The article is not convincing that these are natural monopolies. What happened to AOL and AIM? What happened to MySpace? There is also this recent article about Chinese innovation: https://qht.co/item?id=10806386
Natural monopoly in the Information Age may turn out to have been natural, but it feels unnatural. There are explanations, but I, personally, do not find them to be convincing.
Agree. “Natural monopoly” is a very lazy term. It’s mostly about looking around at a moment and declaring that it must be so.
Utilities don’t need to be monopolies, necessarily. It’s just that they were designed that way at a point in time. It’s a path of history, but not a natural law.
Wintel too. Which was a monopoly, until it wasn’t. It’s not that their position in the market changed, but the definition of the market itself (i.e., computing became mobile).
Google (a monopoly) is (or was) terrified by both Facebook and Amazon. Neither of which is a search engine, but each of which is a path toward determining what product to buy. The market itself changes.
The threat of possible disruption from an uncertain direction 10 years down the line is of a very different nature than the threat posed by direct, immediate competition. Why do you think it's "lazy" to find one type of competition less desirable and then notice and complain when certain markets seem to consistently gravitate towards it?
I don’t think what you’re describing is wrong. But a belief that something is a natural monopoly causes us to make policy choices based on a flawed assumption. Flawed choices about the inevitability of a monopoly tend to entrench same.
E.g. our municipal broadband monopolies trace back to a belief that wireline phone and TV can only be monopolies. And maybe it’s true! But we might have chosen differently, had we not assumed it a natural outcome.
We might have assumed that wireless is a natural monopoly. Gladly, we didn’t. (Though spectrum policy can be more competitive.)
This is not about inevitability and immortality of monopolies, but their likelihood and the detrimental effects they bring on while they exists. Both can be pretty high in some domains, so it is worthwhile to think about it, to me.
Good point about utilities. Plus, with decentralized (solar) power generation, utility companies are really starting to show some cracks too. As soon as distributed energy storage is economically viable, they're going to need to adapt even further.
What does energy generation have to do with the monopoly power of the folks who own the wires, buy from the bulk electricity market, and sell to consumers?
When customers can go 100% off-grid using rooftop solar and in-home storage, it bypasses and obviates the utility's monopoly on bulk generation and transport.
This actually causes a lot of issues, since the long-term fixed costs for the utility get spread across fewer paying customers. You're starting to see this problem in locales with heavy solar penetration (eg. Hawaii).
The weird thing with the "also-rans" of various competitions is that they seem to utterly collapse in a strange fashion.
MySpace got shittier and shittier even as Facebook expanded and there was visible mind-share searching for new things.
Yahoo has gotten similarly worse despite being in a space where people wanted a Google alternative.
The impression I get is that also-rans basically aim to cash-out rather than continuing. The big thing seems to be few investors actually want to think long term and there's money only in being a market leader or in being ad-driven, self-discrediting crap-site - and it costs lots of money running a big website despite it seems like it should be cheap.
Some of those may be the result of trying to differentiate themselves. People might want an alternative to Google (the company), but they don't really want an alternative to Google (the search engine.)
If you're trying to beat someone like Google by offering a different-but-worse search engine, it's not really going to work. Facebook offers the same kind of problem. You're also not going to win by being the same. You have to do different-but-obviously-better, which is actually very very hard.
A decentralized ride solicitation tool with a reputation system, maybe blockchain-based, could kill off Uber and Lyft almost overnight. Especially if existing taxi companies embraced it. I want to know if a driver is licensed, insured, etc. Uber doesn't provide that, and I don't like the rent-seeking aspect of their service.
If it's winner-takes-all, it's only a matter of time until another winner takes all. I don't think we've seen the end of this market yet...
EDIT: Wow, two down votes in 10 minutes. Care to say why? There are a lot of incumbent players losing market share to Uber - how do they compete? It seems like the perfect opportunity for more of a SaaS business model built around selling integration with an open network. There are already reputation-based blockchain implementations. Why would a decentralized model not work?
An interesting problem of working with "real" cabs is that you have to compete with street hails (that is, people doing the traditional stand-on-the-curb-and-wave-their-arms deal). This is a surprisingly big issue.
During slow times, it's not a big deal. But during slow times, you also aren't providing very many rides to the cabbies. And also pricing, which I'll come back to.
