So in each of these markets, Uber needs cash to allow it to operate at a loss - potentially for years - so it can gain market share and prevent overseas rivals from gaining the upper hand. Different Uber competitors - Lyft in the United States, Gett in Europe, Didi Chuxing in China, Ola in India - are strong in different parts of the world. It's a reasonable guess that ride hailing will also become a winner-take-all market, with the winner reaping huge profits.īut because ride-hailing services operate in the physical world, competition happens on a city-by-city basis. The world's richest man under 50, Mark Zuckerberg, is currently profiting from the network effects from owning the world's most popular social network, Facebook.
The world's richest man, Bill Gates, made his billions from the network effects surrounding the world's most popular operating system, Windows.
UBAR SAUDI ARABIA DRIVERS
Like many technology markets, ride hailing exhibits strong network effects: The more drivers a network has, the more attractive it is to passengers, and vice versa.Īnd network effects can be very profitable. As the New York Times puts it, "China is a difficult battleground, as Uber is spending millions in a subsidy war with Didi Chuxing, the dominant ride-hailing start-up in the country." Ride hailing may be a winner-take-all market Photo by Justin Sullivan/Getty Images But something similar is happening in other parts of the world. That $1,500-per-week offer was only in effect for the first month, and Lyft presumably hoped drivers would stay on and work for lower pay in subsequent months. To put it another way, Lyft's average profit margin on my rides was negative 150 percent.
UBAR SAUDI ARABIA DRIVER
Lyft paid me $1,500, which means that my week as a Lyft driver cost Lyft's investors $904 (I donated the full $1,500 to charity). During those 50 hours, my passengers paid a total of $596.
I signed up and drove 50 hours in my first week. At the time, Lyft was running a promotional program where new drivers could earn $1,500 in a week if they drove for at least 50 hours. In 2014, I spent a week driving for Lyft. I have firsthand experience with how wasteful this process can be. The company is planning to lose money on every ride and hope it can outlast its competitors. Uber needs billions of dollars because it's planning to wage brutal price wars with competitors around the world. But when you run a purely online ride-hailing service that doesn't own any vehicles, there's no reason it should cost billions to expand into new markets. Uber says it needs money to finance expansion internationally to places like China and the Middle East. But the most valuable assets required to provide Uber's service - cars - are owned by drivers who work as independent contractors. It costs some money to build the Uber app and run the servers that power Uber's car-sharing service, of course. Running an on-demand service like Uber isn't very expensive. Photo by Steve Jennings/Getty Images for TechCrunch Uber needs billions to fight price wars around the world Uber CEO Travis Kalanick. It suggests that it's getting harder and harder to spend money in ways that boost long-term economic growth. So the fact that so much money is being invested in Uber - and in other companies deliberately losing millions in an effort to gain market share - could be an ominous sign. Price wars do nothing to increase the world's productive capacity. But money spent on money-losing price competition isn't investment. Those investments might allow Uber to expand its share of the global ride-hailing market and make big profits for its investors. Uber is planning to use its billions to fund brutal, zero-sum price wars with competitors around the world. But for the most part, recent "investments" in Uber aren't like that. In the long run, economic growth depends on our ability to convert cash into productive assets like factories, trucks, machinery, or computer software. But while Uber is bragging about the investment, it could reveal a troubling trend in investment trends overall. It's one of the biggest venture capital investments in history and brings Uber's overall fundraising haul to $11 billion. Uber has raised an astonishing $3.5 billion from Saudi Arabia's sovereign wealth fund.
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