By Philip Levinson, Harvard Kennedy School Alum & Learn Capital Venture Advisor
We have a Love-Hate relationship with Uber. Love them? The headline of a recent Fast Company cover story on the company: “Admit It. You Love Uber.” Hate them? A recent Brookings Institute column is entitled “Is Uber a threat to democracy?” Another article features the headline “Uber-Pushy.”
After recently raising $1.2 billion at a valuation of over $50 billion, Uber and its CEO/co-founder Travis Kalanick certainly inspire admiration. The company now offers service in 60+ countries and nearly 300 cities around the world. They also attract more criticism than an Adam Sandler movie. Public-sector-oriented challenges have come at them in all shapes and sizes – from cities (e.g., New York, Los Angeles, Philadelphia), states (e.g., NY, TX, WA), countries (e.g., UK, France, China), politicians (e.g., Hillary Clinton, Mayor Bill de Blasio, French Prime Minister Manuel Valls), lawyers (e.g., the employee-vs. contractor class-action lawsuits), the media and many others.
In addition to these non-market challenges, there are also distinct market threats to Uber, despite its North American leadership position. The recently announced alliances forged among India’s Ola, China’s Didi Kuaidi and U.S.-based Lyft are a good example of a competitive threat. Google and its driverless car initiatives are also potential competitors, despite the company’s venture arm, Google Ventures, being a large early investor and current stakeholder in Uber.
As Terence Lee, Managing Editor of Tech in Asia, put it, Uber could find itself “ambushed on all sides by Google, legislators, and Asian tech giants lurking in the shadows.”
So, what will the endgame be for Uber? As I review the hundreds of articles about Uber published every month and talk with industry and policy experts at Harvard and elsewhere, there are no shortage of opinions.
Despite these market and non-market threats, in the end, I believe Uber will prevail in one form or another. Let me explain why.
Reason #1: “The first marketplace to reach liquidity wins”
Companies that build double-sided marketplaces (e.g., eBay, Etsy, AirBNB) face big initial challenges and big corresponding opportunities. As Simon Rothman – a Greylock partner and early Lyft advisor – says, “Marketplaces are tough to build. But they’re even harder to kill — and they can be incredibly durable and profitable once they reach liquidity. But that’s the hard part.” He adds, “The first marketplace to reach liquidity wins.”
Perhaps no statement better summarizes Uber’s success to date in key markets, including the U.S., than this one. The first marketplace to reach liquidity wins.
HBS lecturer and venture capitalist Jeff Bussgang has a simple answer, “Look at the network effects.” He says, “There’s a race to be the leader because the leader in a network effect-driven business is always going to be able to gain more momentum and separate themselves from the second, third, fourth place players.”
In the case of Uber, this separation takes the form of faster expansion into more markets and shorter wait times in those markets.
“The first time you ever tried Uber, the time that you have to wait for the driver is the real rub,” says Bussgang. “And the bigger the network of drivers the more valuable it is for the consumers, the more valuable it is for the consumers, the bigger the network of drivers, and the flywheel starts to spin. And it’s very hard to create that when you’re number two or number three, when the number one player gets out ahead and starts spinning that flywheel.”
For this reason, double-sided marketplaces ~tend~ to be dominated by one particular large player. Says Rothman: “Two-sided markets are naturally dominant: unlike other models, the bigger you are, the stronger you are. Marketplaces strengthen with scale and scale comes from liquidity.”
How important is liquidity? “Liquidity isn’t the most important thing. It’s the only thing,” says Rothman.
If that’s the case, then the speed and efficiency with which Uber can reach liquidity in more markets is key.
Reason #2: “Speed is the ultimate weapon in business”
This axiom from Dave Girouard, CEO of Upstart and former President of Google Enterprise Apps, applies to the explosive ride-sharing industry as much as any other industry. After all, ride-sharing as an industry was not prominent prior to 2010. Now, it’s not just disrupting taxi and limo markets (a $10-20B U.S. market), but also the auto and transportation markets (a multi-trillion dollar market, just in the U.S.). Girouard says, “All else being equal, the fastest company in any market will win. Speed is a defining characteristic — if not the defining characteristic — of the leader in virtually every industry you look at.”
In a double-sided marketplace, where the first to reach liquidity wins, speed really is the ultimate competitive advantage. Rothman explains: “Until you reach liquidity, you’re vulnerable,” says Rothman. “After, you have the opportunity for dominance.”
The question is, how fast you can go from vulnerability to liquidity.
HBS professor Tom Eisenmann describes this liquidity point as “mobilizing the network.”
