Tuesday, November 25, 2014

Uber: What could possibly go wrong

Uber at the core is nothing more than a bunch of guys who came up with a clever app for streamlining the way you call for a car.  Rather than phoning or texting, you tap on the app.  Rather than paying with cash or credit cards, you have an account.  And rather than depending on the reputation of the car company, you depend on the ratings-based reputation of the specific driver. (Another feature, the pre-determined fare, with that fare essentially including all fees including tip, is nothing new for car services). And, by the way, it is readily replicable by any other car services, including those that already have a reputation and experienced drivers.  

So it seems to me that it is only mildly innovative.  How do you build a successful world-wide  company based on this? I don’t think you do. We are already seeing some of what can go wrong.  We can attribute a lot of this to their own doing. But we are only getting started. Here are four other things that come to my mind. 

A meta app. If a number of Uber competitors, existing limo companies, and taxis put out similar apps, (which they are), the next stage will be a meta-app that looks across all of the companies, scans their car locations and prices, and combines this with the user’s preferences to find the best deal. I would bet that Uber will decline to be involved, but if a broad base of other limo companies do, and it ends up being Uber versus the world, I don't think that will turn out well for Uber. 

Uber’s costs are underestimated. To some degree Uber is thriving by creating a regulatory arbitrage.  It is operating without the constraints of existing car services and taxis. That gives it lower costs. But that is not going to last. The arbitrage window will close, and the related cost advantages will disappear.

The first out of the gate usually doesn’t win.  Uber is doing all the heavy lifting in terms of clearing regulatory barriers and local opposition, and getting consumers warmed up to the idea of using an app for calling cars.  It has made life harder for itself by defining its business as being more than an app and fighting its way through this morass.  But as many business school case studies have demonstrated, the company that blazes the trail is often not the one that stakes the biggest claim in the end.  If could be a set of future entrants.  Or it could simply be efficiencies that ultimately are picked up by existing car service without any one winner.  

Self-driving cars.  I’m not kidding -- and neither is Google.  Self-driving cars are, though it is hard for me to believe, predicted to become a consumer reality in five to ten years.  With these cars, the concept that is gaining momentum via Uber will become a reality.  Tap on your app, and a car will quickly appear to take you on your way.  This is not so far in the future, especially in the time scale of a company. The timeframe for profitability extends far into the future; indeed, many companies with high valuations don’t even turn a profit until five or ten years out. By then, the essence of Uber’s model might become irrelevant. 

People are attributing to Uber as a limo company what is really an app, and a new attitude by consumers towards car services that has come with it. If you have discovered a new and liberating method of obtaining transportation services, that is one thing, and you can thank Uber for bringing that to you.  But ultimately you won’t need an Uber driver for using it.  


  1. Good points. It's also a very local business, which means the benefits to scale and the network effect across markets are limited. Sure, there are frequent travelers who will open the "universal" app whenever they land someone new, but 90% of the customer base is probably resident in the market where they're ordering cars. So every single city is always a laboratory for someone to build an Uber competitor, and when someone gets it right in one city they'll be copied in others. There's a reason there were no nationwide car services to begin with.

  2. Uber has the billions to buy what it needs and finance all those self-driving cars in the future. Little local limo does not. The market for cab-based cities is pretty well understood, and the young and hip urbanites will use their app. Uber will also grow a market to many places where people don't take cabs - it's a new economy.

    It will be awhile before there is an orbitz for competing services. Building brand is far more important at this point. Lyft isn't going to join either. Thiel/Andreessen are rallying their media pals to pull Uber down, but IMO they've missed the bus - or car in this case.

  3. "I’m not kidding -- and neither is Google. Self-driving cars are, though it is hard for me to believe, predicted to become a consumer reality in five to ten years. "

    You are of course kidding. Stop deaming, this is not a simulated world. Be humble. live in reality. Some kids that work for Google cannot differentiate between reality and simulation.

  4. "To some degree Uber is thriving by creating a regulatory arbitrage". You are EXACTLY right. It is actually thriving almost COMPLETELY on regulatory arbitrage. Certainly in AUSTRALIA, where it is operating mostly illegally according to the Statutory bodies. Great idea though, just not original if it involves breaking the rules.

  5. For the unbelievers, there are gcars on the 101 every day of the week. G employees sign up, get on a queue for a demo, and the car picks them up and takes them to the gplex. It happens every day.