What We Seem To Be Missing About Uber’s Hyped Network Effects

Context

Cab aggregation business has Network Effects. We all know that.

But, there is a very important and nuanced difference between the Network Effects in an Online Retail business and the Network Effect in the Cab Aggregation business.

And that nuanced difference has significant implications for the future of Cab Aggregation business.

Let us see.

In both businesses the network effects are between suppliers and consumers: The more the number of suppliers, the more attractive the value-proposition is for the numbers of consumers. The more the number of consumers, the more attractive the value-proposition is for the numbers of suppliers.

But, there is 1 nuanced difference between the Network Effect of the 2 businesses:

In case of online retail, the demand-supply need not be matched locally. This means that a buyer does not much mind seller being from any city (near or far). Similarly, the seller does not much mind the buyer being from any city (near or far).

But in cab aggregation business, the demand-supply need to be matched locally. This means that both the driver and the consumer need to be from the same city or vicinity.

This is the difference.

But, what are the implications of this nuanced difference?

Well, the above-mentioned difference implies that network effects for a cab aggregation business are practically applicable at a city-level only.

Meaning, a driver will not benefit from the passengers in any other city. And a passenger will not benefit from the drivers in any other city.

The right unit of analysis in this business, therefore, is a city or a region comprising of 2-3 contiguous cities (like National Capital Region in India).

The idea of a City/Region being the right unit of analysis is somewhat analogous to the concept of a Business Unit being the right unit of analysis for analyzing competition between two conglomerates such as Tata and Reliance.

A player will have to establish good network in each of the cities separately, if it wants to dominate in those cities.

This implies that it is likely that, in future, in some cities Uber will be dominant, while in others Ola will be.

We may see both players co-existing well, with clear strongholds in separate sets of cities/regions.

Another implication: If city becomes the right unit of analysis, what will stop small city-level competitors from emerging? Especially once these 2 players (Uber and Ola) stop burning cash?

A small player or a taxi fleet operator or a group of taxi fleet operators may be able to cough up enough money to play the same game at city-level that these 2 players have been playing at the national level. These small players will burn cash, incentivize drivers better, and lure them back from these 2 players.

A local fleet operator is also much more likely to have the right political pull in that particular city, as well as much more influence over drivers.

Key Insight

For a cab-aggregation business, the Network Effects are Local, not Global. And this has some interesting implications for the business!

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