooter industry that’s sorely lacking a sustainable moat, this is a brilliant tactic that should pay dividends for Bird.
As opposed to traditional moats like mere economies of scale, modern tech moats like network effects become more than temporally advantageous — they become practically unassailable, due in part to low marginal costs to scale. From “The Carrot and the Stick”:
“Big Tech’s markets all trend toward monopoly, because they operate multi-sided networks with zero barriers-to-entry. Thus, network liquidity is the basis of competition for many of them: Who has the most buyers and sellers; the most producers and consumers; the most supply and demand; etc. That liquidity sets-off the virtuous cycle of network effects, wherein scale improves user experience improves scale and so on. If you add software’s zero marginal costs to that virtuous cycle, you get Aggregation Theory…”
N.B. I say “unassailable” because the legal constructs of “monopoly” and “monopsony” generally don’t apply here (see “Antitrust and Tech’s Endgame”), although there are surely pockets of enforceable regulatory abuse (see “Tech’s Agency Problem”).
Unlike the Web 2.0 startups discussed in that excerpt, “barriers-to-entry” do exist in today’s scooter industry: For example, it’s somewhat capital intensive; there are marginal costs; and, more importantly, municipalities are issuing only a handful of operating permits. That doesn’t mean the supply-side is scarce, because local governments provide for that aforementioned competitive quota in each geography; but it’s also not fully abundant, because, again, governments assure that competition is capped.
The winners will obviously be those suppliers who can aggregate rider demand among that managed competition in the scooter market, which is subject to some of the endogenous competitive factors discussed above (e.g. capital/charge-sharing/reallocation) plus the exogenous blessing of a regulatory operating permit. The point is that the aforementioned moats (capital/charge-sharing/reallocation) are merely ephemeral ones — vestiges of traditional businesses that are prone to disruption from others, like modern aggregators, whose non-rivalrous businesses provide structural competitive advantages.
Once upon a time, for example, traditional economies of scale provided competitive advantages that were sustainable for a limited time only, but they weren’t really unassailable. Today, software has moved-the-goalposts — providing secularly sustainable advantages. While a traditional business can have its lunch eaten via innumerable competitive threats, really the only way a fully-scaled aggregator gets dethroned is via new market disruption. Furthermore, an aggregator’s economics allow it to eat other businesses’ lunches using a myriad of tactics, including classic low-end disruption — as popularized Clay Christensen.
Now, given that framework, Google and Uber would certainly gatecrash traditional moats like capital, charge-sharing, reallocation, subscriptions, rewards programs, etc — at least were the scooter industry proven to be a strategically-important and/or fruitful business for them.
In contrast to those ephemeral moats, Bird’s GovTech segment is an attempt to carve-out a sustainable, unassailable moat. This government-facing platform is a cheeky gambit. It’s a point of differentiation in a market that’s starved for it — a market that’s otherwise almost perfectly competitive. Not only does it give Bird greater personal agency in earning those coveted operating permits, but it also gives them a potential revenue stream that can help aggregate demand. If Bird has a profitable government data business segment that scales almost infinitely with low marginal costs — as software does — then it can finance Bird’s demand aggregation in its core scooter businesses, in which pricing at zero gross margin will eviscerate the competition… #ftw.
Now, as long as government intervention were to manage toward some semblance of competition on the scooter industry’s supply-side, a handful of rivals may sustain, but the endogenous market power should nevertheless accrue to a duopoly, because the scooter-sharing market features a bright line between two distinct segments of consumer demand, as follows. Thanks to its captive audience, Uber will likely be one end of that two-headed monster; Bird is now my favorite to be the other…
- City-slickers (Bird):
Driven by specific intent, those who use 3rd party transit solutions for only short-haul needs will accommodate at least one, separate, dedicated, scooter-only solution — even if they already use Uber and Lyft for longer-haul; - Multi-modal (Uber/Lime):
Seeking a one-stop-shop, those who use 3rd party transit for all needs (e.g. in lieu of car ownership) will keep or download a transportation aggregator app
If “having a government regulator create your moat certainly does the job” — as Ben Thompson asserted — then Bird’s government-facing data solution should enable it to win permits, aggregate more demand, get more data, sign more governments to its platform, etc. That’s more like the coveted virtuous cycle of network effects and scale!
Furthermore, this could also insulate Bird’s marketshare from Uber, who’s loathe to hand-over its holistic data to regulators. (By my estimation, the externalities of traditional ridesharing are big enough structural issues that even Uber CEO Dara Khosrowshahi’s benevolence cannot overcome them — but I’d be happy if someone had the data to prove me wrong here. To be clear, Uber has shared data with municipalities in the past, but only if the data were solicited — and usually via legal process. More recently, Uber has started sharing data voluntarily, but it’s been limited to “nonproprietary” data.)
