The Financial Express

Ridesharing innovation lacks sustainability

| Updated: March 10, 2018 21:11:12

Ridesharing innovation lacks sustainability

In the age of digital service, ride sharing has been a rapidly diffused innovation across the globe. The pioneer in promoting this innovation is Uber. The Uber was founded in 2009. Following a beta launch in May 2010, Uber's services and mobile app were officially launched in San Francisco in 2011. In just 7 years, Uber's ridesharing service expanded to 633 cities worldwide, making Uber a household name. In certain cities like Dhaka having shocking public transportation facility and deplorable private taxi service, Uber has been a great relief. But in a recent report published in The Guardian, sustainability of this innovation is being questioned. 

It's being reported that drivers in certain countries are earning less than minimum wages. For example, a study conducted by Massachusetts Institute of Technology (MIT) states that Uber drivers in the US make an average profit of $3.37 per hour before taxes, which suggests that a majority of ride-share workers earn below minimum wage and that many actually lose money. The report of MIT's Centre for Energy and Environmental Policy Research further states that once insurance, maintenance, repairs, fuel and other costs are factored in, 30 per cent of the drivers are losing money on the job and that 74 per cent earn less than the minimum wage in their states.  Stephen Zoepf, executive director of the Centre for Automotive Research at Stanford University, said, "This business model is not currently sustainable." It's being argued that basically venture capital (VC) funds and drivers are subsidising this service.

There is no denying the fact that VC fund has been the major source of finance to support the diffusion of this innovation. In 2016, Uber lost $3 billion, as reported by the media. It appears that VC fund managers are also losing hope on the future of this innovation. In the recent round of fund raising from VCs, the ride-hailing giant's valuation dropped from nearly $70 billion to $48 billion, according to The Wall Street Journal. But the life cycle of ride sharing innovation does not appear to be completely out of the line. Most of the innovations show up in the market at loss. For years, subsidy is provided to reach profit. Is there any underlying weakness to be concerned about the sustainability of this innovation? The interpretation of reality within applicable theories may shed light to understand the pattern and predict the likely future. 

Irrespective of size and scale, every innovation takes years to reach profit. At the beginning, subsidy is provided to cover up the gap between the cost of delivery and the actual price. Usually, every innovation shows up in the market in a bit primitive form. The willingness to pay for such primitive form of product is very low. Most importantly, only a small fraction of customers are willing to pay for such an innovation. Innovators continuously look for ways to offer higher quality and lower cost, so that the sale increases and the loss decreases, eventually reaching profitable revenue. To materialise this scenario, innovators leverage mostly six underlying potentials such as: 1. technology, 2.ideas, 3.scale, 4.scope, 5.externality, and 6.information & experience gap.

The initial great idea needs to be supplemented by a flow of new ideas so that existing features could be improved, and/or new features could be added. Such a stream of ideas is usually underpinned by the progression of underlying technology core.  By taking advantage of scale and scope, cost is reduced further with the expansion of market. Particularly in digital economy, scale and scope advantages are critical, as the marginal cost of expansion decreases very rapidly. The fifth dimension is the externality. With the growth of diffusion of innovation, externality effect grows increasing the perceived value of the innovation. Externality effects may show up in diverse forms starting from the availability of complementary products to the opening of additional value extraction channels. Last but not the least is the information & experience gap. Through diverse means such as advertisement, word of mouth and testing of samples, this gap is reduced to expand the demand and increase the perceived value of the innovation.

It appears that Uber like ridesharing service has a very weak technology. Basically, there has been no patent portfolio underlying the technology core. As a result, imitation has been rapidly picking up. Virtually, in every country, global ridesharing service has been facing local competition. For example, Lyft in the USA and Pathao in Bangladesh are competing with Uber. Due to the commodity technology core, innovators are forced to reduce the price to acquire more customers and also to remain competitive. As a result, subsidy as opposed to incremental innovation has been the competition strategy. Due to the weak technology core, the substitution effect of this innovation is also very low resulting in very high elasticity in demand. On the scale side, basically the potential has been fully utilised. Unlike smartphone or software, just by rolling out the service in a new city, scale advantage could not be increased further. By increasing the number of cars or rides, the cost could not be reduced further as well. There appears to be very low externality effect in favour of innovators as well. Through massive subsidy-driven accelerated roll out, both the information and experience gaps have been already leveraged.

It appears that ridesharing service has a very weak footing in the world of innovation. Unlike other disruptive innovations starting from digital camera to cellular handset, there has been very limited window for this innovation to benefit from technology, ideas, scale, scope, and externality to offer better products at lower cost for gaining profit. Moreover, due to very weak technology and regulatory barriers, competition force in the form of imitation is very intense.  As a result, charging lower price has been the core competition strategy leading to growing loss. With the given analytical insights and real life scenario, this highly hailed ridesharing service runs the risk of failing to grow as a profitable innovation causing disruption to private car ownership and taxi service. But the development of self-driving car technology has the potential to change the scenario, making technology as the driver to increase the quality and reduce the cost simultaneously. If self-driving cars take too long to show up, the ridesharing innovation may have to prepare to face bankruptcy.

M Rokonuzzaman Ph.D is academic, researcher and activist on technology, innovation and policy. [email protected]

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