Uber’s biggest threat: an Alibaba-Softbank alliance

Uber, a service that gets you a ride via a smartphone app, could follow the path set by Apple, Google, and Facebook: become a once-in-a-generation company transforming how we live. But it has serious competition. On the other side of the globe, a number of firms are keeping it at bay. Noteworthy ones include China’s Didi Kuaidi, India’s Ola, and Southeast Asia’s GrabTaxi.

These companies are fighting in bruising local battles with Uber, and winning much of the time. But the likely endgame is this: Uber will find itself fending off a mega-entity brokered by Alibaba and Softbank, probably consisting of some combination of Didi Kuaidi, GrabTaxi, Ola, and Lyft. It’ll end up becoming a two-horse race, much like Apple and Microsoft in the past for personal computers or Apple and Google today for smartphones.

On-demand transportation is the real deal

Before we wade deeper into this scenario, let’s recap why so many investors are enamored with on-demand transportation apps in the first place. Chiefly, they’re improving a passenger’s experience from start to finish:

• Fast on-demand booking. The app uses GPS to pinpoint your location. From there it’s a few taps to booking a ride. However, some taxi drivers, especially those in China, hardly use GPS, which makes the next feature useful.
• Complete information on drivers, displayed in-app. Drivers below a certain rating are reportedly kicked out of the network. Yes, criminal drivers have fallen through the cracks, but these happen in any taxi network, and can be rooted out over time. The app shows the driver’s precise location and contact details. They know where you are and how to reach you as well. This transparency benefits riders.
• Better matching of supply and demand. Uber’s surge pricing automatically raises fares and incentivizes drivers to ply the roads. UberX or GrabCar brings more drivers onto the roads by getting non-cabbies to pick up passengers, though this is less useful in cities where cabs are already plentiful.
• Automatic payments. Gone are the days of the post-ride sprint to an ATM when you’re late for a meeting. These apps make a ride seamless by automatically deducting the fare from a customer’s credit card and sending a receipt via email. For Uber, disputes are resolved quickly via their prompt customer service, which is miles ahead of anything I’ve ever seen. Even in places where cash payments are preferred, the fare is calculated for both parties to see, minimizing cases of cheating.
• More income for drivers. A more efficient market means drivers can better utilize their vehicles. They make more money as a result, although it’s hard to prove exactly how many of them benefit.

The beauty of on-demand ride apps is that they fix near-universal problems. Customers are more at risk of unscrupulous taxi drivers in Indonesia than the United States. Taxi drivers in India struggle to make a living due to the thousands of cab companies in one city alone.

Further, they could replace car ownership and car rentals, and even take a slice of the food delivery and logistics industries (trials are underway for the latter two by various companies). That’s how Uber’s massive valuation is justified. With the huge market opportunity, expect on-demand ride apps to be around for the long haul.

An expensive arms race

The nature of the problem, however, demands an expensive solution. This means the ones with the deepest pockets and entrenched positions will prevail. With Uber ahead, consolidation by the other guys offers the best way to compete.

Consider how Uber already has a massive advantage in network effects. It has the most drivers in the most cities. While people might compare it to Facebook, it’s different in one key way: the social network builds virtual networks; Uber builds physical networks. This makes Uber highly defensible. Expanding its network is expensive – more so if it’s across cities and countries. Ditto for competitors who got an early start before Uber in their home markets. Which means the race is already closed to a new entrant unless it’s bathing in money – billions of dollars worth.

As a result, we’re seeing regional fiefdoms emerge. Uber dominates in the United States, Didi Kuaidi rules China, GrabTaxi holds Southeast Asia, and Ola leads in India.

Despite Uber’s well-moneyed muscle and presence in over 300 cities, it’ll face a hard time prying market leaders away from the top.

Ola supposedly has 100,000 vehicles in 100 cities in India, which is more than Uber. GrabTaxi innovated by introducing bike rides into its repertoire and helping taxi companies set up call centers. It has the largest vehicle network in Singapore, says Cheryl Goh, vice president of marketing at GrabTaxi.

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