6 ms·

The difference is there's a network effect. Uber & Lyft are not actually transportation companies anymore than Airbnb is a hotel company. They're networks. So

by abalone 12y ago

The difference is there's a network effect. Uber & Lyft are not actually transportation companies anymore than Airbnb is a hotel company. They're networks. So it's not just about price. It's about the size of the network, which means availability -- how fast can you hail a ride. The more drivers on the network the better the availability, so that's where the consumers look first, and so that's where the new drivers join, and so on in a virtuous cycle. Once one network reaches a tipping point and becomes dominant it will be harder for upstarts to enter the market and match the availability of the winner's gigantic network. That's the theory at least. All this VC money is about trying to get to that tipping point where one of them takes the whole transportation network.

woah 12y ago
Many drivers drive for multiple networks simultaneously.
- abalone 12y ago
  Some do. Some people list on Airbnb and competing services simultaneously too. But once that tipping point is reached then the competing networks collapse and it's not even worth bothering with them. Case in point: Airbnb's direct competition (listing services) are totally ineffective at this point. "105bookings with Airbnb, 1 with Roomorama, 0 with with the others"[1] [1] http://www.quora.com/Who-is-Airbnbs-biggest-competition http://www.quora.com/Who-is-Airbnbs-biggest-competition
  - Lucadg 12y ago
    this may be true in some cities and for some top hosts, but for the rest of vacation rentals owners Airbnb is just another provider. It's an extremely fragmented space.
ilghiro 12y ago
Uber is more vulnerable to external price competition. Airbnb doesn't set the price of accommodation across the network and so there's not much of a risk of a competitor entering the market at a lower price point. Internal price competition is as intrinsic to their model as price uniformity is to Uber. I'm not at all suggesting Uber adopt a "Drivers Set Prices" feature but rather pointing out that companies that adopt an internal market have providers that are competing with one another and against other companies on price. Having an "internal monopoly" means the entire company is vulnerable to a lower priced competitor.
- bernardlunn 12y ago
  great point. it is massive difference between airbnb (i a a huge fan) and uber/lyft.
- jmckib 12y ago
  That's not quite right. Airbnb may not set the price of accommodations directly, but their cut does influence the prices that its providers are able to charge. A competitor who takes a smaller cut will be able to have cheaper accomodations in their network, yet Airbnb is still a monopoly. Here's another way of thinking about the difference between Airbnb and Uber. Let's say you are building an Airbnb competitor, and you found a way to attract 25% of Airbnb's providers to your service, likely by taking a smaller cut. That's still not good enough, because users will overwhelmingly prefer the service with the majority of providers, even if yours is a little cheaper. You die and Airbnb returns to dominance. Contrast the situation with building an Uber competitor. To compete with Uber, all you need is some minimum number of drivers to be able to provide service to your initial users, and this is relatively easy because drivers can quickly switch between networks. The users do not care if you only employ 25% of the drivers, since that's still enough to provide good service. Make your service cheap and the users will flock to you, so now you can compete with Uber on price.
  - abalone 12y ago
    > The users do not care if you only employ 25% of the drivers, since that's still enough to provide good service I question that assumption. Once one service reaches a tipping point it may be able to deliver a standard of service that will be very hard for upstarts to match. As an illustration, if Uber wins we may come to expect rides within 1-2 min anywhere in the city and to commonly match riders on Uberpool. Maybe 25% gets you there but at that scale 25% could mean hundreds of active drivers which is very expensive to muster with driver incentives. Also it will be easy for Uber to run promotions to starve competitors of their sole benefit, lower prices, until they run out of capital. That threat will discourage investors. This is why they are fighting so hard right now. It's winner take all.
    - 12y ago
vertex-four 12y ago
At which point we get to sit around with one company having 90%+ of the market for the next couple of decades until some VC wants to sink another few billions into doing the same thing again. Wait, why's this situation better than the taxi industry again?
- deleted 12y ago
  [deleted]
krschultz 12y ago
This is very much a theory. If the companies are not able to create a network effect, much of their valuation is not defendable. I personally believe they do not have a significant network effect. They have a brand. But they do not have a network effect. When I search for flights, I start with JetBlue. I have the most points there, I generally have good flights, and they have the most flights out of my local airport. That's the power of a brand. However I'll go to Hipmunk and start looking for alternatives if the JetBlue options don't look great. If something is better, I'll buy that. On the other hand, I really don't like Facebook. Yet, there is nothing I can do about dragging my friends to an alternative. That's a network. There is literally no value for me to be on a Facebook alternative because my friends are not there. From my experience taking rides in Uber/Lyft, it seems like many drivers are using both. Customers are often aware of both. I have used both. While it is true you need a minimum network size to ensure that rides are available, I don't think the network is exclusive. You need a minimum amount of capital to buy airplanes and setup of a network of flights, that doesn't naturally lead to a single airline.
