In the 1620s, the profits of London water taxis were hit by the advent of Hackney carriages – horse-drawn taxis. So many of them appeared that not only did each one not make that much money, but they also caused traffic chaos. In 1635, regulation was introduced to limit their number.
Competition is a risk you would expect to see on most organisations’ risk maps or registers, but the risk also needs to be really understood: exactly what is the competitive threat? how big is it? how probable is it that it will materialise? and what will it do to your business if it does?
One factor in competition risk is the ease with which others may enter your market, i.e. what are the barriers to entry? In the taxi market, unless licences are limited in number for any given location, then it is relatively easy for anyone to enter the taxi market. As competition increases, discounts have to be offered to customers and profits vanish. Generally, taxi earnings have only ever been maintained by regulation – for example, the medallion system in American cities like New York limited the number of yellow cabs, and consequently, individual medallions became very highly valued for the earnings they could generate for the holder.
Uber was set up as a “transportation network company” in 2009 and it now operates in 785 cities. Since 2009, it has lost $7.9bn. And yet, it now plans to float its shares with a $100bn valuation. Uber claims first-mover advantage in this market with its name becoming synonymous with the ride-hailing product. It intends to move into autonomous vehicles (AVs) or robo-taxis, and also to challenge car ownership itself (cars spend on average 84% of the time stationary, that is: parked up, not in use). From this week, the Uber app includes live London transport data, letting you know the cheapest and quickest ways to get from A to B in London, including using private hire taxis – the idea is that the app may replace the need to own a car, and make the Uber app the place to go to sort out your transport needs.
A lot of tech companies sustain long-term losses in order to reap eventual monopoly profits (think Amazon), and this is why investors stay with them. But have Uber and its investors fully understood competition risk? Well investors, including Toyota, have just put $1bn into Uber’s AV division. How this pans out, and how regulation in different cities and countries will influence competition will be an interesting one to watch..
Source: The Economist, The Financial Times, Wikipedia