Could rideshare services such as Uber and Lyft be using a business model based on insurgency principles? I recently read an article on a book by Mike Smith (How To Counter The Crime Insurgency In South Africa) relating to the political struggles in Southern Africa that outlines the tactics and strategy behind the Marxist insurgencies in the region. While colonialists felt that they won most of the battles, the fact that every country where such battles were fought is now being run by the insurgent’s shows who actually won the war.
As an engineer and business strategist, I tend to look at things in terms of systems and try to identify points of leverage and weakness. Naturally my thoughts turned to what business lessons might be drawn from the seeming successes of rideshare business model? Sun Tzu is widely quoted in business strategy, so why not this?
The article unexpectedly started to resonate with my dilemma with the seemingly unwarranted runaway success of rideshare companies such as Uber and Lyft from a business model and strategy perspective. As he laid out the characteristics of an insurgency, it struck me that much of what Smith was outlining in political sense had direct parallels with the strategies, tactics and resulting successes that ridesharing companies were using in an economic sense.
Some analysts have suggested that rideshare is an instance of Turking (crowd-sourcing of basic units of work through technology, to humans rather than computers, for miniscule payments) but what economy can actually run on that? The popular misconception is that it is a “Disruptive innovation” but we will circle back to this point later. The rideshare business model simply does not fit well into any of the business model archetypes, but turns out it is a shoe-in for an insurgency at the very least from a strategy and tactics point of view. If this is valid business model archetype, how does it work, how could a business use it as a strategy to gain sustainable competitive advantage and how might one combat this as a competitor?
While outlining my thoughts to a legislator on why rideshare’s business model was so fatally flawed, I was asked an excellent question: Why then will they not automatically fail? I happen to believe that based on marginal economics and poor labor practices, it simply has to but that the employment flywheel and the market wheel of fortune is still turning. But what does not add up is why supposedly smart investors and politicians are falling over themselves to support them?
What is the real rideshare business model and where is the problem?
“Ridesharing” companies such as Lyft, Uber and Sidecar are being sensationalized as a highly successful disruptive innovation in the transportation industry: The new way of working that will inescapably replace taxi services with a cheaper and better service. Customers love it because the basic service is dirt cheap (about half the price of a cab); competitors are dead against it for the same reason.
True ridesharing is a variation on hitchhiking or carpooling. Since the driver already carrying the fixed costs of owning and insuring the vehicle and is intending to make the trip anyway; they are committed to carrying the full costs of the trip. Any contribution or even simply providing company on a long drive is a win-win deal. The problem is that new so-called “Rideshare” trips are made solely to serve the passengers requirements, so the driver has no interest in the ride except to make money off of it and therefore no direct or use related costs may reasonably be regarded as sunk and in fact since this is a purely commercial transaction, nor in reality should any indirect or ownership costs.
Rideshare claims to be the new way of working in a “Sharing Economy” or a “Disruptive Innovation” that the incumbent market leaders simply cannot compete with. The concept is definitely disruptive as would any company who charges well below reasonable rates. And yes the app has aspects that are innovative, but to simply string the two words together and believe that this somehow equates it to the concept as defined by Clayton Christensen, is a complete non-sequitur. As the concept is scaled into significant vehicle usage, which will quickly equal, if not overshadow the drivers personal usage, any indirect cost absorption by the driver effectively becomes a subsidy not cost sharing. Therefore this is in no way an instance of legitimate sharing economy.
When one does the math and discards semantic arguments and misdirection in favor of the facts, it becomes clear that the rideshare concept lacks credibility since it is built upon the foundation of marginal costing of cut price services and the unreasonable transfer of risk and costs to their subcontractors. The bottom line is that while rideshare has some slick aspects that might serve to differentiate it from equivalent offerings, there is simply nothing in their model gives them the kind of sustainable or scalable cost leverage that justifies the disruptive innovation title or sustainably supports the price reductions they have implemented. Yet contrary to my thoughts and analysis they have been wildly successful which left me stumped – till now.
As I was reading the article, it struck me that there are some remarkable parallels between the tactics and strategies of the terrorist insurgents and the rideshare business model.
- The struggle never stops. Insurgents are generally paranoid and as in Southern Africa where the “war” has seemingly been won, the struggle continues since total destruction of opponents has not yet felt to have been been achieved. Like other insurgencies, the stated intent of rideshare companies seems to be the total destruction of the cab industry.