- phamilton 12y ago
  It's interesting to see the difference in branding effects in reference to price and "decisioning time". Take potato chips for example. We are probably willing to invest maybe 15 seconds into the decision about potato chips. We generally stick with whatever branding is freshest in our minds because the cost of choosing the wrong one is negligible. Meanwhile, we are willing to spend hours comparing airfare across the half dozen different portals/airlines. I would suggest that branding is much more effective than pricing is for potato chips than it is for air travel. Where do Uber/Lyft fall on that spectrum? My guess is that if prices are low enough there are plenty of brand based decisions. If the prices go up then people will open both apps and compare.
- mvc 12y ago
  > You need a minimum amount of capital to buy airplanes and setup of a network of flights, that doesn't naturally lead to a single airline. Not as much as you might think. Ryanair started with a share capital of £1. http://corporate.ryanair.com/about-us/history-of-ryanair/ http://corporate.ryanair.com/about-us/history-of-ryanair/
rayiner 12y ago
Whatever network effect exists is very weak. Look at it mathematically. Say there are two social networking sites A and B, of equal size. If you combine A and B into one, the number of users doubles, but the number of potential individual connections quadruples. That's important, because what you care about in that space is being able to connect any two specific people. So there's a huge benefit to combining even when both networks are very large. Now, say you have two cab hailing apps. Combining doubles the number of users and the number of drivers, but if both are large to begin with, there's probably a negligible benefit in terms of reduced hailing times. Thus there is little pressure forcing a "winner take all" outcome.
- harryh 12y ago
  It would be interesting to attempt to express mathematically expected hail times based on driver & rider density. Obviously the gains to adding density start out very big but then, as you say, decrease. But when exactly do you get past the elbow on the curve?
  - aetherson 12y ago
    There's no elbow, the curve looks the same all the way down. And it's a square-root relationship. That is, you need to increase number of drivers by a factor of four in order to reduce the expected distance between a driver and a passenger by a factor of two.
    - rayiner 12y ago
      Even leaving aside the assumption of uniform distribution, hail time isn't only a function of distance. Once you get below a 5-minute expected hail (which happens regularly with Uber in the middle of DC), a substantial portion is eaten up by the driver simply orienting himself after accepting a hail, then trying to find the passenger when he arrives.
      - aetherson 12y ago
        It doesn't actually assume uniform distribution, it assumes that the distribution pattern doesn't change as the number of drivers goes up. Which from my experience is a good assumption over reasonable amounts of changes in driver numbers. It might change if you start to recruit some new demographic of drivers. Drivers who are close to you having a hard time getting to you is definitely one of the tough algorithmic problems in this space! At Flywheel, we kept mentioning it, like, "Okay, what if we tried to take into account one-way streets and driver heading," and ultimately we were (when I was there at least) just too resource constrained to try to take on such a fiddly complex data-intensive problem. One thing I don't really like about Uber is that they have All The Money In The World and yet I feel like they don't have a lot of ambition to deliver a really good app experience. Like, I get a weird loading screen every time I bg/fg my app. What's up with that? This is Android, the app can just fuckin' run while it's bged. And they aren't tackling the "driver who can get to you soonest" problem (as far as I can tell from the perspective of a passenger) or the "how to help a driver figure out who you are in a crowd" problem or any of the other cool stuff in this space. Like, what's the point of being a $all the billions company if you don't deliver a really good app?
HillRat 12y ago
I think the issue there is that car-hailing networks lack exclusivity and have limited lock-in. This suggests a race to the bottom is inevitable: customers want faster rides and lower prices; drivers want more customers (either larger networks or fewer drivers) and high rates; the network wants to share as little of the price as possible with the driver. In other words, the network is in the position of having to attract both customers and drivers, and price/reimbursement are the primary tools. Eventually, this should drive the margin for car-hailing networks to a stable low point, because if the price is too high customers will go elsewhere, and if the driver share is too low drivers will go elsewhere. Only by building its own fleet or by maintaining an artificial lockin of some sort (and I would classify brand/marketing dominance as being an artificial method of maintaining market power) can an intermediary network manage any level of bargaining power.
amyjess 12y ago
Except that it's not hard for drivers to sign up with both. I've seen so many drivers operating dual phones in their cars. It might end up like the DVD burner format wars, where nobody won or lost because the burners all ended up supporting every format.

