Uber’s strategic decisions plagued by the shadow of its tech valuation

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Uber’s strategic decisions plagued by the shadow of its tech valuation

Skip ahead to: Down the rabbit hole

Uber drawing back its FinTech ambitions, including credit cards, wallets and digital payments amid a global pandemic and a 70% decline in rides isn’t necessarily surprising, the objective right now is to keep head above water. What is interesting though, is the ride hailing industry’s sustained urgency to survive (and thrive), as companies like Uber struggle to drag their bottom line into the green zone (Uber reported a $8.5 billion loss in 2019). There does seem to be a large disparity between the growth trajectory predicted at the outset, when Uber was the gig economy’s shot at entering a GAFA like league, and today’s reality. 

The disruption ushered in by the gig economy seemed to rely on an aggressive user acquisition strategy, blitzscaling to capture new markets seemed logical. What wasn’t obvious at the time was that the gig economy functioned on a different plane to the other big tech business models. An exercise in comparison is useful here. 

If we broke down the customer offering of the large platforms it would look as follows: 

  • Google – Search capital: a better search experience 
  • Amazon – Discovery capital: a better discovery and purchase experience 
  • Facebook – Social capital: a digitally enhanced social experience 
  • Uber – Time and Financial Capital: time and cost efficiencies for both drivers and riders

The difference between ‘Tech’ and Uber

What’s immediately obvious is that the capital offered by Google, Amazon and Facebook promise a better version of their chosen experience for no explicit cost to the user (a caveat: the less overt cost here is user data). Even Amazon, which is facilitating purchases, promises a better mode of discovery, delivery and consumption rather than the price point of products themselves. Uber however is promising that you can get a ride from point A to B for an affordable price and with reasonably convenient speed. But a ride hailing car can’t go much faster or charge much less than a taxi, so what is the true nature of the disruption Uber brings to the table?  We can look a little closer at the other models to understand this better.

Facebook and Google

As digital only products Google’s search capital and Facebook’s social capital do not have their revenue tied directly to the user’s use of the capital. Therefore no cost is seemingly associated for users leveraging the platform’s capital. Instead their revenue is indirect, for example in the form of advertising. 

Amazon

Discovery capital does not place a cost burden on the user, rather Amazon understands that their revenue comes through conversions with the largest discovery footprint. Where discovery capital is the center of Amazon’s ecommerce platform, onboarding of merchants and solving the supply chain augments the user’s experience of the discovery capital. 

These platforms take on the onus of creating capital, the better they optimise their product the more capital they’re able to create for their users. This means that users are able to form preferences and loyalty to the platform. 

Uber on the other hand relies on its drivers and riders to sustain the production of capital with little room for it to optimise their experiences further. The only experience optimisation Uber offers is the ride itself but given the decentralised nature of the gig economy there is no company culture that ensures an Uber driver or car is unique from any other ride – taxi or ride hailing. 

Uber

Uber’s revenue generation is directly tied to the cost borne by the consumer, the user is not attached to any unique capital created by Uber. Then the user’s loyalty shifts from the use of the capital to being primarily concerned with the cost of leveraging that capital. Where drivers are concerned with their revenue and riders are concerned with the cost of convenience they will more easily jump between ride hailing platforms. 

This probably flew in the face of investors’ expectations who saw Uber as a tech company focused on user acquisition, assuming each user represented an incremental value to the network. Where the platform isn’t able to control user acquisition through the provision of unique capital, the user base becomes transient in nature, significantly diluting the incremental value each user brings to the network. A driver on Uber can as easily be a driver on Lyft, and a rider on Uber can easily choose to ride with Lyft instead. 

Can alternate service adjacencies help Uber fulfil its ‘Tech’ potential? 

Having established that the user base built by Uber is transient, the problem that Uber needs to solve for is creating user stickiness. This attempt then hinges on their ability to create as many touchpoints with their users as possible, increasing the aggregate number of engagements within the ecosystem, where engagement represents convenience. This is why Uber (and many other ride hailing companies) turned to adjacent value propositions like food delivery and fintech. It’s worth exploring some of the potential adjacencies – some which Uber has already ventured into.  

The Fintech Adjacency 

A fintech adjacency provides an additional avenue for creating convenience for the platform’s users, facilitating easier payments and transactions. While creating new touchpoints for the ecosystem, the true stickiness of a payment system lies in how well it  augments and strengthens the convenience available in other ecosystem adjacencies such as food delivery, car rentals, insurance etc. In the absence of an already sticky ecosystem (with incentives and rewards), there is no particular reason for this payment method to provide a better payment experience than any other, doing little to shift the dial on transience.

The Food Delivery Adjacency

A food delivery adjacency appears to be the most sound value proposition that takes advantage of existing infrastructure rather than building entirely new ones, reflected by Uber’s acquisition of Postmates and roll out of on demand grocery delivery in select regions. It does however require the onboarding of a  third set of users; restaurants and retailers. This set of users though come with the same transience of the existing drivers and riders who can look to other platforms to fulfill their needs. Restaurants are driven by discoverability, they remain largely platform agnostic for this reason. It is hard then to differentiate with other competitors who have the same restaurants and offer the same service without eating into slim commission based margins. Here, again like the FinTech adjacency, the convenience created is weighed down by the transient nature of the capital being built. 

