Investing in Uber? Don’t underestimate the competition

In my negotiation class at Stanford, we ran an exercise where we bargained contracts with one supplier, two suppliers, three suppliers, etc. The contracts were all different and randomized, so both sides didn’t know what each wanted and valued. However, one thing quickly became clear — even with just two suppliers, the probability of getting a good deal skyrocketed compared to dealing with just one. The more competition, the better for a customer.

That’s common sense of course, but it was illuminating to see it work first hand.

That’s why I have doubts about Uber becoming the next Google even with its amazing revenue growth. You may have heard it’s trying to raise $1 billion at a $17 billion valuation.

It’s impossible to determine Uber’s fair value without concrete numbers, but I do know this: Uber will face intense competition and struggle against it.

I don’t know if there are natural network effects in the car hailing business. Presumably, the more cars on a service, the more customers; and the more customers, the more cars.

However, I’ve seen cars and taxis with multiple phones supporting multiple services. Drivers don’t particularly care where they get customers from; they want to widen the funnel as much as possible and there’s little cost to supporting multiple companies.

So no matter how successful Uber is in recruiting drivers, other services like Lyft are right behind them. There are already stories about how, in a bid to grab market share, these car hailing apps are essentially paying passengers to use them. Not a great sign. The race to zero marginal profit may have already begun.

Moreover, this business strikes me as a mostly local one. For example, in South East Asia, home grown GrabTaxi might already be more popular than Uber.

Travelers may appreciate a national or a global app, but the vast majority of the market are city dwellers who only need cars and taxis in their own city. I can start an app hailing service tomorrow and focus only on my area — providing a level of service (and price) to drivers and customers that a global player cannot hope to match.

Is Uber’s mad rush to grab market share fool’s gold?

Knock on wood, but I see more similarities with Groupon’s group deals business than with search. High revenue growth, aggressive market share tactics, low barriers to entry, highly localized, little leverage? Hmm…

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