Commodity Wars — Ridesharing’s Race to the Bottom
By: Fahim Saleh
Tags: Apps, Ridesharing, Venture Capital, Funding, Uber

Commodity Wars — Ridesharing’s Race to the Bottom

Ever heard the business motto “Always compete on price”?

It’s what Uber, Lyft, Grab, Gojek, and numerous other ridesharing startups have been doing for the past eight years. Based on the recent performance of these companies in the public markets, it doesn’t seem like a winning motto in ridesharing.

Uber’s rocky road since IPO

How did the smartest people in the room get a fundamentally flawed business model so wrong? The formula was wrong:

Lack of Infrastructure

The idea behind competing on price isn’t new. It’s what made Walmart the largest retailer in the USA and how Amazon became the behemoth of online commerce. But aside from retail, I can’t name a company that has succeeded with such a strategy, especially a technology company. And there is a reason for that.

One of the fundamental roles of technology is to improve efficiencies in markets. Walmart and Amazon’s sheer scale in distribution allowed them to reduce the costs associated with getting you a toaster, for example. And although there is a lot of technology that plays a role in the process such as robot-controlled distribution centers and algorithm-controlled logistics, there is still an enormous amount of spending on pure infrastructure.

Amazon has 175 distribution centers and hires 650,000 full-time employees.

Walmart has 42 distribution centers and hires 1,500,000 full-time employees.

Amazon and Walmart were only successfully able to have the lowest prices through these infrastructural investments. This is against the “asset-light” ridesharing model of Uber and many others. That seems to be changing with the scooter and bicycle sharing craze, but it is too little too late.

Winner Takes All Fallacy

By subsidizing rides and pricing below competition, ridesharing companies believed they could “outspend” their competitor, thereby attracting all users and drivers, inherently affording them a monopoly in their respective markets. Unfortunately, pricing is where the differentiation ended, which in turn makes the service a commodity. The abundance of capital in the booming economy allowed for multiple well-funded ridesharing companies in the same market. There has been some consolidation but only after years of racing to the bottom and billions of dollars spent on nothing of lasting value. Furthermore, such excessive raising of capital resulted in the inefficient deployment of funds. Often resulting in bloated staff overhead, marketing costs, and other irresponsible spending. The most recent layoffs say it all:

UBER — https://www.pymnts.com/news/ridesharing/2019/uber-faces-third-wave-of-layoffs-since-august/

PATHAO — https://www.thedailystar.net/bytes/tech-happening/news/pathao-undergoing-massive-downsizing-1762357

The Raising Game

We’re seeing a change in that kind of mentality now, but even a year ago, it was one’s prowess to raise capital above all else that fueled strategy. Incentives for the entrepreneur became “what will it take me to raise more money” (vanity metrics), not “what will it take me to run a sustainable business” (profitability). The former is dangerous as it is not taking into consideration what the market needs. Users and drivers go to whichever service affords them the most favorable financial return.

Incorrect Formula

Facebook is the most popular social network in the world because it was able to develop a unique service that attracted large swats of people. Each person that joined made Facebook more valuable as a service: the network effect assumption to which investors relied upon. But there’s s one difference with Facebook and Uber. Facebook is free.

Amazon and Walmart compete on price for a wide assortment of commodities. But its that assortment, infrastructural investments, and technology that allowed for their businesses to thrive.

Unfortunately, ridesharing companies wanted the best of both worlds, and that formula does not work.

To note, I don’t think ridesharing companies are the only ones that have got this wrong. Food delivery companies also have it wrong, look at Grubhub’s performance.

Grubhub, a stock to short?

Super App

Ridesharing companies are now adding multiple verticals to differentiate their services from competitors to emulate the success of Wechat and Gojek. Just look at Uber’s most recent foray into financial services.

Uber Money

Early on in the game, this level of differentiation could have given Uber the network effects it strived for. Still, at this point, they are too mature with too much competition to successfully pivot to such a model. Also, the only two super apps that have succeeded are Wechat and Gojek; both have not made huge strides outside of their central geo.

This may make sense

The lesson here is that you need to focus on the product. Money is not enough to win. Creating horizontal integrations early and spending on infrastructure can create incredible MOATS. Every VC wants a SAAS company that prints money with five programmers, but that kind of scale is not always possible. One must look at the unique challenges of a market and decide how to craft a business model that makes sense.