- August 2, 2019
- Posted by: Ramkumar
- Category: Strategy
Ridesharing business including car service companies like Uber and lyft have disrupted the market in the start of this decade.They have caught the attention of the market to such an extent that Uber has become for car services as Google is for search and Xerox was for copiers.
Their business model was very simple – No investments in infrastructure and cars ownership, contracts with driver and using technology to connect drivers and customers to a single platform.
This business model disrupted the cab operator business which owned a fleet of cars and employed drivers in their payroll.Due to the high capital investments, the rides were at higher cost for customers.When the customers started to use Uber, then the cab operators did not respond immediately and were delusional that this business model will not succeed.With each controversy surrounding Uber – be it a driver misbehaving or assaulting a customer, cab operators were convinced that this business would not succeed and is just a passing phase.They also counted on Regulators who shall tacitly support them by banning ride sharing companies to operate in their countries.Countries like Japan and Germany were successful, but could not suppress the rising success of this business model.
It should be clearly noted that in a free market economy, customer decides the winner and whom they would spend their dollars on.Hence deliberate attempts made by regulators and numerous litigation suits filed against ride sharing companies could not deter the success of these companies.
Business Model of Ridesharing business
- As ride sharing companies began attracting demand from customers, competition increased with the no of new players entering the market like Lyft, Ola and Bla Bla Car.
- As the underlying business model is a platform that connects the driver and customer, each player started paying higher salaries to drivers and provide deep discounts to customers in order to gain a huge market share.This resulted in high operating costs for these companies which resulted in these companies continuing to suffer operating losses.These companies were funded by VC firms who were more interested in their growth and hence continued to provide funding.As these companies became listed, their problems have started to increase as shareholders look at profitability and these companies are not having any intention to return to profit mode.These companies are continuing to provide deep discounts to customers and have also been involved in disputes with drivers over less pay and harsher Working conditions.
- Hence the ride sharing market on a longer trends looks to be a losing market where none of the players can afford to be profitable. It also remains to be seen how long the ride sharing market continues to grow and if this business model could completely eliminate the cab operator business and also deters people from owning cars.
How will leading players play in this market?
- Only way for the ride sharing companies to become profitable is when one player emerges from the current lot that takes the entire market share, similar to winner take all approach.This is similar to what Microsoft did with its MS Office software business, where it dominated the entire market that allowed it to have control on prices which helped it to earn huge margins.Uber is trying to replicate Microsoft strategy but is failing because the antitrust and regulation has become more stringent and foster competition.
- Another way could be when there is a collusion formed between these players similar to what is happening in the oil space.These market players can draw their own markets where they would like to control thus avoiding any competition.This is highly unlikely to happen as it deprives the customer from any alternatives and also would not be taken positively by regulators.
- The final approach would be to completely redefine the business model by getting to self driving and driverless cars which eliminate the service of a driver thereby reducing a significant component of costs.Already uber has a robotic team staffed with its robotic engineers who are looking to come up with such a car.At this stage, it seems highly unlikely that Uber has the technological prowess and competence to come up with this car fast.Hence there is a higher probability of a tech company like Google or Apple taking over the ride sharing business.This is because Google after its Waymo business is having a best bet to launch a driverless car soon.In a technology market, the player with a first mover advantage always takes the market share.
- The current business model of ridesharing business does not show any indication of profitability. This is because of high dependence on drivers as players are competing for drivers, thus increasing their operating costs.
- This leads to a Prisoner Dilemma where each player in ride sharing business in order to survive either has to compete or cooperate. This is highly unlikely because of market regulators who would encourage competition and would not allow any cartels formed.
- This leaves with the only alternative of completely disrupting the current business model by introduction of driverless cars.As the possibility of launching self driving cars is highest in a technology company, it is highly possible that Google or Apple will acquire the ride sharing companies, thus controlling the ride sharing business.
- In the case of Disruption, the companies that are disrupting might gain a huge market share, but still is finding difficult to be profitable which tells us that it is very difficult for a disrupted company to operate.