UBER VERSUS LYFT

As Uber and Lyft Brawl, the Real Danger Is Both End Up Dead

The first rumblings came toward the end of the work day Tuesday a week ago, right as reporters were putting the finishing touches on their tidy stories of ride-summoning service Lyft’s plan to add on-demand carpooling to its app. Not very surprisingly, arch-rival Uber had gotten wind of Lyft’s carefully planned announcement slated for the next morning and decided to steal the attention with its own blog post that evening revealing the “private beta” of its own version of carpooling, called Uberpool.

The preemptive move was pretty openly cutthroat for a San Francisco startup scene that on the surface likes to present a shiny, happy version of entrepreneurial capitalism where, as startup founders are wont to tactfully say when asked about the competition, there’s room in the market for more than one player.

As the last week has shown, with allegations of ride-canceling and driver poaching, Uber and Lyft don’t necessarily feel the same way. The surprisingly aggro contest between the two has erupted into public view, a seemingly archetypal business conflict promising to become one of the next great tech rivalries. But the portrayal of Uber versus Lyft as a next-gen Coke versus Pepsi misses the underlying vulnerability facing both companies.

In the eagerness to claim a front seat at the fights, it’s easy to lose sight of the fact that these are startups in the rawest stages of development, rivals both striving not just to succeed at business, but to succeed at a new, unproven kind of business. If this were Coke versus Pepsi, this would still be at a time when no one knew if soda was going to be a thing. As popular as both Uber and Lyft are, no one really knows if either can survive.

A Key Vulnerability

In this fight, Uber has the apparent advantages. A much bigger company operating in many more cities, Uber also has more than a billion dollars in funding, compared to a few hundred million for Lyft.

Such muscle would seem to give Uber all the strength it needs to press the fight with new features and services, better algorithms and operations. But the allegations hurled by Lyft this week against its bigger opponent were of dirty tricks. Lyft accused Uber of a concerted effort to sabotage its service by ordering rides and quickly cancelling them. Uber denied the allegations and claimed that Lyft had engaged in similar tactics.

If either side is guilty as charged, the aim of such campaigns isn’t hard to figure: tie up the competitions’ drivers to slow response times for legitimate customers and make fewer rides available. This is vicious because it goes to the heart of the key quality each service needs to survive: reliability. An on-demand ride pretty much needs to be on-demand. If you open the app to get a ride and you can’t, or it takes too long, you close the app, and you’re less likely to open it again. And for either company, that simple act of switching apps spells disaster for one or the other.

Such street brawling would seem likely to end worse for Lyft, if only because Uber has more resources allowing it to fight harder and recover faster. If Uber really wanted to push this front, it could probably do serious damage to Lyft’s networks, not only frustrating passengers but drivers who may simply decide to jump to the bigger service. But for anyone to imagine the confrontation as winner-take-all ignores the possibility that both sides could still lose.

Price War

Undermining the core credibility (allegedly) of one another might sound like a gratuitous tactic, a signal that these companies can’t simply stand on their own superior service. But the game in on-demand rides, at least right now, doesn’t look so simple.

To secure their places in the broader infrastructure of urban transportation — to become a go-to alternative to taxis, buses, and your own car — Lyft and Uber have engaged in a serious price war. At various times, both have foregone their own cut. In some cases, drivers have been guaranteed their pre-price cut fares, meaning customers pay less than the drivers themselves are paid. But even the simple act of not taking a commission means that the overhead costs incurred of providing drivers and passengers a way to connect amounts to losing money on every ride. The two-pronged intent is to get riders hooked and to convince drivers that Lyft and Uber are good ways to make a living.

Such an approach is viable for the moment because each is swimming in investor cash, money from investors who believe that, if these companies can get people hooked on a new way to get around — the end result will be nothing less than a transformation of transportation, and the money will eventually start flowing the other way. In effect, investors are funding a price war between the two companies. Both are cutting prices while seeking to pay drivers enough to keep them coming back.

THE REAL DRAMA ISN’T WHO WILL COME OUT THE WINNER. IT’S WHETHER THE EXPERIMENT WILL SUCCEED AT ALL.

But this isn’t money being spent on improving any product per se. It’s pure loss from a product standpoint in the name of seeding a marketplace that each is hoping can ultimately become self-sustaining. For now, however, the money these companies are awash in hides whether or not there’s a sustainable business involved. Drivers may not have a reason to be loyal to either side at all, simply jumping from one to another when the price is right. In that sense, as each company clambers to retain the drivers it already has, the only sure way to stymie drivers’ job-jumping is for one company to go completely out of business.

The brief history of online business is littered with companies that have burned through their capital without managing to drill down to that wellspring of sustainable revenue that reverses the flow of cash back in their direction. When prices for rides go back up, as it seems like they must, no one knows if the convenience of on-demand rides will have become so seductive that riders will willingly pay more. Similarly, once each starts taking its commission again, as Lyft did this week, the question is whether drivers’ enthusiasm will dampen. In effect, both companies are engaged in an immensely complex experiment in economics, logistics, and urban planning. The real drama isn’t who will come out the winner. It’s whether the experiment will succeed at all.