I wrote a bit about Uber's competitive advantages, the electrification of the motorization and finally I shared some interesting links.
Read more below.
🚗 Uber's IPO
Uber is 4 times bigger than Lyft and loses 3 times as much money. The losses are big: for the last three years, Uber has lost at least $3B per year. They have $7B in cash left, but also $5B in long-term debt.
Uber’s plan for profitability outlined in its S-1 form can be summarized with a single word: scale. Scale will allow us to get better margins. Right now we’re losing money because we’re scaling up and subsidising rides, but we’ll become profitable as soon as we get to the right scale.
In other words: we want to monopolize rides in cities. After we’ve monopolized them, we’ll increase our prices, pay drivers less, and start making money.
Other online business use a similar model: scale leads to monopoly, monopoly leads to profit.
However, the S-1 has no proof that the strategy is working.
There is a different problem with Uber’s strategy. While businesses like Facebook and Linkedin strongly benefit from the network effect, Uber doesn’t have one.
The network effect boils down to a service becoming better just by gaining popularity. The more people join Facebook, the better Facebook is for each additional user, because the chances their friends are already there are higher. The network effect also means that competitors operating on a smaller scale have a worse product. As a result, consumers choose the better product and, by making that choice, increase its quality. The network effect naturally supports market monopolization. Naturally because consumers, on their own accord, choose the monopolist’s product. It’s very difficult for Uber to get a similar effect. The fact that I use Uber to get around Poznan doesn’t affect the quality of the rides of someone in Warsaw or New York.
There are big businesses which have no network effect and succeed. These businesses typically have a “moat” that differentiates them from their competitors. For many tech businesses the moat is the product itself - with unique features, a unique distribution model, price, or brand, or a combination of these. For example, iPhone’s moat is iOS - any manufacturer can make good hardware, but only Apple has iOS. The moat of Coco Chanel is the company’s brand, which it continues to protect and strengthen, also by building a sense of limited availability: you can’t buy a Coco Chanel bag on the internet.
What does it look like for Uber?
The product moat is very shallow. New local competitors keep popping up, each of them offering a similar software experience (similar apps), the same ride experience (same drivers using several apps), and the same or lower prices. All of these platforms are probably unprofitable and fighting for scale with VC money, just like Uber. Uber is global, so it competes with all its local counterparts, and often loses. Despite the act that Uber’s founders are exceptionally talented at sucking up money from the market, they will never be able to get as much as all their competitors combined.
Price moat: it’s hard to lower the price when you’re already generating such huge losses. You can’t do the things that Uber does more cheaply than they are doing them. There is the vision of autonomous taxis, but it won’t necessarily solve Uber’s problems.
Distribution moat: I can’t deny that Uber has reached a huge number of consumers and drivers and, to a large degree, created a market. But the distribution channels which Uber used are equally available to all of their competitors. Uber can compete by spending more on marketing, but it’s difficult for them to build a unique distribution model. Consumers on the ride market are not loyal. They’ll pick a new app if they hear that it’s cheaper. It’s the same with drivers: there is no reason not to drive for several Uber-like companies at the same time. Downloading an app is very simple.
Brand moat: I think this is Uber’s strongest moat. I think that the board of directors would agree, given that after a series of scandals and firing Travis Kalanick, the previous CEO, they’re investing a lot into improving their public image. A good brand should be well-known, but it should also seem trustworthy, safe, and be associated with good customer service - Uber wasted this with all their scandals. The board’s efforts to improve the brand’s perception are clear. A brand is an advantage because it makes choices simpler for consumers while offering comfort to the less price-sensitive ones and gives the business higher margins and customer loyalty, leading to higher lifetime values.
Aggregation moat: “everything in one place” is an advantage of many online and traditional businesses. I go to the mall because it has a lot of stores, a laundry and a car wash; I use Spotify because it has all the songs; I pay for Netflix because it has a lot of movies and shows; I go to Facebook because it has content from many websites; I search with Google because all of the internet is in there; I buy on Amazon because they sell everything; I use AWS because they have a lot of services I can combine with each other; and so on. Uber is clearly going in that direction: they’re buying businesses related to micro-mobility and growing Uber Eats. I wouldn’t be surprised if Uber enabled you to pay for Lime scooter rides within the Uber app soon etc.
Technology moat: in the case of Uber this is mostly about autonomous cars, because they could dramatically affect the company’s profitability. In an interview, Travis Kalanick said that “the person sitting behind the wheel” is the biggest problem with Uber’s business model. Uber is investing in autonomous car technology and raising a separate round for a special division to focus solely on the project. Indeed - autonomous driving would enable Uber to consume most of the income it classifies as “Gross Booking” (the amount paid by the passenger) and make the company very profitable. However, autonomous driving technology is still far away and we don’t know if Uber is going to make it that long. We also don’t know the advantage that “custom” autonomous driving gives - why not licence the technology from Waymo or their competitors as soon as it becomes available? Why invest hundreds of millions into R&D of something that others are already working on? Is there a real benefit to having full integration? What is it?
All of the above arguments make it so that I’d prefer to invest in other companies than Uber - for instance the sharing economy icon Airbnb.
The automotive industry is responsible for 3.6% of the global GDP. Car exports account for around $700B per year, which is more than oil exports. A typical internal combustion engine (ICE) car is made up of around 1400 components; an electric vehicle (EV) has around 200. These parts break and degrade with time, increasing the need for maintenance.
The engine is the most expensive component of ICE cars - it’s big, complicated, and offers a lot of opportunities for optimization of efficiency and building competitive advantage based on it. ICEs are very complicated machines; electric engines are fairly simple. Batteries are the most expensive components of EVs. Batteries are a commodity and their prices continue to decrease. They’re bought in bulk from national champions like the Korean LG Chem or the Chinese BYD. Batteries are relatively easy to manufacture, are assembled in one place, and require a smaller network of subcontractors and suppliers. Batteries are much less sophisticated than ICEs.
Legacy automotive corporations like VW and Toyota are not the leaders of the EV space - it is ruled by companies like the Chinese BYD and the American Tesla. Will large corporations be able to transform quicker than the time it takes new contenders to scale up and get sufficient manufacturing capabilities?
In Germany, around 800 thousand people are employed in the automotive industry. If we count vendors and subcontractors, the number grows to 1.8 million. The switch from ICEs to EVs will have a huge impact on these people’s jobs. Considering the scale on which the automotive industry operates and the influence it has on the world’s key economies, we can expect some turmoil.
🦴Facebook’s co-founder, who left the company 10 years ago, proposes to split Facebook into parts. I don’t think that it would help anything.
📈The Guardian is (finally) profitable. 55% of their income comes from the digital edition of the magazine and only 8% from ads in the paper edition. Interestingly, The Guardian doesn’t have a paywall (all content is available for free), but they do offer a premium version which has no ads and includes their crossword. The Guardian has sold 190 thousand such subscriptions.
⚗️An interesting quote from the story of how Amazon Prime came to be: “This wasn’t a product where MBAs spent months and months doing all sorts of crazy spreadsheet analysis and then they said, “Let’s do this.” It was instinct and the belief that we were smart enough to figure out how to make this new way of buying on the Amazon site work for the company.”