He says, “Whether it’s one-sided or two-sided, mobilizing the network is a hard problem because until there are enough people to make it worth my while, I’m not interested. It’s a particularly hard problem with a two-sided platform because until enough of Side A is on board, then Side B won’t come. And until the Bs are on board, the As won’t come.”
Have you ever tried using Uber or Lyft in a virgin market? I have. When there is a dearth of drivers (i.e., not a lot of Bs), there can be a very long wait for a ride – or simply no ride available.
With speed as the ultimate weapon in this marketplace, Uber has plenty of ammunition in the form of $8.2 billion in equity and debt financing raised to date. Even Lee, who raises some skepticism about Uber’s outlook in Asia and India, acknowledges, “The equation, therefore, is simple. A larger war chest lets you acquire market share, secure more rides, and make more actual money. Uber is in the lead here, raising more capital than all its Asian competitors combined.”
And it’s not just the size of the war chest that helps Uber execute. Bussgang points out that it is investors’ complete support of its focus on adoption and scale at the expense of profit, in order to reach that liquidity point. Indeed, according to recent reports and leaked documents, Uber lost $470 million on sales of $415 million between 2012 and 2014. Other reports have detailed how much Uber has invested in China and India where it faces big homegrown competitors.
Bussgang explains: “They’re in a land grab mode…it’s all about driving scale. The capital markets are supportive of that strategy.”
Will the strategy pay off?
Carl Icahn recently made a notable investment in competitor Lyft with his justification being that the market is likely to be controlled by more than one player. Said Icahn: “I believe that ride-sharing is poised to become a fundamental component of our transportation infrastructure.” He added, “If you look at the way the market evaluates Uber and then look at the valuation of Lyft — Lyft is a tremendous bargain. There is room for two.”
Early Uber investor Chris Sacca disagrees. “Well, if you really look at this thing, it’s not gonna be a two-horse race,” he said on Bloomberg TV. “I think [Icahn] made a big mistake. This is a winner-take-all game.”
Who is right? Eisenmann suggests a guideline: “You’re more likely to see a winner-take-all (or winners-takes-most) outcome when you have really strong network effects,” says Eisenmann. “If network effects are strong, then users are going to tip to one platform.”
Just how strong are the network effects? The question is complicated by the fact that there are variances and different factors across hundreds of cities and markets. They are clearly meaningful, though.
Reason #3: “The Times They Are A-Changin”
Dylan’s prescient 1964 song applies to today’s transportation and ride-sharing industry almost as perfectly as it applied to social movements in the 1960s. The market for ride-sharing around the world is growing and changing so rapidly, that numerous market and non-market forces are coming into play at lightning speed. In addition moving fast to reach liquidity, Uber uses speed in innovation to quickly test, iterate and add new services. Examples include its bearhug embrace with Carnegie Mellon (and others) on autonomous self-driving cars, finding resourceful ways to accept cash payments in India, forging innovative partnerships with CapitalOne, Starwood, Spotify et al, and launching UberEATS, UberFRESH, UberASSIST and other Uber[fill in the blank] services.
So, Uber’s speed and ability to horizontally grow its markets and expand its product line represents a meaningful competitive advantage. In rapidly changing times, this can turn in to a meaningful competitive advantage.
Some argue convincingly that Uber is vulnerable to non-market forces. Examples include recent conflicts and regulatory challenges in many countries (e.g., France, China and Mexico) and the recent Employee vs. Contractor class-action lawsuits now going on in California. In addition, the company (and some of its regional units) have adopted questionable tactics and made some well-publicized unfortunate comments.
Recently, I attended a conference in Orange County, and the topic of Uber and these issues came up for discussion with two of my colleagues.
“I don’t like them. They’re too aggressive. Too many PR issues,” said one.
“I don’t like them either. Not a fan of their tactics. Not a likeable company at all,” said the other.
Then, the first one looked at his phone and suddenly looked up: “We’ve got to go – our Uber is here.”
I stopped them. “Wait, you both just said you don’t like them,” I said. “What gives?”
“Yeah, but we need to get the airport,” the second one said.
“Flight leaves in an hour,” the first one said. “No other choice.”
Of course, it is partly the same aggressive, stepping-on-toes approach that allows these conference-goers to reliably and efficiently get an Uber to the airport at the last minute in this 91st-largest city in the U.S. Ironic, huh? This irony seems lost on them – and others. The New York Times deftly refers to this as “Uber Angst.”
“Why Didn’t Government Invent Uber?”
Here’s my take on Uber Angst: in 2011, when I took a flight, I had to call two taxi companies to ensure that one cab arrived on time. If both arrived at the same time, I tipped one $10 and used the other, trying to remember which one, so I could reverse this pattern next time to stay in good graces with both taxi companies. Sometimes neither taxi arrived on time – and I occasionally missed that flight. For urgent flights, I started having to call three taxis. This problem is now solved.