by abalone 12y ago

woah 12y ago

Many drivers drive for multiple networks simultaneously.

abalone 12y ago
Some do. Some people list on Airbnb and competing services simultaneously too. But once that tipping point is reached then the competing networks collapse and it's not even worth bothering with them. Case in point: Airbnb's direct competition (listing services) are totally ineffective at this point. "105bookings with Airbnb, 1 with Roomorama, 0 with with the others"[1] [1] http://www.quora.com/Who-is-Airbnbs-biggest-competition http://www.quora.com/Who-is-Airbnbs-biggest-competition
- Lucadg 12y ago
  this may be true in some cities and for some top hosts, but for the rest of vacation rentals owners Airbnb is just another provider. It's an extremely fragmented space.

ilghiro 12y ago

Uber is more vulnerable to external price competition. Airbnb doesn't set the price of accommodation across the network and so there's not much of a risk of a competitor entering the market at a lower price point. Internal price competition is as intrinsic to their model as price uniformity is to Uber. I'm not at all suggesting Uber adopt a "Drivers Set Prices" feature but rather pointing out that companies that adopt an internal market have providers that are competing with one another and against other companies on price. Having an "internal monopoly" means the entire company is vulnerable to a lower priced competitor.

bernardlunn 12y ago
great point. it is massive difference between airbnb (i a a huge fan) and uber/lyft.
jmckib 12y ago
That's not quite right. Airbnb may not set the price of accommodations directly, but their cut does influence the prices that its providers are able to charge. A competitor who takes a smaller cut will be able to have cheaper accomodations in their network, yet Airbnb is still a monopoly. Here's another way of thinking about the difference between Airbnb and Uber. Let's say you are building an Airbnb competitor, and you found a way to attract 25% of Airbnb's providers to your service, likely by taking a smaller cut. That's still not good enough, because users will overwhelmingly prefer the service with the majority of providers, even if yours is a little cheaper. You die and Airbnb returns to dominance. Contrast the situation with building an Uber competitor. To compete with Uber, all you need is some minimum number of drivers to be able to provide service to your initial users, and this is relatively easy because drivers can quickly switch between networks. The users do not care if you only employ 25% of the drivers, since that's still enough to provide good service. Make your service cheap and the users will flock to you, so now you can compete with Uber on price.
- abalone 12y ago
  > The users do not care if you only employ 25% of the drivers, since that's still enough to provide good service I question that assumption. Once one service reaches a tipping point it may be able to deliver a standard of service that will be very hard for upstarts to match. As an illustration, if Uber wins we may come to expect rides within 1-2 min anywhere in the city and to commonly match riders on Uberpool. Maybe 25% gets you there but at that scale 25% could mean hundreds of active drivers which is very expensive to muster with driver incentives. Also it will be easy for Uber to run promotions to starve competitors of their sole benefit, lower prices, until they run out of capital. That threat will discourage investors. This is why they are fighting so hard right now. It's winner take all.
  - 12y ago

vertex-four 12y ago

At which point we get to sit around with one company having 90%+ of the market for the next couple of decades until some VC wants to sink another few billions into doing the same thing again. Wait, why's this situation better than the taxi industry again?

deleted 12y ago
[deleted]

krschultz 12y ago

This is very much a theory. If the companies are not able to create a network effect, much of their valuation is not defendable. I personally believe they do not have a significant network effect. They have a brand. But they do not have a network effect. When I search for flights, I start with JetBlue. I have the most points there, I generally have good flights, and they have the most flights out of my local airport. That's the power of a brand. However I'll go to Hipmunk and start looking for alternatives if the JetBlue options don't look great. If something is better, I'll buy that. On the other hand, I really don't like Facebook. Yet, there is nothing I can do about dragging my friends to an alternative. That's a network. There is literally no value for me to be on a Facebook alternative because my friends are not there. From my experience taking rides in Uber/Lyft, it seems like many drivers are using both. Customers are often aware of both. I have used both. While it is true you need a minimum network size to ensure that rides are available, I don't think the network is exclusive. You need a minimum amount of capital to buy airplanes and setup of a network of flights, that doesn't naturally lead to a single airline.