During peak times, it's very likely in a dense urban environment that a taxi driver will see a prospective customer and want to bail on your ride.
It's hard to make drivers not do this. You can easily get bogged down in a war of you trying to prevent them from bailing on people during peak hours (but remain hailable) and them trying to game you back.
Passengers will only use you if you can reliably get them a ride during peak hours, quickly. Also, taxis have mandated rate structures, and they will likely be more expensive than UberX or Lyft during non-peak hours, so the only time that you'll be able to really get a lot of passengers is during peak hours, and that's the time when all your drivers are at their most flakey.
Source: I spent two years as the lead engineer of Flywheel's server team. Flywheel being an Uber competitor that works with real cabs. Disclaimer: I've been away from Flywheel for more than a year, so my experiences are not current.
I'm curious how this is any different than Uber other than presentation? During peak hours there's peak pricing and not enough cars to go around so I have to wait.
Also, if it was legal for drivers to pick up hails I'm sure many drivers would just turn off Uber during peak and then turn it back on after, no "flakiness". Besides, their rep will go down if they bail on pickups so it seems like they'd just turn if off during peak to avoid that.
Obviously in the ideal world for passengers, they'd get prompt pickups at any time for low prices. But given that that's not realistic, our experience is that they prefer moderate surge pricing plus prompt reliable pickups to "your cab is on its way oh wait no it's not," or just "we can't get you a ride right now."
Turning off during peak is bad. Again, your service will only be used if you can remotely get people rides during peak times. They're peak times because that's when passengers want rides.
Interesting observations on the dynamic with "real cabbies."
I would envision a decentralized system including both "real cabs", whose parent company vouches for a driver's licensing, as well as independent drivers, whose insurance company does. But if any driver participated in a transparent network, their reputation would be important to them, and I would assume that would be a deterrent to taking fares you don't actually intend to pick up.
Well... I mean, it depends on how you do reputation.
Passengers do not by-and-large want to page through a list of cabbies and try to trade off the reputation of the person versus how far away they are or whatever.
Uber gives its reputation system some bite by just delisting drivers who fall below some rating system (and probably by threatening to do so considerably before they actually do so), and that's more-or-less what we did at Flywheel as well. But how does a decentralized system do that? For that matter, how does a decentralized system prevent the driver from just giving themselves a good rating by creating some dummy passenger accounts and upvoting themselves?
The reputation system also sort of implicitly depends on you having a working system that gets a substantial volume of rides. But the most vulnerable time for a TNC is right when you're starting out. You need to gain your users' trust, and that means getting them rides promptly the first few times they use you.
I'm not saying that it's impossible, and for the record I don't think that Uber has a "natural monopoly." I actually wouldn't invest in Uber precisely because I don't think they have any way to protect any profit margin they have. But mostly because I kind of expect that if Uber ever really demonstrates that they can actually make a decent margin, Amazon will come in and clone the service, not because you can do it with OSS.
The software agent that consumers interact with would have to be responsible for determining the accuracy of ratings.
I suspect that the most important aspect of such a system would be trusted participants: eg, insurance companies, city licensing agencies, etc. If you get one hundred great, but fake, reviews from shell accounts, it would be rather meaningless if your city didn't issue you a license on the blockchain, or you claimed false insurance which was somehow disputed on the same blockchain by the legitimate insurer.
What's in it for the insurance company to do this blockchain activity? What's in it for the city? They're not going to do this for nothing. And whatever entity that will help get this to work - wouldn't they be the next "uber"?
If the city is "issuing" licenses on a blockchain, how is this different than the medallion system already in use?
I'm not the one who downvoted, but I would imagine this is why.
* Overnight is a bit too quick. Uber's service has grown so quickly partly because they have an organization behind it to fight against regulations which is part of what made their rapid growth possible.
* Implementing a standardized "blockchain" protocol to guarantee all of those things is a non trivial task
* Go outside of SF Bay, whip out your phone with a group and tell them that you're about to order a "distributed reputation system cab" and they're just going to look at you like "wat" then open the Uber app and get an Uber that already works with their credit cards and lets them split the fare. They maybe have heard of Lyft, and most likely have Uber, not the blockchain app.
