HARD DRIVE

Why is Uber so scared of a much smaller competitor?

August 27, 2014
August 27, 2014

Uber, the online car service, is reportedly running a secret operation to recruit drivers from competitor Lyft that involves canceling thousands of ordered rides, and wasting drivers’ time. While some are outraged at the dirty-tricks aspect of the hiring campaign, there isn’t enough attention to being paid to why Uber is going to such lengths to add drivers to its network—and what it means for the company’s future.

After all, Uber has raised $1.5 billion dollars and operates in 92 North American cities, not to mention its numerous outposts around the world, while Lyft has raised $350 million and only works in 64 US cities. Uber is more well known, and it seems miles ahead of Lyft, with its dreams of expanding beyond car services into logistics and hopes of replacing everything from car rental to car ownership.

The company’s cut-throat tactics indicate that if there is an Achilles’ heel somewhere, it lies in the drivers the car service platforms rely on to provide service. These companies make noise about “ride sharing,” but it’s not the heart of their business, as Uber’s stated goal of ending private car ownership suggests. They require professional drivers to meet the demand for car service at a reasonable price.

Drivers, however, don’t need Uber: They just need a way to find passengers and collect their pay, and building the software necessary to do that, while not trivial, isn’t a huge technical challenge—besides Uber and Lyft, there’s SideCar, Curb (formerly Taxi Magic) and numerous others offering similar services, not to mention street hails for cab drives. Uber’s battle for Lyft’s drivers reflects that, for all its global reach, it is at the mercy of local labor markets—at least until there is widespread adoption of self-driving cars.

Until then—about two decades from now, if you believe Morgan Stanley—Uber’s primary advantage in luring customers is its network: Because it has the most drivers, you never have to wait long for a car. That’s one reason why surge pricing during inclement weather and heavy traffic is such a noticeable part of Uber’s strategy. Even though customers howl, it puts drivers on the road, and the car service with all the drivers wins. But Uber also needs to offer a comparable price point to traditional car services and cabs. The conflicts between these two priorities (attracting the most drivers and offering the best price) offer opportunities for competitors, even small ones, to exploit.

The promise at the heart of Uber—and any good exchange—is to find the optimal balance between the two. The problem is, with so many markets to choose from, drivers have the upper hand. That’s one reason why Uber, like the taxi companies it hopes to disrupt, is experimenting with financing car purchases for Uber drivers; it’s one way to lock them into the network in a way that wages can’t. Otherwise, a free market for labor will put pressure on the cut Uber takes from each ride. And that, in turn, might have people questioning the assumptions behind its $17 billion valuation.

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