phamilton 12y ago
It's interesting to see the difference in branding effects in reference to price and "decisioning time". Take potato chips for example. We are probably willing to invest maybe 15 seconds into the decision about potato chips. We generally stick with whatever branding is freshest in our minds because the cost of choosing the wrong one is negligible. Meanwhile, we are willing to spend hours comparing airfare across the half dozen different portals/airlines. I would suggest that branding is much more effective than pricing is for potato chips than it is for air travel. Where do Uber/Lyft fall on that spectrum? My guess is that if prices are low enough there are plenty of brand based decisions. If the prices go up then people will open both apps and compare.
mvc 12y ago
> You need a minimum amount of capital to buy airplanes and setup of a network of flights, that doesn't naturally lead to a single airline. Not as much as you might think. Ryanair started with a share capital of £1. http://corporate.ryanair.com/about-us/history-of-ryanair/ http://corporate.ryanair.com/about-us/history-of-ryanair/

rayiner 12y ago

Whatever network effect exists is very weak. Look at it mathematically. Say there are two social networking sites A and B, of equal size. If you combine A and B into one, the number of users doubles, but the number of potential individual connections quadruples. That's important, because what you care about in that space is being able to connect any two specific people. So there's a huge benefit to combining even when both networks are very large. Now, say you have two cab hailing apps. Combining doubles the number of users and the number of drivers, but if both are large to begin with, there's probably a negligible benefit in terms of reduced hailing times. Thus there is little pressure forcing a "winner take all" outcome.

harryh 12y ago
It would be interesting to attempt to express mathematically expected hail times based on driver & rider density. Obviously the gains to adding density start out very big but then, as you say, decrease. But when exactly do you get past the elbow on the curve?
- aetherson 12y ago
  There's no elbow, the curve looks the same all the way down. And it's a square-root relationship. That is, you need to increase number of drivers by a factor of four in order to reduce the expected distance between a driver and a passenger by a factor of two.
  - rayiner 12y ago
    Even leaving aside the assumption of uniform distribution, hail time isn't only a function of distance. Once you get below a 5-minute expected hail (which happens regularly with Uber in the middle of DC), a substantial portion is eaten up by the driver simply orienting himself after accepting a hail, then trying to find the passenger when he arrives.
    - aetherson 12y ago
      It doesn't actually assume uniform distribution, it assumes that the distribution pattern doesn't change as the number of drivers goes up. Which from my experience is a good assumption over reasonable amounts of changes in driver numbers. It might change if you start to recruit some new demographic of drivers. Drivers who are close to you having a hard time getting to you is definitely one of the tough algorithmic problems in this space! At Flywheel, we kept mentioning it, like, "Okay, what if we tried to take into account one-way streets and driver heading," and ultimately we were (when I was there at least) just too resource constrained to try to take on such a fiddly complex data-intensive problem. One thing I don't really like about Uber is that they have All The Money In The World and yet I feel like they don't have a lot of ambition to deliver a really good app experience. Like, I get a weird loading screen every time I bg/fg my app. What's up with that? This is Android, the app can just fuckin' run while it's bged. And they aren't tackling the "driver who can get to you soonest" problem (as far as I can tell from the perspective of a passenger) or the "how to help a driver figure out who you are in a crowd" problem or any of the other cool stuff in this space. Like, what's the point of being a $all the billions company if you don't deliver a really good app?

HillRat 12y ago

I think the issue there is that car-hailing networks lack exclusivity and have limited lock-in. This suggests a race to the bottom is inevitable: customers want faster rides and lower prices; drivers want more customers (either larger networks or fewer drivers) and high rates; the network wants to share as little of the price as possible with the driver. In other words, the network is in the position of having to attract both customers and drivers, and price/reimbursement are the primary tools. Eventually, this should drive the margin for car-hailing networks to a stable low point, because if the price is too high customers will go elsewhere, and if the driver share is too low drivers will go elsewhere. Only by building its own fleet or by maintaining an artificial lockin of some sort (and I would classify brand/marketing dominance as being an artificial method of maintaining market power) can an intermediary network manage any level of bargaining power.

amyjess 12y ago

Except that it's not hard for drivers to sign up with both. I've seen so many drivers operating dual phones in their cars. It might end up like the DVD burner format wars, where nobody won or lost because the burners all ended up supporting every format.