Uber – Porter’s Five Forces

(1) Bargaining Power of Buyers (=riders)

Bargaining power of customers: reasonably high at this stage as there is strong ride-
hailing competition, alternate means of transports and taxis. Beyond a certain market
share, Uber may have a better pricing position (and in any case, they may decide to
grow through complementary offerings)

Switching barriers for the demand side: are low. Similar to the drivers, customers
are multi-homing. But this may change if the industry ends up becoming a winner-takes-
(almost)-all. Due to the indirect network effects, waiting times would increase for
competing platforms

Value proposition for customers: are compelling. Lower transaction and search costs,
shorter waiting times and lower costs. This is in comparison to other means of transport.
But in comparison to other ride-hailing companies there is very little differentiation, thus
price will play a big role

Buyer information availability: high. Those people who know about Uber also know
Lyft and other ride-hailing companies

Power of distribution channels: low. In this case, we are talking about the app and all
competing apps can be equally easily installed. All competing ride-hailing can be used
equally easily. If Uber becomes the dominant player due to the network effects then they
become the predominant distribution channel for all (or the majority) of hailed rides
amplifying their advantage

(2) Bargaining Power of Suppliers (=drivers)

Bargaining power of supply side: is weak at this stage as there is no unionisation,

Switching costs of the supply side: are low. Some drivers are multi-homing by driving
for Uber and Lyft (or other ride-hailing companies) at different times. But given hourly
wages are similar (and there is no reported shortage of drivers), there is no significant
bargaining power gain for drivers at this stage

Value proposition for supply side: compelling. Due to the indirect network effects and
the scale that Uber has reached in some cities, they can offer low idle times which lead to
comparable per hour wages as taxi drivers but in less absolute time on the street. This
may also increase switching costs for drivers if Uber takes a larger market share

Barriers to entry for the supply side: It is easy to join Uber and other ride-hailing
companies as a driver. But the lower switching costs make it easier for new drivers to
join (no multi-year apprenticeship, certificates, etc) effectively reducing the bargaining
power of the supply side and – interestingly – increasing the value proposition for new
joiners at the same time

The bargaining power of drivers is low but likely rising: after a string of issues co-
founder and ex-CEO Kalanick stepped down over a video that showed him arguing and
yelling at one of the drivers. One of the first things the new CEO did was give in to a
long-standing request of the drivers to introduce tipping which Kalanick had refused for
so long. Also, in some European legislation, riders for food delivery companies now have
been ruled to be employees of the platform. This could set a precedence for ride-hailing
companies further increasing their bargaining power.

(3) Threat of new entrants

Barriers to entry:

On the surface, they are low. Anyone can program an app. But will you be able to scale it
up?

Any new entrant needs to get to critical mass. This is often costly in terms of acquiring
the supply side and the demand side

Uber has spent billions on demand generation. Customer acquisition costs are very high
as seen in the battle with Didi. Will investors be willing to fork out capital for a new
entrant to fight an already established brand like Uber?

Will a new entrant be able to get to critical mass on the driver side to provide a
comparable value proposition (e.g. low waiting times)?

Could new entrants come from unexpected areas? Maybe Apple, Microsoft, Ford, Toyota,
Volkswagen or other companies that already have a huge customer bases and a brand
who can mobilise them at low marginal costs? Possible, but Uber is moving into many
adjacent/complementary areas, such as freight, meal delivery that may lead to better
asset utilisation which other players may not want (or be able) to enter.

Economies of scale:

Can Uber scale up in a way that they have lower unit costs that makes it very hard for
new entrants? The answer likely is yes

Can this help Uber increase their lead? Same drivers could work for UberEATS or other
conceivable ideas (“the Uber of X”)

If they are able to negotiate better terms for operational, maintenance and servicing for
their drivers, this is something that can bring unit cost further down

Some of the economies of scale will pertain even with driverless cars (and most
importantly the indirect network effects)

Brand equity: while tarnished temporarily, it is still a major asset and in the long-term

Expected retaliatory action: no doubt, Uber will fight hard against new entrants as
they have fought hard in the cities they have entered. This will discourage investors to
support new entrants in markets where Uber is strong (mainly the US)

The most likely scenario here is not that another global Uber emerges but rather several
local competitors. A lot of locally-focused entrants (possibly with slightly differing value
propositions) may dilute Uber’s strength (i.e. financial resources) enough to capture
enough market share in those regions

(4) Threat of substitutes

Car sharing companies such as Zipcar

Self-driving cars: many people debate what self-driving cars will mean for the entire
transport industry. I am not going to join this speculation. As you certainly know, Uber is
investing a lot in self-driving technology themselves
Better public transport: seems very unlikely. I have not heard of any large cities with
any success stories on this front (sadly)

More people working from home: it is hard to assess if mobility requirements will
reduce due to technological penetration but worth keeping an eye on

Bike sharing can become a better option in cities that are growing fast and traffic
congestion becomes an issue

The threat of substitutes is low due to the very different value proposition of the
substitutes – check the map above.

(5) Rivalry among competitors

Rivalry is stiff. Though there is no as large player if you look globally, there are many
strong players in various geographies:

Ola in India,

Didi has managed to fend Uber off in China,

Lyft is now concentrating its resources to the US

Other competitors are emerging in various locations

A lot of locally-focused entrants may dilute Uber’s strength (i.e. financial resources)
enough to capture enough market share in those regions

It is likely that the competition will have to be taken very serious by Uber and it may
keep a cap on prices and possibly even on Uber’s pace of growth

Uber itself is expanding into several adjacent areas, such as freight, food delivery, self-
driving cars and some other. There are complementary, i.e. synergetic, effects that can
increase Uber’s competitive moat