Tagged: mobile

Uber And The Future Marketplace

About a month ago David Sacks posted this model of Uber.


It depicts the flywheel of Uber’s growing business, a marketplace with interesting supply- and demand-side dynamics (and these dynamics have precipitated much of the debate around Uber’s surge pricing tactics).

Using geographic density as a network effect is of course not entirely new. The early days of Facebook’s growth were driven by high density activity and word-of-mouth within select colleges. However Uber is one of a breed of new companies built specifically for mobile and the network and scale this platform affords.

I sit in the forward-looking camp, holding the opinion that Uber will be one of the biggest and most impactful companies of the coming decade. A ton of upside exists that perhaps justifies a potential $100B+ market cap. In fast moving tech-driven markets, however, nothing is guaranteed. How Uber realizes its potential will come down to positioning and, of course, execution.

I want to make some assertions from the position of devil’s advocate, rather than homer, for the purposes of this post though. There are some challenges that Uber will have to overcome.

1. At least one reason Uber has raised a whopping $1.5B is because it’s a low margin business. There are a variety of variable costs ranging from marketing to managing regulatory hurdles that necessitate such massive upfront investments. What revenues and scale and customer loyalty must Uber attain in order to think about winding down these types of expenses? When will that happen? These are metrics that hopefully become increasingly evident, tangible, and measurable as their markets mature.

2. Uber is a marketplace with a strong offline component. It will be Uber’s mission to continue to deliver a safe and trusted experience to all participants of the marketplace.  As the number of drivers and passengers scale, this mission becomes increasingly challenging. A small number of bad actors or poor experiences can have a disproportionately negative impact on customer opinion. The two-way ratings system definitely helps Uber’s cause but it remains to be seen whether this is sufficient to prevent all unfavorable behavior. The good news is systems with such feedback loops tend to improve over time. Anand Iyer has a great post on this issue at First Round Review. Trust takes a long time to earn and little time to lose.

3. Marketplaces are all about liquidity. Simon Rothman, well-known expert on marketplaces, hints at the right question at the end of that post. Since Uber has taken a more centralized approach to structuring it’s marketplace, growth will take longer than would otherwise. What rate of growth is acceptable while maintaining a more central role in the marketplace? In a space with low barriers to entry, rapid expansion is necessary to win across global markets. Uber must balance restraint, to maintain a world-class user experience, and growth, to be the global market leader.

4. Which brings me to my next point: Does Uber need to take all markets outright in order to win? This is unlikely. The ride-sharing business, and the car-ownership industry, are big enough to allow multiple entrants prosper, at local, national and global scales. This again is related to the liquidity of the marketplace. People and automobiles are everywhere, implying ride-sharing services can spring up anywhere. Could there be hundreds of players in this space? We are already seeing some of this behavior in Europe and Asia, and it is somewhat akin to the flurry of activity we saw in the daily deals space. There too we saw the industry leader with low barriers to entry push the pedal on growth. The underlying economics are different in the ride-sharing space, but some similarities persist. This is not so much a challenge Uber faces, but it is definitely an aspect they must weigh when considering the total addressable market.

5. This is one of my biggest question marks for Uber and the virtuous flywheel – and it’s related to #4 and the risks of a low barrier to entry. One of Uber’s most important moats is and will need to be customer loyalty, driven by an amazing customer experience. How does a service like Uber build loyalty? For passengers, faster pickup times is just one dimension of customer experience. In what other ways will Uber be able to power the flywheel? Cheaper prices is another way. However, there are fixed bounds on how fast and how cheap a service can be. On what other dimensions will Uber optimize customer experience? On the supply side, there is a fixed upper bound on the number of rides a driver can provide per day. (This is the contrary to most online marketplaces where the upside for suppliers is nearly limitless. But actually my issue is not with this limited upside – other marketplaces such as AirBnB face similar constraints.) In the long run, Uber will need to find other ways to further differentiate its customer experience.

6. Lastly, as intimated above, some may rightly argue that Uber is, for better or worse, not a true marketplace. In a true marketplace, the suppliers set their own prices and define how the customer experiences the product (one manifestation of this is peer-to-peer transactions). This creates a network of competition and diversification of services, both of which drive customer engagement. This growing network attracts even more suppliers. And the wheel turns. Uber has chosen a more centralized approach, one that favors a more consistent experience across customers. Whether this will continue to work well, or how Uber will respond in the face of successful market-driven competitors, remains to be seen.

Uber requires enough demand so that while suppliers may not make much per unit service provided, overall they are able to pull in non-trivial income. Some early experiments have shown that this kind of elasticity to exist but it’s yet to be proven across many markets. Uber will need to continue to scale its coverage and density in order to continue extending low prices to its passengers.

The types of experiences and marketplaces the mobile device has enabled is incredible. It has exponentially increased the density of available market participants both physically and temporally.

I would love to exchange the costs associated with car ownership with the convenience of Uber. I think at the least I would end up with one car instead of two. Regardless of whether Uber “wins” or not, it is in the consumer’s interest that these kinds of choices exist, opening up opportunities and markets that did not exist previously.

Update: Amazing. No sooner had I posted this, upon checking Twitter I see that Bill Gurley has written a long (likely excellent) post, yet to read, on Uber’s total addressable market. He also uses the same David Sacks tweet.