* Uber has hordes of information available that lets them tell drivers where to be and when, it also prices the rides based on demand. The block chain app has none of that.
* Traditional cab drivers are terrible, the cars smell, they don't show up on time, they drive you in circles to up the fare, sometimes they take off when they hear where you want to go. An app is not going to change this overnight, though eventually the reputation system might change it.
* Rent seeking is annoying but they are still much cheaper than traditional cabs, at least everywhere I have used them.
Maybe it's winner takes all, maybe not. It remains to be seen whether the legal system has just been slow to react to Uber and its ilk or if it will not react at all. I think the end of this in the short run is that Uber takes > 90% of the market, Lyft takes the majority of the rest, and the cab companies continue to operate at a smaller scale with less profits. This is after local and state governments wake up and impose more modern, but less restrictive taxi-style regulations on these companies to enforce some level of accountability for when the shit hits the fan or whatever.
The end of this market in the much longer term seems to be self driving cars and some form of shared ownership. I could see premium ride sharing clubs where you pay more to ride in an Audi or something with common ride sharing clubs where you ride in a van. It is this much longer term that I see Uber having more potential competition.
> Go outside of SF Bay, whip out your phone with a group and tell them that you're about to order a "distributed reputation system cab" and they're just going to look at you like "wat"
If your friends trust you, they'll humour you; when your order comes through, your friends will ask you what app you used. I remember when I first saw the "Google" name and logo, I also went 'wat'. But then I used it and I never looked back. Reputation matters but reputations are made by delivering the goods.
Good points. I meant "overnight" loosely, but I have a few other comments.
* Any software may be branded - no one needs to know the word "blockchain" when they use a well-designed app. If a driver may have more take-home pay from an open network, there is no reason they wouldn't list themselves there in the same way many drivers are on both Uber and Lyft.
* The blockchain would record all transactions in a manner that any software could get something similar to Uber's intelligence, with some allowances for the privacy of the rider.
* I've taken Uber rides that reek of cigarette smoke. If anything, many cab companies have standards that you can't guarantee with the closest Uber. But like you say, reputation systems could address those issues.
I agree, though, that the technical challenges are real and not trivial. In particular, the privacy concerns seem very real. I just find it difficult to believe that a multi-billion dollar industry will allow a middleman to take all their customers away when really the only thing that Uber sells is UX.
>* I've taken Uber rides that reek of cigarette smoke. If anything, many cab companies have standards that you can't guarantee with the closest Uber. But like you say, reputation systems could address those issues.
Did you downrate the driver and complain? If not, the reputation system isn't going to work.
>The end of this market in the much longer term seems to be self driving cars and some form of shared ownership. I could see premium ride sharing clubs where you pay more to ride in an Audi or something with common ride sharing clubs where you ride in a van. It is this much longer term that I see Uber having more potential competition.
I see it looking much like air travel today. Some will opt for fractional/full ownership like netjets and the like, but most commoners will simply pay-as-you go. I hope it evolves like travel by horse with the endpoint being only the very rich will be able to own their own car and there will be restrictions keeping them off important travel arteries because they would be relatively slow, stupid, and dangerous.
It won't happen quite that way. With driverless cars, the rich peoples' cars will also be driverless and would be just as fast as all the others, so there'd be no reason to have any restrictions. The difference will be that while you're riding in some self-driving van you don't own with some other strangers and paying a fare for the ride, the rich guy will be riding in his self-driving Aston Martin drinking scotch and listening to whatever music he wants in some very luxurious seats.
Because claiming "a decentralized ride solicitation tool with a reputation system, maybe blockchain-based, could kill off Uber and Lyft almost overnight" shows you don't know what you're talking about. You don't know what Uber does or the value it adds in keeping the critical mass of drivers and customers necessary to have a functional and high performing marketplace.
FWIW there is a http://taxime.to/ in Bulgaria, which has a reputation system and was embraced by existing taxi companies - you get a well-ranked driver that is licensed and insured, with overall quality much higher compared to random taxis in the country.
It might work just fine, but it clearly does not have the sex appeal associated with a big potential market and a profit seeking gatekeeper.
And nothing wrong with that, mind you.
Frankly, I see the incentive to develop such a thing directly correlated to how well existing, centralized players treat their market potentials.