I understand why popular consensus is eager to laud playing nice with regulators as a strategic moat. I too root for the good guys and gals who have a good sense of civic duty. And, yes, a lot of these scooter companies started with a page from Uber’s playbook, namely, the brash “move fast and break things” mentality epitomized by “asking for forgiveness instead of permission”. (Ironically, that revolutionary credo was part of the allure that helped Uber enlist a cult following of evangelist riders and drivers, who were instrumental in the service’s repeated strong-arming of governments and regulators.) The aforementioned Skip was a dissenter from that guerilla lobby. Skip was the good shepherd who made an early choice to defer to regulators before plowing-ahead. Of course, that’s now proven to have accrued more goodwill than the alternative, and everyone else has to scramble to catch-up — including Bird, who itself was once one of those smash-mouth disruptors.
Despite its standing-start, Bird is approaching this with a portfolio that assures its goodwill is more structural than ephemeral. If Bird can earn the good graces of municipalities, as such, Bird could also earn its own captive audience (a la Uber) by fully integrating with public transit infrastructure and workflow — as opposed to just dumping data on public agencies. From Bird’s own launch announcement (emphasis mine):
“Bird… today unveiled its GovTech Platform, a comprehensive set of technologies and products built in coordination with and for cities. The platform will help local governments incorporate and manage e-scooters as part of their transportation infrastructure.”
— Highlights courtesy of Annotote
That’s a long-shot, to be sure; but in a market that’s otherwise more perfectly competitive than not, that’s a better strategy than anything anyone else is trying. In such a way, Bird’s platform is a benign Trojan Horse to make integration turnkey.
Vertical vs horizontal integration
There are two markets that Bird is addressing, and each requires a different approach…
- Vertical integration (GovTech data):
Since really only Bird has taken the first-mover-advantage to provide this valuable data, the scooter market’s feedstock is relatively scarce, so providing a platform for 3rd party municipalities is the killer app; - Horizontal integration (scooter-sharing):
Even with government regulation, the scooter market’s anointed providers are relatively commoditized — given their weaker-form, ephemeral moats described above — so aggregating demand for a proprietary solution is the killer app
Think of these strategies within context of “The Moat Map":
To simplify the connotation of that “Network Effect” X-axis therein, I use “proprietary aggregator” vs “3rd party platform” (instead of “internalized” vs “externalized”) to describe the nature of a business’s product. That’s a bit more descriptive and intuitive. (For what it’s worth, I would also advocate for using the “Suppliers” variable as the X-axis, since the “differentiated” vs “commoditized” factor has more explanatory power than “Network Effects”, but take that up with the map’s creators, Ben Thompson and James Allworth.)
With that explained, the upshot is that a digital business wants to strategically occupy the moat highlighted above, because:
- If suppliers are highly commoditized, then a new entrant should optimize for a proprietary solution (e.g. supply is easy to procure/too abundant, thus aggregation is the major attraction for demand);
- If suppliers are highly differentiated, then a new entrant should optimize for 3rd party solutions (e.g. supply is hard to procure/too scarce, thus a platform is the major attraction for suppliers)
Accordingly, occupying the other two quadrants outside of that moat just doesn’t make sense:
- If suppliers are highly commoditized, then 3rd party solutions either exacerbate abundance by adding another layer of redundant fragmentation (increasing deadweight loss) or create products inferior to that of an aggregator;
- If suppliers are highly differentiated, then a proprietary solution either exacerbates scarcity by adding another layer of redundant aggregation (invoking the agency problem) or creates a product inferior to those of specialized 3rd parties
Now, fit Bird into that framework again…
- GovTech (vertical):
The scooter market’s data supply is relatively differentiated, so 3rd party platform is the killer app; - Scooter-sharing (horizontal):
The scooter market’s vehicle suppliers are relatively commoditized, so proprietary aggregation is the killer app
Bird isn’t as far off into the extreme tips of each quadrant as are Google/Facebook or Microsoft/Apple — nor would we expect scooter-sharing to be so wholly unfettered, given the structural competition nurtured by aforementioned regulations. Nonetheless, its strategic approach is as sound as possible, particularly given how one hand (GovTech) could feed the other (scooter-sharing).
Now, Bird has to scale its GovTech Platform quickly, then hope that its holistic data actually reflect the positive externalities of scooters (in juxtaposition to those of ridesharing). That is certainly a challenge, especially if scooters fail to displace cars in the short-run — the biggest threat to which is seasonality (i.e. far fewer users are going to ride scooters in the winter, rain, snow, sleet, and hail).
On the topic of sustainability…
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