​Lyft, Uber, and the Race for Critical Mass

Joel Anderson |

I remember when social media first started. Hell, I remember when email first started - it’s just one of those things about today’s society that makes me feel like talking about my childhood might as well include reminiscing about the pony express despite the fact that I’m 33. Point is, it’s easy to forget that when the social media landscape was entirely unformed, there were other social media sites that essentially served the same role as Facebook (FB). At least, to my eye, they were basically the same thing - you had a profile, your picture, you posted stuff on your wall.

To others, though, Facebook was clearly doing something others weren’t, as it proceeded to grow into a $200 billion company while Friendster and MySpace ended up at a valuation…a little lower than that.

The lesson, though, is an important one -ne of critical mass. Really, Facebook managed to make itself a household name before the others, and that was what really mattered. When Google (GOOG) countered with Google Plus, the war had already been fought and won by Zuckerberg and his minions.

Even though Google Plus arguably offered some exciting new changes to the social media experience, no one used Google Plus because...no one used Google Plus. Interaction defines social media, so the fact that all of your friends were on Facebook meant that no sort of mass exodus was forthcoming. Facebook, by reaching critical mass first, established a certain dominance over that market that may not ever slip away.

The reason I mention this now is because I believe we’re witnessing a similar battle playing out right now in the ridesharing industry. There, Uber is a dominant force, with a massive footprint and a valuation that’s cracked $61 billion. Its primary competitor, Lyft, is not going quietly, however.

Lyft and Uber Locked in a Money Race

Things certainly appear to be heating up, for the time being.

Uber’s most recent round of funding brought in $2.1 billion with a valuation of $62.5 billion overall, meaning the company already appears to be hailing a ride to one of the largest IPOs in history. But news that Lyft was filing plans to raise an additional $1 billion in funding, with a total valuation of around $4 billion, appears to indicate that Lyft is not ready to go quietly.

Altogether, it clearly seems to indicate that venture capitalists see this as being a very large industry in the future. With more and more people living in more densely populated urban areas, the ride sharing revolution could change the way people all over the world handle transportation.

Drivers Drive of the Rideshare Market

At first blush, it wouldn’t seem as though the Facebook comparison holds any weight. Sure, Uber might dominate the market, but that doesn’t mean Lyft can’t survive on its smaller piece of the pie. However, a closer look at the dynamic created by these apps would indicate that getting biggest fastest could allow a company to put a Facebook-style stranglehold on the market.

The important thing to remember is that the apps function on both the supply and the demand side. The number of drivers working for a company makes a big difference. Namely, the more drivers a service has in a given area, the faster it can respond to rider requests, making it a more appealing service for the riders.

So, the more riders download the app, the more drivers will want to work for that service to take advantage of that larger customer base. And the more drivers a service has, the more people will want to download the app for the timely service created by a multitude of drivers.

It’s when you consider this arms race that the importance of the next five years for both companies is. Uber can’t afford to take its foot off the gas because it has a real interest in getting large enough that it can kill the competition and get to critical mass, taking a dominant share of a massive industry in its early going just like Facebook did.

It’s also why Lyft is currently in a desperate fight for its own survival. If it fails to hold onto its current market share, not to mention expand its footprint, Lyft will fade away into obscurity, relegated to punchline status like MySpace or Friendster.

Driverless is the Future

Of course, this is all also a stop-gap, to some degree. The race to grab up loyal customers by recruiting more drivers (and vice versa) is about winning the present, but not necessarily the future. That’s because the future of this industry is clear to pretty much anyone: driverless cars.

Labor has increasingly become a point of issue for Uber, as Seattle and other cities appear to increasingly be challenging the assertion that their drivers are “independent contractors.” Something that’s important, given the way that a larger driver network is essential to success in any given area.

However, this is all somewhat temporary. Uber is undoubtedly looking forward to the days when a driverless car is a technology adopted widely enough that they can change up their business model. By owning a fleet of cars, or even simply renting out cars owned by their “drivers” on a short-term basis, they can really change an entire industry.

Uber and Lyft are no doubt imagining a future where the majority of traffic in cities is a series of driverless cars that they own, simply circling high-traffic areas and then carrying passengers to their destinations, all operating on one coordinated platform that optimizes efficiency and avoids human error.

Winning the Current Battle Could Mean Winning the Future War

Suffice to say, whichever company can be in the best position, with the largest war-chest of cash ready to spend on their new infrastructure, could become the de-facto transportation company of the future. Winning this battle over the next decade could be the key to being in the right position to buy fleets of driverless automobiles and remake the face of the urban landscape when the day of the human driver comes to an end.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


Symbol Name Price Change % Volume
FB Facebook Inc. 132.08 2.08 1.60 16,348,246
GOOG Alphabet Inc. 798.89 1.92 0.24 1,062,626


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