- No insurgency is the same. Rideshare insurgencies all over the globe have morphed to deal with local conditions.
- Agreements mean nothing. Rideshare companies have routinely negotiated in bad faith and often launch despite agreeing not to. Their signature move of the rideshare business model seems to be to consistently ignore social contracts, laws and regulations.
- Elected officials are often co-opted as insurgents. Officials and regulators across the world too often seem to conveniently look the other way. Many it seems are totally on board with the initiative or have at least drunk the rideshare Kool Aid and do not see it as a particular threat or priority in the grander scheme of things. More worrying are people like the politicians in Arizona who seem to think this is a great idea and are actively advancing their cause with seemingly little or no regard to the bigger picture? Rideshare does not create quality jobs as they claim since one needs to have and a car (and a job that supports you) to be able to drive for rideshare schemes. We should all be extremely concerned that the very people that should be protecting public interests are protecting companies that seek to entrench turking in our states resulting in highly fragmented employment and lower wage rates.
- Play the victim to get public sympathy. Rideshare portrays themselves as locked in some supposed epic David vs. Goliath battle when in reality they are vastly bigger and infinitely stronger than the majority (if not all) of their competitors. How else do you justify your punitive actions against people who are so much weaker than you and still win the PR battle for the hearts and minds of the public?
- Wherever possible, elevate your opponent’s actions as grossly unfair to you in order to create a focal point away from you and continually cement your victim status. Much like political insurgents, a standard tactic of Uber is to respond to regulation with a campaign of supposed public outrage designed to achieve their goals by bullying officials into conceding.
- Negotiate concessions as a distraction and in bad faith – see point #1. Uber has done this repeatedly. Usually un-challenged except for places such as Las Vegas and Portland. They simply do as they please following their mantra that they don’t comply with laws but rather make their own rules to suit themselves as pointed out by Nevada Deputy Attorney General Gina Session: “I’ve never seen a multibillion-dollar company come into Nevada and so aggressively and deliberately disregard the law!” Business Insider
- No competitors who follow the rules have any chance of winning many battles let alone the war since by design the playing field will never be level. Also an important part of the rideshare business model so it seems that it is key to have co-opted officials on board or at least on-sides to make sure it stays that way.
- Mount guerrilla raids on soft targets and use them to amplify the central message. Ridesharing’s central message is that it is cheaper than a cab even though in reality it is only so because of a systematic abuse of their drivers. Unsustainable bargain basement penetration pricing is used wherever resistance is met in the market by significantly underpaying the subcontractors. The fact is that when comparing properly insured and licensed services such as UberXL one finds that they are generally more expensive than a cab. However the pricing arguments are conveniently misdirected towards the UberX unlicensed and improperly insured service and driver income towards the high end limo service. http://www.iid.state.ia.us/node/8898736
- Goal is to enrich themselves unfettered. As has been repeatedly demonstrated in the real world, an insurgent’s cause quickly devolves into a platform for them to continually enrich themselves unchallenged. If rideshare succeeds in their stated goal, they could then hike prices at will.
- Questionable methods and ethics. Most insurgents have questionable ethics and morals and believe that the ends justify the means. To load the rideshare apps requires unrestricted access to large portions of the users phone, which contains an absolute wealth of data. It is little wonder therefore that Google was so interested to partner with Uber and one shudders to think why they need all that information or what alternative “uses” there might be for it?
So when all the factors are weighed, it appears that the thought that rideshare companies are conducting an economic insurgency seem quite feasible. As a Business Model it has distinct and unique characteristics, strategies and tactics so I would say that my instinct is good to call it out as such.
Using the Business Model Wheel, Rideshare business model can be summarized as follows:
Offering (Cab Rides)
- Market Attractiveness – 1.4bn taxi trips in the US per year. A small profit on a significant market share could be very lucrative.
- Unique value proposition – App and pricing.
- Profit Model – Franchise model but delegate costs and risk to subcontractors.
- Sales Performance Model – Insurgency and penetration pricing till opposition can be demolished.
- Ongoing competitive advantage – Destroy opposition.
- Innovation factor – app, actual cost reduction (driverless cars), concentric diversification.
- Pitfall Avoidance – Play the insurgency game hard and delegate cost and risk to subcontractors.
- Graceful Exit – Go public and take profit from the IPO, then it will be someone else’s problem.
So the burning question now becomes:
How do competitors fight back against the rideshare business model?