Since the Lyft IPO a few months ago, I’ve received 9 emails advertising a 25% discount on fares. Price cutting and subsidies have been a key strategy underpinning the expansion of ridehail companies such as Uber, Lyft, Ola, Grab and Didi over the past decade. These are some of the fastest growing start-ups in history, and I’ve been following their rise with both admiration and skepticism for some time. Admiration over the sheer ambition of these companies to dominate the future of mobility, and skepticism over the ability of these businesses to turn a profit.
The key differentiator between today’s tech mobility revolution and revolutions of the past, is the level of investment going into companies that arguably (in some cases, on their own admission!) don’t have viable business models.
The primary strategy of this new wave of disruptors has been to attract mega rounds of investment and use the capital to undercut incumbents (who are profit-driven) and win market share. That’s it. Charge less and they will come!! Uber is charging 25% commission and losing money which simply means what customers are paying is not the real cost of the journey. As more players enter (and they will), the current business model of these disruptors can only force prices down further. It’s all they know what to do. It’s great for customers in the short term, but a complete race to the bottom.
Raising millions is now futile in this new game of thrones. The play now is about raising billions with new capital just being used to further discount fares. Thus, disruption via subsidy ensues.
While I don’t see the rideshare giants going anywhere anytime soon, a correction is needed. Only when investors, or speculators, which is a better classification, stop backing these disruptors will we finally start seeing real signs of who the winners and losers are going to be. With IPOs now done by two major players, that day is coming sooner rather than later. There are going to be big casualties as this plays out, not just the incumbents who have been decimated in lots of cases, but also among the disruptors who are betting big on what could be a ‘winner takes all’ scenario.
Behind the scenes, a japenese giant tech investor called SoftBank look to be in a prime position to be the big winner in the mobility revolution. They have invested in India’s Ola, Singapore’s Grab, China’s Didi Chuxing, and Brazil’s 99, now a subsidiary of DiDi. SoftBank invested $1.25 billion in Uber at its previous valuation of $68 billion, and also bought up existing shares at a 30% discount, or a $48 billion valuation, so while Uber represents the face of disruption in the modern era, commanding the same epochal verb status as Google, the likely winner in the global mobility game could ultimately be SoftBank as they orchestrate the players like a chess board.
It will be in Softbank’s interest to curtail the race to the bottom price-wars, and ultimately shift client companies towards profitability. They are likely to join forces, divvy up markets or reach common agreements under the stewardship of their mutual shareholder.
All companies need to make a profit at some point and the incumbents do just that. This makes them potentially very important, but overlooked right now. Taxi companies can play a key part in the future of mobility. If disruption through subsidy is shaping up to be a major bubble, the traditional taxi industry, even in the face of rideshare disruption, will find itself in a very enviable position.
Fleets do not need to compete in the race to the bottom price wars with rideshare giants. Let them burn that candle down themselves. What fleets can do, however, is endeavour to disrupt the disruptors. This can be achieved by matching the convenience of their tech offerings and innovating new and sustainable ways of meeting passenger demand in a world where transport, and the experience of transport, is rapidly changing.
So, when will the rideshare bubble burst? If Softbank had equity in all mobility players, the answer would be easier, but they don’t and the competition makes it a very interesting space that is not just relevant for the taxi industry but for other industries that are facing similar aggressive disruptors born out of the Silicon Valley era. One thing is for sure, the outcome of this discussion is going to shape all business for years to come….