Is UBER forever ?
Recently, I attended a lecture from Prof. Nishant Chadha (Head of Research at IDF) on the economies of platform. I think it’s essential for any individual to understand how platforms work, and one reason is because we use them every day. Nishant asked us to analyze Uber’s ride-sharing services as a platform.
According to Wikipedia, UBER is a “mobility-as-a-service” ride-hailing platform that connects people who need a ride to drivers with vehicles who are willing to provide the service. If we look from a platform perspective, Uber is essentially a marketplace with two kinds of customers. one who requires transportation and another who can supply it. If you look at the definition of “platform,” it fits perfectly.
Entity that enables interactions between users so as to generate value from these interactions and typically takes part from that value in return.
Uber on the Platformization Spectrum
Since Uber controls the prices of rides, we can say that it is a partially controlled platform where interactions between users are controlled by the platform entity. On the platformization scale, it falls somewhere in the middle.
Why does this partial platform model work?
Recently, in the ride-sharing service domain, a few other competitors have also popped up. Examples like InDriver help us understand why ride-sharing platforms can also act as pure platforms. People who need rides can bid for a price quote from all the riders, and if it suits them, the riders accept the ride. But inherent problem with pure platforms can be explained using a simple function of value to the buyer, let me show you,
Because ride-sharing platforms have an inherent indirect network effect (the originator and receiver of the service both belong to different groups), if the number of cab drivers decreases, it may exacerbate problems on the other side, such as increased ride confirmation times and pricing that may go haywire. But in the case of Uber, if the number of cab riders goes down, Uber will not directly affect the pricing of rides, because if they do that, platform users will drop. Thus, Uber will take corrective measures (subsidizing incentives for cabbies) first to minimize the impact rather than take a direct approach like InDriver.
How defensible are Uber’s network effects?
As we already discussed, Uber is not a pure platform, thus it doesn’t have a pure network effect like a market place, but rather has an asymptotic effect. When a typical number of cab riders is added to the platform, the effect of each additional rider’s value to the buyer diminishes, resulting in a flattening of the value-to-demand curve. (You can not get a cab faster than 2 mins even if there are thousands of drivers in your locality :P)
https://www.nfx.com/post/network-effects-manual#asymptotic-marketplace-2-sided
Is Uber is ever going to be profitable?
“It’s a steady march,” said Pradeep Parameswaran, Uber’s regional general manager for the Asia-Pacific region. “Every year, our unit economics is getting better than the previous year. So we don’t have an exact timeline for being profitable in India. But I’d say it’s not that far away either.”
This was the official statement by Uber in August about their stand in India. According to Uber, the ride-sharing market has 0.3% penetration in India, and Uber’s business has seen growth of 15–20% in India. In June 2022, Uber posted its first positive cash flow quarter in its history. These numbers show some promise in terms of viability, but for this to continue, Uber has to provide more means of transportation in a country where cars are not the only commercial vehicles.
A note to UBER’s CEO — Dara Khosrowshahi
Hey, Mr. Khosrowshahi, There is no doubt that Uber is a revolutionary business, and I would love to see Uber cabs operating in all cities across India one day, because it is extremely difficult to find local transportation in unfamiliar cities. Considering the Indian landscape is different than the global public transit landscape, your current strategy to include two- and three-wheelers under Uber is fantastic. Uber Intercity and high-capacity vehicles are also good line extensions for business. However, considering the efficiency of the network effect in India, it would make more sense to Uber if you could somehow increase the buyer value irrespective of the number of sellers (example: Uber Pass for frequent travelers or Uber Green for environmentally friendly cab services). I understand that it’s easier said than done, but it very well fits the Uber growth strategy. Moving toward a more connected network where switching costs is higher for both types of users is the only way to maintain the competitive edge Uber has.
More power to Uber!