Uber appears to have developed a lot of negatives quickly. I know little about Lyft.
The dynamic might just be the same sort of thing we see with closed vs open software, only with law playing the role patents play in software.
Like with closed software, ain't nothing wrong with that, but it had better be real easy and deliver real value, or people will attempt something to keep that equation honest.
Notice how it's not hard, nor expensive to get access to Office these days. Some of that is Microsoft working hard to deliver value and serve it's markets, but the prospect of free / OSS out there keeps it all pretty sane too. There is zero chance of an OSS tool reaching critical mass, and the work needed to prevent that is good for everyone.
Say Uber continues to irritate... enter FUber, the decentralized, direct compensation, combination ride share, taxi service to the rescue. It could be a general marketplace. People want a taxi, exuber driver, rideshare, etc... sign up, check the little boxes and go.
Doing this would devalue things, but also doing this might show that there really wasn't anywhere near the value to begin with.
And some people just don't like the thought of that kind of check and balance gaining traction.
Maybe downvotes because the claim that your combination of buzzwords "could kill off Uber and Lyft almost overnight" requires more backing than just asking people "why would [it] not work"?
Today I had the Blockchain nirvana when it perfectly fit a usecase I had. It was when I could understand why are people calling it the next internet. For the next rideshare to be decentralized, someone will have to build that service over blockchain protocol, it will sure need time and there would need to be users to adapt. Till then Uber and Lyft would be starting their driverless car service I guess. But I would love to see that day soon when there is a true competition to Uber from a blockchain ridesharing service.
>> Decentralized has no immediate direct benefit for riders.
Yes, but decentralized could have a very direct benefit for drivers... considering that sans an army of driverless cars, driver supply is what makes Uber's "sharing economy" work.
(Not to mention that the insurance/license guarantees are not currently being satisfied.)
I don’t see much network effect with Uber. I see a liquidity effect, to a degree, but the barriers of entry are low on both supply and demand side.
To the extent Uber has a network effect it’s O(n) at best. I don’t have a connection to other Uber users. I like that there are enough users to make it worth the drivers’ while – again, liquidity, not network.
On Facebook, network effect is probably O(n^2). The connections exist and themselves have value.
Network effects for ridesharing are overstated. Its a commodity that'll race to the bottom. It already occurs in markets where both Uber and Lyft are present.
I guess I don't see how liquidity effect and network effect are different here. If there aren't enough riders then there aren't enough drivers. If there aren't enough drivers then pickup times are too high and the service dies. It really comes down to how important pickup times are.
The ultimate test for a monopoly is if the monopolist could raise prices significantly and not lose significant business to competitors. I don't think Uber could pass that test.
If you can get rides with Uber instantly versus waiting 20-30mins with the competition, then Uber can raise prices a bit and not lose many customers. People are impatient and Uber has already trained a vast audience that you click a button and get a car in 10mins or less. Once you get used to it, you won't settle for an inferior network where you have to wait 2x or 3x for a couple bucks less.
I think the keyword is significantly. If Uber tripled or quadrupled their prices, I think they'd be fairly vulnerable to regional competitors. Even an increase of 1.5x seems like it'd be hard to pull off.
Speaking anecdotally, I know for sure that I'd use a cheaper alternative to save $5 even if it took an extra 10 min.
It depends on the market you're in. Every market has different economics due to population, density, city layout, socioeconomic landscape, etc.
In many cities Uber is losing money, but in many others they are doing very well. They probably adjust prices to optimize for growth in the cities where they're trying to gain traction. In established cities (as in SF), they tend to raise prices slowly.
I think this gets down to the network effect (aka Metcalfe's Law).
Like the author notes, Coke isn't going to drive Pepsi out of business. Because fundamentally if either gets an additional point in market share, that doesn't compound into larger and larger gains.
But in marketplaces (Uber, Lyft, Ebay) or pure network plays (Skype, Facebook), having one additional user creates N new potential connections. Out of those potential connections, a handful are made which encourages more and more.
A 1% gain can compound over time to huge advantages that the next group can't overcome.
Not sure SideCar is a good example. Investors are pouring billions of dollars into Uber and Lyft in an attempt to get the monopoly position. That doesn't sound much like a natural "winner take all".