Automation as an Adjacency

There is an interesting outlier adjacency that would allow Uber to do away with the need for loyalty from one of their core user categories – the drivers. Here autonomous vehicles would allow Uber to pivot their focus to solely servicing the riders to create better margins and at least temporary loyalty. This would mean Uber ceased to be part of the ‘gig economy’ though, but the primary mode of revenue generation – rider payments – would remain unchanged. 

This effectively shifts the capital cost of managing drivers to the capital costs of building and deploying the autonomous fleet – a hefty upfront cost. By removing drivers from the equation, Uber gains more control over pricing but it wouldn’t be long before competitors caught up and the existing margin squeeze was replicated. More importantly, uber would still be left with its user transience over the long run. 

A model that doesn’t fit in an asymmetrically profitable tech world

Any scalable adjacency would necessarily build on the core proposition of getting something from point A to B – if not for this Uber’s already tenuous user base would become even less sticky once ported across use cases (if this was possible to begin with). 

This being said, without building out adjacencies – regardless of how incrementally they are able to shift the dial on transience – the issue is likely to grow to a point at which Uber would struggle to remain afloat. 

Perhaps ride-hailing can never achieve the asymmetric profitability other big tech ventures enjoy through aggressive user acquisition. Without strong adjacencies that ensure the user capital is consolidated within the Uber ecosystem, transience will always plague ride-hailing as a proposition. Even with the introduction of adjacencies, it is more likely that the adjacencies become profitable enough to sustain a loss-making ride hailing business rather than vice versa. 

What Uber has brought to the world is ride hailing as part of our everyday lives, a consumer habit that is likely to persist beyond the profitability of the businesses that run it. But given the inability of the model to create sticky revenue through user acquisition it will go down as one of the somewhat rare cases of a globally disruptive (and hyped) business venture that wasn’t able to capitalise on its innovation.

Down the Rabbit Hole

1. Vector and thrust – the difficult task of achieving peer-beating, value creating growth through pivots for mature companies

“A rocket attempting to escape Earth’s gravity must achieve a speed of 25,000 mph, or it will fall back to earth. This escape velocity is nonnegotiable. Companies attempting to achieve breakout, value-creating growth often fight their own gravitational pull: stagnant demand, weak ideas, capability gaps, cultural inertia, and skeptical investors.”

“Making the pivot to growth is not easy and not optional. During the 20-year period that began in 1995, only one in eight mature companies achieved peer-beating, sustained, and value-creating growth. But the rewards of growth justify the attempt…A hypothetical investment in these companies just prior to their period of breakout growth would have beaten an investment in the S&P 500 by a factor of almost three.”

BCG’s study across 1700 companies and 300 growth attempts found that the difference between achieving escape velocity and stalling out were those who pay close attention to “vector (its direction or heading) and thrust (the propulsive force behind that heading)”. The study found correlations to the success of growth pivots across ten primary factors, four of which were related to ‘vector’ and six related to ‘thrust’. The unspoken implication being that the managerial oversight in picking amongst the ten factors to focus company efforts on is perhaps the genesis differentiator of success. 

Setting vector

  1. Build from advantage – growth moves that leverage advantages (assets, market positions or capabilities)
  2. Stretch the thinking – big ideas that exploit market change and company advantage to move the needle
  3. Set the growth aspiration – a shared, motivating growth goal in the context of an honest base-case outlook 
  4. Define the growth portfolio mix – growth emphasis across core versus adjacencies versus new frontiers

Calibrating thrust

  1. Concentrate force – concentration of attention and resources on the few initiatives that matter most
  2. Build critical capabilities – new capabilities and aligned structure and culture to support the future direction
  3. Accelerate M&A – prioritized acquisitions to speed access and close capability gaps
  4. Fund the journey – productivity initiatives to support margins and fuel bigger growth investment
  5. Bring investors along – a growth story grounded in drivers of value creation
  6. Manage growth as a program – programmatic rigor, KPIs and accountability across growth initiatives

Source: Vector and thrust, what breakout growers get right By Kermit King, Gerry Hansell, and Brad Martens for BCG

2. The scaling woes of the food delivery industry

“The Netflix model introduced convenience to the purchase and viewership of entertainment, but it eliminated the overhead costs borne by physical rental shops like Blockbuster – the absence of a physical product was its very value add. But food delivery services create convenience for a physical sales journey, one that is made up of variable costs like the logistics of delivery, customer service, assurance of food quality etc. The focus on creating convenience didn’t allow the services to offload these extra costs back onto the customer, customers would simply switch to a competitor’s platform. This is why we now find that food delivery startups are increasingly headed toward M&A deals, the industry’s narrow margins having burned through most of the $11 billion it raised in 2018 alone. The latest acquisitions coming from Just Eat Takeaway acquiring Grubhub for a reported $7.3 billion and Uber acquiring Postmates for $2.65 billion.

Although the consumer delivery habits are growing stronger, the fact that the industry’s cost scales with each customer leaves little room for economies of scale to bail it out. In fact, sometimes the cost scales disproportionately to customer growth with blitzscaling strategies absorbing even larger portions of the cost to edge out competition. Where no new points of profitability have been created around the individual customer, food delivery services continue burning cash and charging steep commissions – it would seem the customer is the only real winner in this situation.”

Source: Is food delivery viable after burning through VC money? – 4th Quadrant

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