The Uber conundrum
How to get out of the impasse?
Cemeteries are full of companies that didn’t understand the power game.
From The Financial Times (October 11, 2019):
Uber has announced it is moving into online groceries after buying a majority stake in the South American online retailer Cornershop, in a deal that moves the ride-hailing company into competition with the likes of AmazonFresh and Instacart.
The terms were not disclosed, but Walmart offered $225m last year when it tried to buy the company, only to be scotched by antitrust concerns.
Uber hopes to broaden the platform to work with as many retailers as possible and does not foresee the same antitrust hurdles. It said the deal was expected to close in early 2020, subject to regulatory approval.
“We’re excited to partner with the team at Cornershop to scale their vision, and look forward to working with them to bring grocery delivery to millions of consumers on the Uber platform,” said Dara Khosrowshahi, Uber’s chief executive, in a press release.
Mr Khosrowshahi has been repositioning Uber to be “the operating system for your everyday life” rather than just a ride-hailing service. In recent years it has expanded into on-demand scooters, electric bicycles and meal deliveries.
Last month it launched a new app in Chicago, Uber Works, to match temporary workers with shift work, signalling even wider ambitions to move beyond mobility.
Supporters of Uber’s strategy see it expanding into areas where it can leverage its more than 100m users to find new lines of revenue. The hope is that Uber could become a “super-app” along the lines of WeChat in China, which bundles a huge range of services into one app.
Uber's stock market debut was not very successful. Introduced at $45 on May 10, 2019, the stock is now trading at $33. The 2nd quarter’s results did not help: the number of rides increased by 35% compared to the 2nd quarter 2018 (40% in 2018 and 105% in 2017). Similarly, the number of Uber monthly users increased by 30% in the 2nd quarter to 99 million, a slowdown compared to 34% in 2018 and 51% in 2017. Uber's negative cash flows are a byproduct of subsidizing drivers to increase the platform's liquidity and thus attract new users, without losing old ones. Also when cash flows deteriorate and growth slows, the signal sent to the market is not good:
And this is all the more worrying as in its IPO filing Uber presents itself as a start up capturing only 0.3% of the market, with high potential.
To add to Uber's problem, California recently passed AB5, a law requiring a test, called ABC, to determine whether Uber drivers are contractors or employees. The most ambiguous part of the test, the B, is whether Uber is in the same profession as its drivers or carries out another activity: is Uber a taxi company or a drivers platform? California is not the only state to test (so far Uber has managed to compromise), but the idea is likely to spread. The risk for Uber is to have to pay its drivers and raise prices.
Therefore, the various acquisitions made by Dara Khosrowshahi and the launch of a temporary work service may signal a desperate move to pass the ABC test, i.e. to prove that Uber is indeed a platform and not the largest taxi company in the world (ex China).
What is a platform ?
Everyone knows more or less what a platform is: a place where supply and demand meet. This theoretical conception does not differentiate between the different kinds of platforms, only the magic of the network effect being highlighted in a world of zero marginal cost. Thus Alex Moazed and Nicholas L. Johnson in Modern monopolies put all platforms in the same bag, without distinguishing the leverage they seek to obtain on supply or on demand. However, the platforms are anything but symmetrical (except perhaps in the world of consultants to which the two authors of the book belong). In real life, companies must distinguish and capture areas of power. It is a bad strategy to want to embrace everything, because it leaves a gap open to competition. Whoever kisses too much poorly embraces says the proverb.
The platform’s definition that Bill Gates would have given to Chamath Palihapitiya, a former Facebook leader, is a good start:
I was in charge of Facebook platform. We trumpeted it out like it was some hot shit big deal. And I remember when we raised money from Bill Gates, 3 or 4 months after.. like our funding history was $5M, $83 M, $500M, and then $15B. When that 15B happened around literally a few months after Facebook platform and Gates said something along the lines of, “That’s a crock of shit. This isn’t a platform. A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.”
A real platform is first of all measured by the economic value it brings to its ecosystem, and therefore to the suppliers who use it. It must be distinguished from the aggregator who wants to control the customer (Facebook, Google, Netflix) by reducing the offer’s potential exclusivity:
N.B.: As shown in the drawing, the economic value of an aggregator may be higher than that of a platform, but it attracts the attention of the regulator, given the low added value provided to the ecosystem.
A real platform works like this:
It is supply-centred to ensure distribution and not demand-centred to level supply by making it abundant. By this standard, Amazon Marketplace is not a platform because it is a complement to Amazon's e-commerce business. The goal is to leverage the customers already acquired by e-commerce to attract a complementary offer that will delight customers and attract others. Jeff Bezos makes no secret of it: Amazon is customer-centric. Most of the value is captured by Amazon, not by suppliers who don't even know the customer and have to comply with their dictates. In contrast Shopify which is a tool to help merchants sell online is a platform. This is the most credible threat to Amazon. Similarly, YouTube is a platform because it aims to motivate video producers to put their work online. YouTube has implemented a compensation system to attract the best and maximize engagement. On the other hand, Facebook is not a platform because its objective is to strengthen the social graph, the interactions of its 2.6 billion users to become an essential point of passage for everything that is published (advertisements and others).