Google got lucky because AltaVista was run by Digital Equipment Corporation, whose marketing was legendarily bad (slogan: "DEC has it now, but you can't have it.")
Also, Google's search results were profoundly better than Alta Vista, which had no real quality score as far as I could tell. I think it took me about 5 searches to switch permanently.
"DEC has it now" was from the late '80s; I can't find the original source, but tech media referenced it occasionally in the following years. [1][2] The "you can't have it" part was Bader's joke, of course.
Read the article and try to replace every description of computer technology with mechanization. You'll find that in many instances you'll see the same thing. I don't disagree with the piece, but I think its chief error is failing to identify what's coming from network effects vs. pure economies of scale.
I would argue that Uber's dominance is the intentional strategic choice to seek monopoly in their space. We saw the same things during the growth of mechanization.
Lyft has already lost the battle. The one to watch is Uber vs Didi Kuaidi, which owns China's market (80%+, vs <15% for Uber) and is tightly integrated into Wechat/Weixin, which is rapidly expanding outside China.
Didi Kuaidi is only competitive in china because of homefield advantage. They have used bribes and other tactics to hinder uber. Uber has had to fight with the government to even allow them to operate while didi kuaidi was granted a license to operate from day one because they are invested with big names who have government connections. Outside of china didi kuaidi can not compete with uber. It is the same reason why amazon does so bad in china. China is a strange market where corruption and physical social networks play a large role in business the foreign companies just cant compete with
Even if we stipulate to all of these claims, so what? Do you expect China to change any of that soon? Maybe a better question is whether other populous nations like India, Nigeria, Brazil, etc. will decide to follow China's example.
It doesn't matter if China changes it or not. The point is that some Chinese company has a huge advantage in China. That doesn't extend to Brazil or India; it isn't going to do any better there than Uber, and probably much worse. Now, some other Brazilian or Indian company might have a huge advantage (again, thanks to corruption) in their respective country, but the Chinese company isn't likely to do well at all there because their usual tactics won't work since they don't have any insider connections in those countries the way they do in China.
It is wrong to assume corruption. It might just be that China prefers seeing local companies run the Chinese market, and engages in a form of protectionism. That is perfectly justified and not corrupt.
I would argue that with perfect unregulated competition, having more than one firm with a stable market share is a sign of INefficiency. Small differences will get magnified, and whoever has the small edge will completely dominate, assuming rational behavior.
Not in the magic world of VC funding! There will always be at least one dominant firm and a few others setting tens of millions of dollars on fire by offering five dollar Lyft Lines in Manhattan hoping to get traction.
It's a bit like restaurants - you have to compete both with established, profitable competitors and upstarts willing to take a temporary operating loss.
It may be unsustainable, but I've gotten hundreds of dollars of discounted stuff from companies operating at a loss looking for traction... thanks, pension fund VC investors!
You're assuming that different people have identical preferences. They don't. Some are more price-sensitive, while others are more interested in quality, which can itself be broken down into any number of specific factors about competing services. This is totally rational behavior, in the economic sense of the word.
Don't get it. There are still different businesses doing more or less the same thing. Just the media tells the story about the big players. Small profitable companies are still surviving in the current market.
As an example: Amazon is everything in retail. Well, there is a thriving company in Belgium called coolblue.be There is also a Dutch company called bol.com. For every of those great news stories there are profitable small businesses making money. You just don't see them. To be honest that's ok.
Most of those companies didn't need to shut down if they used money sensibly and were not only dedicated to growth. But off course that's what VC money makes you do.
Uber isn't profitable. At some point, they have to raise prices and make a profit. At that point, the competition will swarm in to undercut them. The barrier for a consumer to use a different app is almost nothing.
I didn't expect SideCar to shut down just hours before the most difficult night of the year to get a ride. I hope their users install an alternative and get it working before they go out for NYE.
No matter what business we do, "can do" sprite is the most important element. Look at Uber, Sidecar and Gogovan. I think everyone can generate similar ideas but no one do it. The one who did it succeed.
Start up business is a gamble. Being a pioneer of the industry takes the highest risk but also get higher opportunity to gain market share.
Natural monopoly in the Information Age may turn out to have been natural, but it feels unnatural. There are explanations, but I, personally, do not find them to be convincing.