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do ride sharing companies become airlines or cereals? Over the years, we've tried to figure out why the competition in some markets gets sort of rational from

do ride sharing companies become airlines or cereals? Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investor's point of view so that the shareholders do well, and in other markets, there's destructive competition that destroys shareholder wealth. It's easy to understand why air travel is so unprofitable.... Munger: If it's a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world - safe travel. greater experience, time with your loved ones, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figure - a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business. But why is the cereal business so profitable? Munger: Yet, in other fields - like cereals, for example - almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good. you might make 40%. But why are cereals so profitable - despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it. Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it. Maybe it boils down to individual psychology.... Munger: And maybe the cereal makers by and large have learned to be less crazy about fighting for market share - because if you get even one person who's hell-bent on gaining market share.... For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I'd ruin Kellogg in the process. But I think I could do it. In some businesses, the participants behave like a demented Kellogg. In other businesses, they don't. Unfortunately, I do not have a perfect model for predicting how that's going to happen. http://www.valueplays.net/wp-content/uploads/The-Best-of-Charlie-Munger-1994-2011.pdf http://www.valueplays.net/wp-content/uploads/The-Best-of-Cha...

stale2002 10y ago
Ugh, so the answer why other industries have so much profit is because of oligopolistic collaboration.
- SamReidHughes 10y ago
  Well, no, the difference is that their products are different, and people that prefer Cheerios aren't going to switch over ten cents a box.
- thomasthomas 10y ago
  if uber/lyft can't differentiate their product in any way it seems a race to the bottom imo unless some cooperation happens. i bet thats why lyfts been running these commercials about how great their drivers are; to create some perceived differentiation. i guess one of these companies could go the amazon route and make margins so small to make entry into the market less attractive. ride sharing seems less capital intensive though so not sure that'd work.
  - sdenton4 10y ago
    I only use Lyft unless there's like a ten dollar price difference. The amount of just terrible behavior coming from uber corporate makes me avoid them.
    - reacharavindh 10y ago
      Same here. I consciously choose Lyft and feel good about encouraging competition and voting with my money against all the evil things Uber does recently. Oh that, and I refuse to give Uber my location 24/7. Uber App went to trash.
nathanvanfleet 10y ago
Isn't the logic that people are willing to pay a certain amount for cereals, and that amount is well over the cost to produce it? And something like and airline is much more costly and people are less able to pay the amount needed for a cereal-like margin?
- sdenton4 10y ago
  Right, and if one cereal decided to significantly discount itself -lose some money for a while - in order to capture more market share, it could lead to a pricing death spiral if the other cereal makers tried to keep up, and people's mental model of what cereal costs went down along the way...
trimbo 10y ago
> why is the cereal business so profitable? My mind was boggled until I realized that he said this in 1994. The cereal business has been collapsing for years.
- adventured 10y ago
  Adding further to the comedy of the switch, airlines in the US are now very profitable and doing tremendous thanks to a reduction in competition / consolidation. In the history of US aviation, airlines have never been so profitable as they are right now. Munger was wrong because he left out critical qualifiers. A 'pure' commodity can be wildly profitable, if you have a restriction on competition - a cartel or otherwise - that prevents a race to the bottom on price. You don't necessarily have to shift the ratio to the extreme either, there's a line where if you lower the competition beneath that, the profitability becomes significant while still retaining a modest amount of competition. Munger should have known better than to say that, oil is the most obvious demonstration, but there are countless others. Airlines today are nicely profitable for exactly the same reason AT&T and Verizon can still print large profits in a commodity wireless business (even with T-Mobile doing a great job chomping at their heels).
didibus 10y ago
Seems pretty simple to me. Cereals are vastly different from one another. They taste different, and so everyone is going to average to like one more then the others, and it won't be the same one for everyone. Also, when it comes to food, you get bored of the same thing over and over again, so every customer will buy a different one once in a while. So with Cereals, the thing customers want isn't too feed themselves, but to enjoy the particular flavours of a specific cereal. With airlines, people just want to go from A to B. It's not about the experience. So obviously all that matter is price and convenience. Same thing for ridesharing.
- 3minus1 10y ago
  the obvious counter this argument is that companies could create a competing version that tastes the same as a competitors product, similar to what coke and pepsi do.
dharmon 10y ago
I wonder if the difference was that airlines took "thinking on the margin" to an extreme? They all know that the cost of filling one more seat is practically zero, so even if that flyer is only paying $50, it's a win. This leads to variable pricing which leads to price shopping which leads to price competition, which has absolutely slaughtered airlines, especially with price aggregators. For what a profitable airline business looks like, look at Southwest and what they do. They have variable pricing, but its predictable based on only a few factors, and they don't allow listing in aggregators. Filling seats is important, but they keep an eye on the big picture. Cereal, on the other hand, has some non-zero incremental cost that, while small, can't be ignored. You can still think on the margin, but cannot ignore the overall economics.
pdog 10y ago
The fixed and variable costs are much higher for the airlines than for cereal makers. There's probably less than ten cents worth of corn in a box of cereal that Kellogg sells for three dollars.

