On Lyft and the Future of Ridesharing
On Friday, Lyft became the first ridesharing company to go public. By beating Uber to go public, Lyft will, to some extent, control the narrative around the US ridesharing market. That narrative will be centered around big ideas like ending burdensome car ownership, rebuilding cities around people, and offering cheap, ubiquitous, multimodal transportation as a service.
As we consider the dynamics of the ridesharing industry, we are directed by two questions: 1. Should this exist? 2. Is this a good business?
There is little doubt that ridesharing should exist. Ridesharing has transformed our lives, making it easier and cheaper to get where we need to go, and it’s pioneering an undeniable trend toward transportation as a service.
Is it a good business? Not right now, but it could be a great business.
Lyft’s S-1 shows that, today, ridesharing is characterized by intense competition, potentially questionable brand loyalty, and massive growth spending. The large valuations assigned to both Lyft and Uber are based on the hope that the future of ridesharing will look different than it does today.
What follows is a framework for how we look at the landscape of the US ridesharing market as Lyft and Uber compete for market share, expand into other modalities, take on other jobs, and embrace autonomy.
Transportation Is a Commodity
Ridesharing today is a commodity service. It doesn’t matter whether the sticker on the car says Lyft or Uber (or, in many cases, both), the in-car experience is the same and switching costs are low. The same is true for most transportation services like airlines, scooters, bikes, public buses, etc.
Transportation services tend to have two classes of users that reflect their commoditized nature: loyal users and price-focused users. Loyal users return to a specific provider for incentives (frequent flyer programs) or, less commonly, because of some unincentivized brand allegiance. Price-focused users use whichever transportation offering is cheapest (Kayak, Priceline).
There is certainly a two-sided network effect with riders and drivers that differentiates ridesharing from other forms of transportation. However, the network effect for ridesharing seems relatively weak compared to other marketplace models like eBay, Etsy, etc. The benefit of more supply leading to lower wait times leading to more riders leading to more supply has its limits.
Some ridesharing users price shop between the two apps given its ease, but we believe that comparison shopping in ridesharing is less common than it is for airline or hotel where aggregators make it easy to shop across multiple offerings. Whether as a result of weak network effects, the relative immaturity of the industry, or something else, ridesharing loyalty seems to be dictated mostly by unincentivized brand allegiance. While both Lyft and Uber have loyalty programs, they’re nascent and don’t appear to be significant drivers of repeat usage.
On the driver side, we see the price dynamic much more clearly. Almost 80% of drivers drive for both services and are likely to switch back and forth depending where they can make the most money given rates or relative demand. There is little that Lyft or Uber can do to motivate drivers to stay if their pay is better and more frequent on the other service. Switching is just a few taps away.
If pure market logic won out, the riders would habitually use the app with the most drivers (lower wait times) and the other would slowly be starved. But as we saw during Uber’s ugly 2017, this isn’t the case. Both riders and drivers are sensitive to brand, not just economics. It is clear the fight will play out on multiple fronts.
Lyft’s S-1 makes it clear that brand will be a primary point of differentiation with Uber. The top three items under “Why Lyft Wins” all position Lyft’s brand as the anti-Uber, which makes strategic sense given that the services are so similar. Brand is a key element in converting price-focused users (who have both apps and search for the best price) to loyal users. Loyalty programs will also be a part of creating power users and act as an extension of each company’s brand.
The airline business illustrates how fragile both brand and experience are with respect to transportation services. Airlines offer a commodity service, and most consumers are hyper price-sensitive, so margins are slim (industry average of 4.7%). Airlines operate some of the most robust loyalty programs in the world to turn price matchers into loyal users. However, this brand loyalty is fragile; an average of only 11% of airline revenue comes from loyalty programs. Some airlines, like JetBlue, attempt to differentiate on in-flight experience. But discount airline Ryanair (with a presumably worse in-flight experience) had the highest margins in the industry last year.
The in-car experience may matter even less than it does in-flight. Not only is each trip shorter, but the experience (riding in the back of someone’s car) is much less controlled by the brand. For these reasons, we doubt that rider loyalty programs can create a long-term advantage.
Per Lyft’s S-1, getting from A to B is worth $1.2T in the US alone, and transportation is the second largest household expenditure – less than housing, but twice as much as healthcare.
To earn more of each person’s wallet share, Lyft needs to expand beyond just on-demand cars, into anything that moves people.
Both Lyft and Uber want you to open their app when you need to go anywhere you can’t walk. Lyft says they have a “multimodal platform that offers riders seamless, personalized and on-demand access to a variety of transportation options.” Uber says they want to be the “Amazon of transportation.” These efforts are all aimed at associating the activity of going somewhere with opening their app.
We believe the strongest brands are associated with a behavior. Google is probably the best example – if you need to know something “Google it.” Today, most drivers open their preferred maps app to get somewhere.
To make their apps habitual, Lyft and Uber are adding bikes, scooters, and public transit to their platforms. Last June, Lyft acquired Motivate, which operates the largest shared bike network in the US. Shortly afterward, they added scooters to the platform in select cities. Uber bought the dockless, electric bike sharing company Jump in April of last year and has since added scooters as well.