Show Me The Money

The evolution of the mobile ecosystem as a platform mirrors that of the online space. In its simplest form the Internet evolved over three stages:

Communication –> Gaming –> Commerce

On top of these pillars of the online space, social context has fueled further growth. This evolution reflects the maturation of technology, business models, and people’s comfort with new things (value of time, ideas, technology, privacy, etc).

The mobile ecosystem was built from the beginning around communication — calling and messaging have been the killer apps for the mobile platform for more than a decade and will continue to play the central role. But now, with the advent of iPhone and Android devices, the mobile ecosystem has finally been able to take the next step in its evolution. The smartphone experience now centers around applications, the majority of which are games. Mobile gaming is still in its infancy and will continue to power advancement in GPU technology, pixels per square inch, and see expansion into other markets such as education. Features such as interactivity, social context, and location will continue to be added and improved upon over the next few years. The iPhone and Android devices have the usual suspects within the gaming industry rolling up their own sleeves.

The ability of a platform to securely support C2C, C2B, and B2B transactions is a great sign of maturity. This most exciting stage of the mobile evolution, commerce, is coming to our doorsteps. To date much of mobile commerce has involved online transactions. Facebook has powered the rise of online of games, many of which use virtual currency and virtual goods to monetize applications. Startups like Zong and Boku have taken advantage of this by allowing gamers to very quickly pay for virtual goods by entering his/her mobile phone number. Zong and Boku confirm the transaction over the SMS network and the transaction shows up on the gamer’s phone bill. In order to avoid the hefty transaction fee demanded by carriers, Zong now offers users the ability to link your mobile number to a credit card account or a prepaid account. Zong alone processed payments for more than 10 million users last year.

Startups Obopay and Venmo continue to drive usage and growth of mobile as a commercial platform. These companies have moved away from the online space and allow users to send and receive payments over SMS. Each user’s account is linked to a bank account. Although transfers are currently capped (usually around $1000), people’s early acceptance of these applications portends minimized visits to the bank, decreased use of checks (which costs banks millions annually to process), and a different set of expectations around the availability and ubiquity of “money”. David Schwartz, Obopay’s marketing chief, has a great sound bite:

There’s now four billion people in the world who have a cell phone. But there’s only about a billion and a half people who have a bank account today or any access to financial services.

This underlines the significance moving forward of the mobile platform in our online and offline lives, across the world. Much as content has become on-demand, anytime, anywhere, the ability to access, use, and share money will only become cheaper and easier across the world. In fact the line between online and offline will begin to blur — these ostensibly discrete states will be more interactive and continuous.

Payments online and user to user transactions are only a slice of the mobile payments pie. One of the most ubiquitous points of transactions is the cashier register, at the grocery store, at the mall, at the retail outlet. Billions of dollars are spent here annually in the US alone. Various solutions are already in play, both startups and heavy hitters. Most ideas center around replacing plastic with the mobile phone: the mobile phone is waved in front of a POS reader, and money is transferred. One of the barriers to entry here is the hardware requirement, namely the POS scanner. One likely needs to broker deals with national brands in order to get their scanner placed at the POS. Below are companies looking to disrupt this space:

  • Square (iPhone) has taken a shot at solving part of the problem by using the iPhone itself as the POS device. The application is targeted towards SMBs looking to accept payments faster and more conveniently. Millions of people have credit cards, but less than 5% have the ability to accept credit card payments.  Others, like FaceCash, Facebook, and Foursquare have hinted at introducing contactless payment services.
  • FaceCash (iPhone, Android, Blackberry) deploys an application and a piece of software that sits on the cashier’s computer. The only requirement here is that the cashier has a web-connected computer and a standard barcode scanner.
  • Foursquare (iPhone, Android, Blackberry) has hinted at integrating with barcode scanners,

While the ultimate responsibility rests with the merchant, we want to make sure they have the tools and documentation necessary to teach everyone involved about our programs. As technology advances and Point of Sale systems get smarter, this responsibility can move from humans to barcode scans, loyalty card integrations and other means, thus reducing the potential friction.

It is still too early to confirm what role the latter two truly play in the respective roll-outs, and neither are necessarily involved in the transaction process, possibly placing themselves more in “competition” with Swipely and Blippy.

In addition to the startups, there are the heavy hitters that cannot be ignored in the mobile payments space. Carriers (Verizon, AT&T, Deutsche Telekom AG), credit card companies (Visa, MasterCard, American Express), and banks (Bank of America, CitiBank), and software giants such as Apple and Google, all have the ability to disrupt mobile commerce. It is a space ripe for innovation and the stakes are high. Today Verizon and AT&T announced an equal-share partnership with game-changing potential in deploying contactless payment technologies, beginning with pilots in three stores in Atlanta. Contactless payments rely on RFID chips, a technology that still faces questions around security, partly due to its wide broadcast range. Near field communication (NFC) technology, a subset of RFID, is restricted to four inches, and thus may enjoy better community acceptance. Again, in these scenarios, the efficacy of the distribution of the POS scanner will be critical for any traction.

While consumers have learned to keep their plastic cards close at hand, the convenience and ubiquity of the mobile device will ensure growth of the mobile commerce space. NFC technology will almost certainly be deployed in iPhone and Android devices within the next 2 years. Customers and businesses will rely ever more heavily on the mobile device to execute cheap, secure, fast, and numerous transactions on the go.

[Update 08/17/10: Indeed Apple is moving towards this feature]