Plus, thanks to Uber – along with Lyft, BART, CalTrain and ZipCar – I can live in San Francisco without owning a car, so another set of problems (e.g., expenses, time, parking) are now solved.
That’s why some have argued that the taxi industry – or even the government – should’ve invented Uber. In an article entitled “Why Didn’t Government Invent Uber?” Daniel Castro writes, “Surprisingly, until Uber and its competitors like Lyft, Curb and Hailo burst onto the scene, there appeared to be little effort among local governments to address…common [taxi] complaint[s].”
People remain bothered by the company’s overly-aggressive tactics – and can certainly choose to not use the service. That said, enough people are comfortable enough to keep using the service to the tune of 2+ million rides a day. It certainly doesn’t hurt that many politicians – and even political critics – are also heavy users of Uber. According to a recent study of campaign spending records, 275 federal politicians and political committees together spent more than $275K on at least thousands of Uber rides during the last election cycle.
I believe the execution speed and skills wielded by Uber in a market environment can potentially help them adapt to non-market challenges, with the right commitment and motivation, just as with companies like GE, Nike, Microsoft, Google and others. Certainly, Uber will not change its overarching aggressive, don’t-ask-permission approach any time soon. However, there’s too much at stake for the company to ignore reasonable conventions and public concerns about certain questionable tactics. Uber has already corrected certain practices, and some of their recent announcements seem like a greatest hits collection of “how to be a good corporate citizen” initiatives.
As for the regulatory hurdles, I’ve had a lot of recent experience helping public-sector oriented tech companies achieve leadership positions in their segments (TigerText in government and healthcare, WaterSmart in government and water, Learn Capital in government and education). What I’ve seen is that the same regulatory and bureaucratic barriers that slow down initial market growth – as bureaucratic and irrational as they may seem – can eventually help the incumbent leader after the company ends up succeeding in penetrating that particular market.
Uber’s approach in flouting traditional restrictions and elbowing its way in to a market – asking regulators for forgiveness instead of asking for permission – is certainly bold. Uber’s SVP of Business Emil Michael, a Harvard alum, agrees: “I like the word ‘bold.’…When you see rules in place that prevent all these things from happening…you say to the people, the riders and drivers of that city and to the politicians, this doesn’t make sense. And to stand up and say that, that’s bold.”
Agreed. As with Disney, Nike, Apple, Google, Tesla, and other innovative companies, regardless of whether you like or dislike Uber, the company is clearly a pioneer. In 2015, the entire On-Demand economy that is driving so much of today’s innovation, growth and VC investment owes a debt of gratitude to Uber and its founding back in 2009.
For these pioneering companies, government and regulatory risk is a pendulum that can end up swinging both ways – serving as a barrier for Uber and Lyft in the short-run but serving as a much more problematic barrier for competitive latecomers in the long-run. Recent turnaround success examples for Uber now include India, Germany, New York, Las Vegas and Houston.
My Uber Prediction
I agree with the premise of Terence Lee’s July 14 column – Uber’s biggest threat: an Alibaba-Softbank alliance. Witness the recent announcement that China’s Didi Kuaidi is investing and partnering with Lyft and India’s Ola to forge a formidable anti-Uber alliance. Of course, Softbank has invested in Ola and Didi Kuaidi, as well as Alibaba, which, in turn, is backing Didi Kuaidi and Lyft.
The nature of the Lyft-Didi Kuadi partnership and integration is likely a preview of what’s to come. In an article entitled “Will China be Uber’s Waterloo?” UCLA Professor Christopher Tang argues that with the entrenched lead that Didi Kuaidi has in China, “Uber…is the Lyft of China.” Talk about irony.
Given just how expansive and varied ride-sharing markets are around the world, perhaps Carl Icahn is right. There is room for two. The question is what will these two players look like? And who will emerge as the worldwide leader?
Lee argues that these companies will continue to be successful in their home markets. I agree that alliances will continue to form, yielding some synergies at Uber’s expense. However, some of these alliances may be more intricate and complicated to execute in practice than in theory. In the end, I would not bet against Uber emerging as the worldwide leader.
In unsurprisingly bold fashion, Uber investor and champion Sacca states, “They’ll absolutely win.”
Nothing about this booming, expansive and volatile segment is absolute. Or certain. But whether you love them or hate them, I also believe Uber will win in the end.
Levinson is a Venture Advisor to Learn Capital and was the first Sales & Marketing executive at TigerText, a leading VC-backed enterprise mobile company founded in 2009. His last article focused on HBS-founded CloudFlare.