The unit economics of bike and scooter networks are not likely to bring these companies to profitability given that they are commodity offerings that face regulation by most large cities. The most likely path for bike and scooter networks to expand margins will be to win exclusive rights to operate in a given area. Lyft doesn’t even monetize their public transit offering. The goal of bundling other transportation methods must be to gain more habitual power users who will spend a higher percentage of their total transportation with Lyft.
Taking on Other Jobs
As ridesharing extends beyond just on-demand cars, we also expect the jobs those cars (or bikes) carry out to expand as well. Once a network has millions of customers looking to go somewhere, millions of vehicles needing utilization, data about demand trends in cities, and expertise at routing vehicles at scale, these transportation ecosystems can carry out jobs beyond transportation. For example, instead of just delivering people to places, the network can be utilized to deliver goods to people.
The first iteration of this is last mile delivery, namely for food, starting with Uber Eats. In the short-term, this creates something of a driver lock-in. If drivers want maximum utilization, the main thing that causes them to switch to the other service is the lack of riders looking to be picked up. If you can augment rider demand with delivery demand, drivers are less likely to jump to another app. In the long-run, it creates new business lines and extends a company’s brand reach. While Lyft remains “laser-focused” on transportation, we believe there is value in taking on new jobs and we expect Lyft to experiment with other jobs to try to enhance driver lock-in.
Both Lyft and Uber view autonomy as a critical component of their future. Lyft lists the inability to develop autonomous vehicles in their top ten risk factors, and Uber has long classified autonomy as “existential.” The current consensus is that once autonomy is “solved,” Lyft and Uber will gradually replace their human drivers with never-tiring robots. AVs would improve each company’s take rate on bookings, resulting in greater profitability. We believe that, in the long-term, autonomy will benefit the ridesharing business, and in the super-long-term, it will completely change the basis of competition.
First, we continue to believe that autonomy will take longer than we expect but will impact the world in ways we aren’t imagining. Rather than emerging from a decade(s) long R&D project with a level 5 autonomous vehicle prepared for full autonomy, we believe the rollout will be more incremental, starting with fixed routes, controlled areas like campuses, or small, well-monitored, geo-fenced regions.
While autonomy could make Lyft and Uber’s businesses more profitable, it also decreases the value of their two-sided network effects by making drivers less important over time. It will also increase competition given the killer use case for many of the biggest full autonomy projects is to operate a fleet of autonomous taxis. Given the competition in the autonomy field, the quality of autonomous navigation may create a short-term non-commodity offering for the early winner, although we suspect multiple platforms will achieve full autonomy in time and negate that factor.
As we mentioned earlier, people create habitual relationships with products. When users need to go somewhere, they are already opening Lyft, Uber, or Google Maps. As each of those companies begins to offer autonomous transport (Google via Waymo), they have a built-in advantage of demand from millions of habitually committed customers looking to go somewhere. Even if early autonomous offerings can only operate in small areas at first, Lyft and Uber are all but guaranteed to have customers that want to travel within that area. Just as public transportation can’t take you everywhere but serves nicely as an additional offering for Lyft and Uber, the initial autonomous vehicle service would act as another channel in the app.
Given the channel strategy, Lyft and Uber may have a near term advantage over autonomous only offerings. If an autonomous fleet can go some places but not everywhere, consumers are unlikely to download a new app and use it when only it’s available instead of Lyft or Uber who can leverage their human driver networks. Since transportation is a commodity, unless a fully autonomous service has similar wait times, coverage, and prices to conventional ridesharing, it is unlikely to be successful on its own.
Super Long Term
Even though we expect the rollout of autonomous transport to be incremental, at some point autonomous vehicles will be widely available and able to go anywhere. In this future, “driver” supply has to be considered differently. Full autonomy changes the network effect of ridesharing completely. Supply may come from autonomous vehicle owners lending their vehicles to the network to make money or from transport services buying and operating their own fleet of vehicles.
In the super long term, autonomous taxis may look more like the airline business, where loyalty is the primary basis of competition. In-vehicle experience, which Lyft and Uber would have greater control of if operating their own fleets, might be a point of differentiation, but would be easily copied. Competing on brand will be a challenge for Lyft as Tesla, Google, Apple, Amazon, and several auto OEMs have influential consumer brands that could succeed in offering autonomous transportation services. While autonomous vehicles may offer a road to profitability for ridesharing companies, the longer-term impact could shift the competitive landscape and open the door for other players.
We began with two questions: 1. Should this exist? And 2. Is this a good business? First, ridesharing should exist because it has transformed transportation, making it easier and more affordable to get from one place to another. It is pioneering an undeniable trend toward transportation as a service. But ridesharing is a tough business today, characterized by intense competition, potentially questionable brand loyalty, and massive growth spending. The autonomous future provides huge option value to Lyft long term but also poses one of its most significant risks.
We are cautious on shares of LYFT following the IPO – and for the next 12 months; however, we are optimistic long term as the company’s progress in autonomy becomes clearer.
Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making any investment decisions and provided solely for informational purposes. We hold no obligation to update any of our projections and the content on this site should not be relied upon. We express no warranties about any estimates or opinions we make.