Friday, June 13, 2014

Uber's Wonderlamp

Uber's uber large funding round has been the talk of the day in the tech community in the last week. And it should be, since it doesn't happen very often that a four year old company raises $1.2B at a $17B valuation. In fact, according to this Bloomberg story, Uber's new valuation sets a record for investments into privately-held tech startups.

When I first heard about Uber a few years ago, I didn't quite get it in the beginning. The traditional taxi system works quite well in Germany, and I thought that the advantage of using an app to order a cab as opposed to making a quick call wasn't such a big deal. Also, the expensive "private limo" service, which Uber started with in the beginning, didn't appeal to me.

After using mytaxi in Germany, I started to like the idea, but it was the launch of UberX and my recent two-months stay in San Francisco which turned me into a huge Uber fan. What is it that makes Uber so compelling? It's a number of smaller and bigger factors, which, combined with a slick mobile app, make Uber a highly habit-forming service:

  • Speed: In San Francisco, Uber has such a large number of drivers that no matter where you are in the city, it rarely takes more than 5-10 minutes until your car arrives. It happened to me several times that "my" Uber arrived in less than a minute because a driver was just around the corner, which gives you an Aladdin's wonderlamp feeling: You hit the order button on your phone, and almost instantly a car shows up to pick you up. 
  • Transparency: You get an ETA and you can watch your car on the map as it's getting closer to you, so you know pretty exactly when your car will arrive.
  • Price: The company's budget option, UberX, is cheaper than normal taxis.
  • Convenience: The fact that you only have to enter your credit card once makes the payment process extremely convenient and saves you a lot of time every time you arrive at your destination. Related to that, Uber has constructed its business model in such a way that the drivers aren't allowed to take tips, so you don't have to think about how much tip to give. That leads to another almost magical experience – you arrive at your destination and off you go. No waiting for your credit card to be processed or for the driver to look for change. You don't have to worry about getting a receipt neither, since a receipt is emailed to you after the ride. The driver stops and 5 seconds later you're out of the car. Brilliant.

Last but not least, virtually all of the drivers I drove with were very friendly and courteous. Maybe that was just professional friendliness in some cases, but my feeling was that almost all of them were very happy working for Uber and were genuinely trying to provide a great service (besides making sure that they maintain a great rating).

So Uber is great for riders, and based on what I know, it's good for the drivers, too. But is it also a great business? I think so. If a company delivers so much value to both sides of a marketplace, it can take a significant cut and acquire buyers and sellers profitably. I also think that although driver and rider loyalty might not be huge in principal (as this WSJ piece suggests), Uber will be able to create significant moat around its business through network effects and the building of its brand.

If Uber manages to sign up more and more drivers in an area (something which I don't doubt they'll be able to do), those magical moments which I described above – where your car arrives almost instantly – will occur more and more frequently. Competitors with less driver density won't be able to deliver the same level of uber user experience. In theory, an extremely well-funded competitor might be able to attack one of Uber's markets by offering both drivers and riders a much better deal. In practice that will be very, very difficult given Uber's lead and the quality of its execution. And the fact that Uber has now more than a billion dollars in its war chest won't make it easier.

Is Uber worth $17B? I don't know enough about the company to judge that, but what's clear is that Uber has a very realistic chance to revolutionize the worldwide taxi industry. What's more, Uber's long-term vision is much bigger. As Travis Kalanick puts it, they want to make "car ownership a thing of the  past", and my guess is they'll try to disrupt a few other industries (such as last-mile delivery) along the way. Huge congrats to Bill Gurley and his partners at Benchmark for betting on Uber early!


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