It brings real added value to this supply, which can be differentiated through it. The supply must be able to take advantage of the platform's distribution power. A global platform is ideal. It is estimated that there are 1.3 billion people watching videos on YouTube. This is very motivating for the best YouTubers who earn nearly $20 million a year. In another business, Live Nation and its subsidiary Ticketmaster are an excellent platform to promote the world tours of the big stars. They have access to 570 million fans worldwide: there is enough to attract Madonna, Jay Z and Lady Gaga.
The accumulation of exclusive supply cements the platform's competitive advantage by creating an impregnable quantitative and especially qualitative network effect. Live Nation, for example, is calibrated to attract the big stars and organize their tours under the best conditions. Eventbrite, potential disruptor, internet ticketing platform eliminates frictions to attract the maximum number of event organizers to its platform. Eventbrite has had some success with 850,000 event creators on its platform. The problem with Eventbrite will be the move up the range: as soon as an Eventbrite artist breaks through, he will tend to try his luck at Live Nation, designed for stars. Eventbrite will remain a breeding ground for Live Nation. The limitation of the exercise is that once a supply is truly exclusive, it can do without the platform. So Netflix decided to leave the App Store because it estimates the percentage of 30% taken by Apple excessive. Similarly, Ninja recently decided to leave the Twitch streaming platform, this time because the competing platform Mixer (Microsoft group) made him a golden bridge for his exclusivity. The beauty of the platform is that once a significant number of exclusivities use it, the loss of one or the other has little impact on it. Netflix represents less than 1% of the App Store's revenue, Ninja 1% of the hours viewed on Twicht. At the same time the little Mixer (3% of the hours of game streaming against 72% for Twitcht) will bleed itself blank for this exclusivity.
The Uber platform
Travis Kalanick, the Uber’s founder, decided to make it a platform. As will be seen later, for example, the pricing mechanism is designed to favour the driver at the expense of the user. What distinguishes a driver from another driver? Not much, especially since with Waze, the driver no longer needs to know his city by heart. This is a big difference compared to YouTube, Twitch, the App Store or Live Nation. Uber is a platform as it seeks to grow the ecosystem by maximizing drivers revenue (unit rate multiplied by the number of trips). The S1 clearly explains the starting point: the drivers. But Uber will have difficulty differentiating one driver from another, especially since the users of the platform are local. A driver necessarily has a limited perimeter around the location of his car, which can leave room for a competing application that, without having the liquidity of Uber, is just in the right place and at the right time to make arbitrage.
What does Uber bring to the driver? On average, a shorter processing time and, in theory, better remuneration because the ratio between the number of users and the number of drivers is greater at Uber than at its competitors, as the network effect is more developed. At Uber there are 23 passengers for 1 driver, at Lyft 17. Unfortunately, this is only an average for Uber: the company does not have superiority everywhere: every city, even every district, must be defended from the onslaught of competition. It is in the driver's best interest to be cross-platform and arbitrate against each other depending on the circumstances. As Uber's added value is limited compared to drivers, the platform must fight to attract them (subsidies) and keep them (this is the origin of the creation of Uber Eats, which is supposed to occupy their idle time). Nevertheless, the network effect of Uber is more quantitative than qualitative and it is a real weakness: Facebook was able to move Myspace with a less important but more qualitative network effect, centered on a solid social graph. Similarly, Zoom is displacing Skype. In fact, drivers do not really have the power, they look alike and have many competitors: public transport, cycling, walking, etc. Isn't it a strategic mistake to side with the driver and want to create a platform?
Uber wants to become an aggregator
In his previous role as an Expedia executive, Dara Khosrowshahi (now CEO of Uber) made the mistake of missing the acquisition of Booking in 2005, not understanding at the time the importance of monopolizing consumer attention. Expedia's business was hotel room arbitrage: buying rooms sold off by hotels and reselling them online with a margin to users of the service. The goal was not to grow the ecosystem but to exploit it instead. The user came on the application to make a deal, not for his travel needs. It was profitable for Expedia but the application didn't make enough sense in people's lives, like an automatic reflex when you travel. Booking offered a consistency to its users: the certainty of finding a room. As a result, users tended to use more Booking which became a mandatory gateway for hotels. The network effect has been activated in the right direction. Today Booking is worth $85 billion on the stock market, Expedia $20 billion. To find out how to get ejected from first place, ask Dara Khosrowshahi.
