What's the endgame for Ride-Sharing?

Uber's non-dominance in SEA markets

2017 was the year of reckoning for Uber due to a barrage of scandals, culminating in a massive coup/down-round investment by Japanese investment firm SoftBank. But it's worth taking a closer look at the nature of the business itself.  Ride-sharing (also known as ride-hailing, or on-demand mobility) companies like Uber and Lyft are designed to be an intermediary business: they have no assets, take on no risk, no nothing, just technology-based platform for the transport industry, connecting riders and part-time drivers wanting to make additional income.  In Southeast Asia, the market leaders are Go-Jek and Grab, with a slightly different business model of enrolling professional drivers, helping them with car ownership/rentals, and providing access to the app.  How any of that justifies billion dollar valuations, you tell me.  One may argue that an asset-heavy business should justify bigger valuation, but recent crashes in Chinese bike-sharing startups (due to either poor asset management, or mismanagement in general) should put that theory to rest.

So this begs the question: what's the real endgame for ride-sharing? The companies simply can't survive by doing this forever, as both drivers and riders are spoiled by subsidized economics. Is it logistics? Food delivery? Fintech (e.g. do they want to end up like Alipay)? If Uber fares rise significantly to levels that make the business sustainable without subsidies, won't the market also shrink greatly (e.g. people would just return to owning cars or, gasp, taking public transport) ? Would self-driving cars be the endgame? How do we even know that driverless Uber taxis make a good business?

Let's explore.

Rides are fundamentally unprofitable

Transportation industry analyst Huber Horan lays out the case for skepticism over Uber's hype. Amazon saved costs by getting rid of expensive retail stores and sales staff.  But Uber rides still require a car, a driver, and fuel -- just like any old taxi rides.

OK then, many taxi companies were making decent profits for some time before Uber; wouldn't ride-hailing be at least as profitable as these old companies?  No, for three reasons, eloquently laid-out by Len Sherman in Forbes:

(a) The taxi industry that Uber is seeking to disrupt was never profitable when allowed to expand in unregulated markets, reflecting the industry’s low barriers to entry, high variable costs, low economies of scale and intense price competition -- and Uber’s current business model doesn’t fundamentally change these structural industry characteristics.

This historical experience exhibits several parallels to Uber’s current business model, presaging the company’s dismal financial performance. The pre-regulated taxi industry was characterized by bounded demand, abundant supply, relatively undifferentiated service quality, extremely low barriers to entry, low customer switching costs, high variable costs and virtually no economies of scale.  [...]

(b) Conventional wisdom has held that Uber would enjoy a global winner-take-most outcome because of their outsized balance sheet and strong network effects. But to the extent that network effects exist, they are local, not global. For example, Uber's 89% market share in Tampa doesn’t help them in Portland, where Uber’s market share is below 50%. In fact, Uber has struggled to achieve market share leadership in many large foreign markets, including China, India, SE Asia and Brazil. Moreover, while network effects do exist within each metro market, the benefits are significantly weakened by extremely low switching costs, which enable drivers and riders to utilize whichever ridesharing service offers the best deal on any given trip. [...]

(c) [There's] an inherent conflict between the business objectives of Uber and its drivers. Uber’s revenues are directly proportional to the number of trips it can facilitate, and thus the company has strong incentives to continuously scale its business. Drivers of course want to maximize their revenue per hour worked. But as Uber continues to recruit drivers, the revenue potential per driver inevitably declines. As the highest revenue-generating neighborhoods become increasingly saturated, new drivers are forced to seek less attractive service territories to find customers.

Ride economics are heavily distorted

Although we pay less for Uber rides than taxis, our views are highly distorted; it just seems like rides are cheaper because the company is making a loss on every ride, with a dream of dominating each market it enters.   Uber burns cash at US$2bn per year globally, mainly on subsidies and new market expansion.   Similarly in Indonesia, leaked investor presentation shows market leader Go-Jek spent US$73mm on subsidies in the six months between Oct15-Mar16, yielding 12% growth in completed orders over that period.  For that period, subsidies actually made up 72% of the company's gross booking fare value.  The distortion affects the economics for consumers as well as drivers.

Challenging economics

Not just subsidies, gamification also distorts the psychology, giving both riders and drivers real and false rewards for spending/loyalty to the platform.  Nightmare stories and complaints about exploitation and lack of transparency abound -- especially as the platforms naturally always side with riders over drivers.

Ride-sharing creates serious public policy issues

Setting aside the debate over independent contractors vs employees (which have not been settled), or the corporate culture/moral compass issues, or the whole evading the law thing, recent analysis from extensive data in New York City shows that ride-hailing apps are significantly worsening the traffic problem, while also impacting the ridership and quality of public transport.  “For years, as the city grew, more and more people took the subway and bus,” according to Bruce Schaller, a former NYC DOT official. “Now, as the city grows, more and more people are taking Uber, Lyft, and Via. This is not a sustainable way for the city to grow.”  He continues by noting the drop in quality of New York City’s mass transit. Not only has MTA bus ridership rapidly dropped in recent years, but the subways are also now losing passengers, too. Service quality deteriorates, and delays and mechanical failures have become the norm rather than the exception.  Clearly we still don't have a grasp of the real, long-term public policy impact of ride-sharing.

The picture in Singapore is no different

The endgame remains a question mark

SE Asian market leaders are taking a stance: Go-Jek and Grab wants to expand beyond ride-hailing, and into fintech through organic growth and acquisitions.  Grab CEO Anthony Tan said the company wants to “win payments in Southeast Asia,” saying that the app’s user base can be the groundwork for more services.

Robots are employees or independent contractors?

Uber's endgame is less clear.  Are they just buying time until things figure themselves out? After all, Amazon spent many years and many billion dollars in shareholders' equity, evolving from selling books to selling CDs to selling everything to producing own hardware to producing own content to selling cloud services to selling groceries (did I miss anything? something with drones?) -- all in the hunt for that elusive profitability...