stale2002 10y ago

Ugh, so the answer why other industries have so much profit is because of oligopolistic collaboration.

SamReidHughes 10y ago
Well, no, the difference is that their products are different, and people that prefer Cheerios aren't going to switch over ten cents a box.
thomasthomas 10y ago
if uber/lyft can't differentiate their product in any way it seems a race to the bottom imo unless some cooperation happens. i bet thats why lyfts been running these commercials about how great their drivers are; to create some perceived differentiation. i guess one of these companies could go the amazon route and make margins so small to make entry into the market less attractive. ride sharing seems less capital intensive though so not sure that'd work.
- sdenton4 10y ago
  I only use Lyft unless there's like a ten dollar price difference. The amount of just terrible behavior coming from uber corporate makes me avoid them.
  - reacharavindh 10y ago
    Same here. I consciously choose Lyft and feel good about encouraging competition and voting with my money against all the evil things Uber does recently. Oh that, and I refuse to give Uber my location 24/7. Uber App went to trash.

nathanvanfleet 10y ago

Isn't the logic that people are willing to pay a certain amount for cereals, and that amount is well over the cost to produce it? And something like and airline is much more costly and people are less able to pay the amount needed for a cereal-like margin?

sdenton4 10y ago
Right, and if one cereal decided to significantly discount itself -lose some money for a while - in order to capture more market share, it could lead to a pricing death spiral if the other cereal makers tried to keep up, and people's mental model of what cereal costs went down along the way...

trimbo 10y ago

> why is the cereal business so profitable? My mind was boggled until I realized that he said this in 1994. The cereal business has been collapsing for years.

adventured 10y ago
Adding further to the comedy of the switch, airlines in the US are now very profitable and doing tremendous thanks to a reduction in competition / consolidation. In the history of US aviation, airlines have never been so profitable as they are right now. Munger was wrong because he left out critical qualifiers. A 'pure' commodity can be wildly profitable, if you have a restriction on competition - a cartel or otherwise - that prevents a race to the bottom on price. You don't necessarily have to shift the ratio to the extreme either, there's a line where if you lower the competition beneath that, the profitability becomes significant while still retaining a modest amount of competition. Munger should have known better than to say that, oil is the most obvious demonstration, but there are countless others. Airlines today are nicely profitable for exactly the same reason AT&T and Verizon can still print large profits in a commodity wireless business (even with T-Mobile doing a great job chomping at their heels).

didibus 10y ago

Seems pretty simple to me. Cereals are vastly different from one another. They taste different, and so everyone is going to average to like one more then the others, and it won't be the same one for everyone. Also, when it comes to food, you get bored of the same thing over and over again, so every customer will buy a different one once in a while. So with Cereals, the thing customers want isn't too feed themselves, but to enjoy the particular flavours of a specific cereal. With airlines, people just want to go from A to B. It's not about the experience. So obviously all that matter is price and convenience. Same thing for ridesharing.

3minus1 10y ago
the obvious counter this argument is that companies could create a competing version that tastes the same as a competitors product, similar to what coke and pepsi do.

dharmon 10y ago

I wonder if the difference was that airlines took "thinking on the margin" to an extreme? They all know that the cost of filling one more seat is practically zero, so even if that flyer is only paying $50, it's a win. This leads to variable pricing which leads to price shopping which leads to price competition, which has absolutely slaughtered airlines, especially with price aggregators. For what a profitable airline business looks like, look at Southwest and what they do. They have variable pricing, but its predictable based on only a few factors, and they don't allow listing in aggregators. Filling seats is important, but they keep an eye on the big picture. Cereal, on the other hand, has some non-zero incremental cost that, while small, can't be ignored. You can still think on the margin, but cannot ignore the overall economics.

pdog 10y ago

The fixed and variable costs are much higher for the airlines than for cereal makers. There's probably less than ten cents worth of corn in a box of cereal that Kellogg sells for three dollars.