Tuesday, November 25, 2014

How Big Can Uber get?

Beats me. People see the slide deck and come out of the presentation wishing they had more money to invest into Uber.

From Stratechery:

Why Uber Fights
In his, to my mind, fair defense of Uber, Mark Suster made a very important observation about the reality of business:
Let’s put this into perspective. As somebody who has to rub shoulders with big tech companies often I can tell you that there is much blood spilled in the competitive trenches of Apple, Twitter, Facebook, Google and so on. Changes to algorithms. Clamping down on app ecosystems. Changing how third-parties monetize. Kicking ecosystem partners in the nuts.
Be real.
It’s a brutally competitive world out there because there are extreme amounts of money at stake. I’ve been on the sharp end of it and it doesn’t feel nice. And I pick myself back up, dust off and think to myself that I need to think through the realpolitik of power and money and competition and no matter how unpleasant it is – it’s a Hobbesian world out there. It ain’t pretty – but it’s all around us.
This is particularly relevant to Uber: the company is looking to raise another $1 billion at a valuation of over $30 billion, and, as I wrote when the company raised its last billion, they are likely worth far more than that. Still, though, skeptics about both the size of the potential market and the prospects of Uber in particular are widespread, so consider this post my stake in the ground1 for why Uber – and their market – is worthy of so many sharp elbows. I expect to link to it often!

There are three perspectives with which to examine the competitive dynamics of ride-sharing:
  1. Ride-sharing in a single city
  2. Ride-sharing in multiple cities
  3. Tipping points
I will build up the model that I believes governs this market in this order; ultimately, though, they all interact extensively. In addition, for these models I am going to act as if there are only two players: Uber and Lyft. However, the same principles apply no matter how many competitors are in a given market.

Ride Sharing in a Single City

Consider a single market: Riderville. Uber and Lyft are competing for two markets: drivers and riders.
uber
There are a few immediate takeaways here:
  • The number of riders is far greater than the number of drivers (far greater, in fact, than the percentage difference depicted by this not-to-scale sketch)
  • On the flip side, drivers engage with Uber and Lyft far more frequently than do riders
  • Ride-sharing is a two-sided market, which means there are two places for Uber and Lyft to compete – and two potential opportunities for winner-take-all dynamics to emerge
It’s important to note that drivers in-and-of-themselves do not have network dynamics, nor do riders: Metcalfe’s Law, which states that the value of a network is proportional to the square of the number of connected users, does not apply. In other words, Uber having more drivers does not increase the value of Uber to other drivers, nor does Lyft having more riders increase the value of Lyft to other riders, at least not directly.

However, the driver and rider markets do interact, and it’s that interaction that creates a winner-take-all dynamic.
...MUCH MORE
HT: FT Alphaville's Further Reading post
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