President and CEO of Uber since August 2017, Dara Khosrowshahi has learned the lesson: power is in the user, let's engage the user as much as possible on the application (or applications) to capture that power. The acquisition of Uber Eats by its predecessor Travis Kalanick, has changed destination: the goal is now to strengthens customer engagement. Source S1:
Additionally, in the quarter ended December 31, 2018, consumers who used both Personal Mobility and Uber Eats had 11.5 Trips per month on average, compared to 4.9 Trips per month on average for consumers who used a single offering in cities where both Personal Mobility and Uber Eats were offered.
Uber is now in the business of offering an abundance of services to its users. As Dara says, the goal is to become the operating system for people's daily lives. The company takes over Amazon's playbook: starting with the sale of books online and eventually absorbing all retail. Similarly, Uber starts with the taxi, to swallow all the trips in a first step and finally all services to the person. The idea is that a considerable and diversified supply (not just drivers!) has to go through Uber to reach the consumer: these are restaurants with Uber Eats, then supermarkets with Cornershop, then companies with Uber temporary work. The more abundant the supply, the more non exclusive it is, and the more it becomes a means of monetization for Uber: Uber's acquisition of a stake in Lime (scooters) and the acquisition of Jump (bicycles) reflect this strategy: the company competes on its application with drivers, scooters and electric bicycles to offer the best way for the user to move from point A to point B.
Becoming an aggregator: a journey full of pitfalls
Uber wants to be for everyday services what Amazon is for material goods: the obvious destination site for the consumer. The anchoring on the daily is important: the daily requires speed and it is there that Uber stands out. The time to obtain a particular service becomes the parameter on which an abundant supply (of services and even goods!) will be grafted. We order through Uber Eats because we have confidence in the delivery time, it will be the same for daily shopping with Cornershop or a temporary job offer for a blue collar. This strategy is not going to be simple:
Amazon has chosen the easiest part to process: material goods and electrons (AWS). It is much more complicated to treat men and Uber experiences it. Men can demonstrate, gather, refuse the conditions set for them, etc. Laws are passed in many states to protect drivers. From then on, it becomes difficult for Uber to plan: if California establishes that a driver is an employee instead of a contractor, the rule of the game changes for Uber: the service becomes more expensive, growth slows down seriously but Lyft is probably eliminated: an employee driver having to choose between Uber and Lyft, will prefer the most liquid platform to maximize his interest.
Unlike traditional aggregators, which can aggregate users worldwide with the same supply (Google, Facebook, Amazon, Netflix) and therefore benefit from a very low marginal cost, Uber's offer is local with a high marginal cost. The leverage effect is limited, the network effect must be obtained zone by zone. This implies high expenses to defend your positions everywhere with only local leverage: a Netflix series can be viewed all over the world, a Uber driver will cover a radius of 20 km. This is why even Didi Chuxing with 500 million users in China and 88% market share is still losing money, forcing this Chinese company to reorient his strategy.
Amazon took the Internet by surprise and was able to impose its leadership without having to worry too much about the competition. The technological crash of 2000 was useful to it by making it more difficult for competitors to access financing. Uber is in the opposite situation: financing is easy for it and its competitors. In addition, Uber has to fight city by city to win, which give copycats time. As a result, the price war is almost inevitable. Uber's cash flow account is not very exciting: 10 years after the company's creation, operating cash flows are largely in the red:
In 2005, 10 years after Amazon's creation, its operating cash flows were positive, making the company independent of the vagaries of the financial markets:
The optimal strategy for Uber: from local to global
The optimal strategy for Uber, if it wants to become an aggregator, is to focus its added value on electrons and bytes. Electrons move quickly and cheaply around the world. Knowing how to organize them can be done at no marginal cost and affect the whole world. The functions to be promoted are mapping to locate the user and service, payment (Uber is innovative with its automatic payment system), presentation of the characteristics of the services, the mechanism for setting tariffs, etc. Why not follow the example of Didi in China which house competing applications in its own app to compete with Autonavi ? Uber's added value is to reduce friction so that the user can quickly use a daily service, whatever it may be. Uber must therefore avoid, like the plague, the temptation of vertical integration aimed at reserving an exclusive supply for itself, because it can’t afford it. The less Uber gets involved in the services it offers on its platform, the more it can invest in reducing friction. Isn't investing in a fleet of scooters or electric bicycles a waste ? we can see the objective of getting on the side of the user even if it means dissatisfying the driver, but wouldn't it be better to make agreements with the scooter companies ? Similarly, Uber's investment in autonomous cars raises the question: it is better to use outdoor fleets once they exist. Who can do without Uber's distribution force? Meanwhile, Uber is losing valuable resources that could be dedicated to aggregating users around a great app.
Let's not kid ourselves, Uber and Google are ultimately in the same business: the organization of information. In the long run, the Uber application and Google Maps will collide. The two great apps will start from the map. Google strength is the amount of information it can proceed intelligently, Uber strength is to provide speed. This differentiated strategy of the two players could allow them to coexist and finally Uber could be profitable as long as it does not fall into the trap of verticalization: what is good for Amazon is not necessarily good for Uber.