Disruption means changing the basic economics of an industry

Famous Last Words

Prompted by an interesting article on the financial state of Uber I was led to research the fortunes of various similar companies around the world. The picture I formed after doing so was uniformly dismal – ALL the big ride hailing app companies around the world seem to be losing money hand over fist. This is happening when they’ve each been in business several years and accumulated a large user base – while that base may grow some more, it’s not going to grow quite so fast. If we don’t see profitable revenue now, we probably never will.

Which got me thinking about why this so called disruption hasn’t led to a single financial success, at least at this stage.

The reason seems to be that none of these companies has changed anything fundamental about the taxi business. For a while, they brought in lots of new drivers – private car owners looking to make some extra money – by offering a high proportion of the fare to them. For a while they also brought in new users or changed the frequency of usage by offering very low fares. All of this was funded by investor money.

These companies failed to fundamentally improve the taxi business and create some new, previously undiscovered efficiencies because they raised too much money too soon and spent it on “buying” drivers and customers with subsidies. Each time a company attempts to leverage its dominance by changing price or dropping driver earnings a new competitor comes in and starts undercutting them.

All that these companies will have done in the long run is helped the taxi industry add a simpler and better tool for engaging with its consumers – the mobile app. Apart from that, the app has not created a different market or cost structure that is sustainable over time.

What about the others in the list? Alibaba, Amazon and Face book are hugely successful because they came up with new definitions of retail and media that made the old ones obsolete. AirBnB did something analogous to the ride-hail app companies but has succeeded, reaching profitability and contemplating the real possibility of an IPO. However, unlike ride hail, this category had less of the savage local competition in market after market that made customer / network acquisition so expensive. Also, unlike transport where variable costs are significant and therefore driver revenue / rider fares are not really flexible, renting out an apartment or room involves relatively small variable costs and the possibility of earning something against fixed costs – a logic which leads to more permanent network, flexibility on pricing and overall, a real opportunity to change the economics of the hotel industry.

Just because Uber and its ilk look set to fail doesn’t mean the transportation industry isn’t vulnerable to disruption. All industries are – including yours. The question is, are you going to let someone else do it or are you going to disrupt it from within?