WHAT THE UBER-LYFT WAR TEACHES US ABOUT BUILDING THE NEXT UBER FOR X Interaction failure and multihoming costs will determine winners in the war for the next big platform

Sangeet Paul Choudary

ABOUT THE AUTHOR SANGEET PAUL CHOUDARY is the founder of Platformation Labs and the best-selling author of the books Platform Scale and Platform Revolution. He has been ranked as a leading global thinker for two consecutive years by Thinkers50, ranking among the top 30 emerging thinkers globally in 2016 (Thinkers50 Radar) and ranking among the top 50 thinkers of Indian origin in 2015 (Thinkers50 India). He is the co-chair of the MIT Platform Strategy Summit at the MIT Media Labs and an Entrepreneur-in-residence at INSEAD Business School. He is also an empaneled expert on the global advisory council for the World Economic Forum’s initiative on the Digital Transformation of Industries. His work has been featured as the Spotlight article on Harvard Business Review (April 2016 edition) and the themed Business Report of the MIT Technology Review (September 2015). As the founder of Platformation Labs, Sangeet is an advisor to leading executives globally. He is also an empaneled executive educator with Harvard Business School Publishing, and has advised the leadership of Fortune 500 firms, family-owned conglomerates, and key government bodies. He is frequently quoted and published in leading journals and media including the Harvard Business Review, MIT Technology Review, MIT Sloan Management Review.The Economist, The Wall Street Journal, WIRED Magazine, Forbes, Fortune, and others. Sangeet is a frequently sought after advisor to CXOs globally on the topic of digital transformation and also serves as a fellow at the Centre for Global Enterprise in New York. He is a frequent keynote speaker and has been invited to speak at leading global forums including the World Economic Forum’s Annual Meeting of the New Champions (Summer Davos), the WEF ASEAN Summit, and the G20 Summit 2014 events. Sangeet has a bachelors in computer science from IIT Kanpur and a masters in management from IIM Bangalore.

CONTRIBUTING AUTHORS

ABOUT PLATFORMATION LABS

Marshall Van Alstyne and Geoffrey Parker are contributing authors to the research published by Platformation Labs, including the books Platform Revolution (coauthors) and Platform Scale.

Platformation Labs is C-level executive advisory firm and think-tank, focused on the analysis and implementation of platform business models and network effects towards the digital transformation of industries. Platformation Labs has advised governments, Fortune 100 firms and high growth startups in 40+ countries across the Americas, Europe, Africa and Asia-Pacific. Our thought leadership and intellectual capital are commissioned and licensed by leading consulting firms globally and have been featured in leading global forums.

Note: Special thanks to Griffin Anderson. The on-demand economy is bringing together technology and freelance workers, to deliver us services in exciting new ways. We are increasingly using our cell phones as a remote control for the real world. In the past, you could sit on a sofa and flip through TV channels. Today, you can click on a button and request a taxi, get your home cleaned, or order a bite to eat. Every week, we see a new platform come up that connects consumers with freelance labor. New companies are forming in almost every service vertical. • • • • • •

Transportation: Uber, Lyft Home Cleaning & Handyman: HomeJoy, TaskRabbit, Handy Food Delivery: Postmates, DoorDash, Spoonrocket, Instacart Dry Cleaning & Laundry: Washio Shipping: Shyp Hotel: HotelTonight

All of the above on-demand experiences are delivered by platforms connecting consumers with freelance labor or spare service capacity.

Success in the On-demand economy There are two critical factors that will determine the success of a company in the on-demand economy: multihoming costs and interaction failure.

MULTIHOMING COSTS In computer networking parlance, multihoming refers to a computer or device connected to more than one computer network. In the world of platforms, this notion is an important one. If your producers and/or consumers can co-exist on multiple platforms, you face a constant competitive threat. Eventually, it may be difficult for clear winners to easily emerge. Multihoming costs are relatively high for developers to co-develop for both Android and iOS. Multihoming costs are high for consumers also because of the cost of mobile phones. Most consumers will own only one. However, multihoming costs for drivers to co-exist on Uber and Lyft are relatively low. Most drivers participate on both platforms. Given the ease of booking rides, multihoming costs are very low on the consumer side as well.

In a previous article on TechCrunch, I had elaborated in detail how multihoming could be prevented by creating long-term stored value within the platform. For on-demand platforms, this is important because multihoming allows producers (service providers) to coexist on multiple platforms. With a limited supply of service providers available, this can lead to interaction failure.

INTERACTION FAILURE Interaction failure happens when the producer or consumer (or both) participate(s) in an interaction, without the interaction reaching its logical, desired conclusion. Imagine a merchant setting up a listing on eBay that never gets any traction, or a video enthusiast uploading a video on YouTube that fails to get a minimum number of views. Quite often, these outcomes could be the result of poor quality listings or videos, but they could also be owing to the platform’s inability to find the right matches. Producers and consumers who experience interaction failure get discouraged from participating further and abandon the platform. If reverse network effects set in, this can eventually lead to an implosion of a platform. In the initial days, interaction failure regularly leads to the chicken and egg problem. To understand these phenomena better and how they could impact your platform, I’d recommend this post on reverse network effects and this one on the chicken and egg problem.

Bringing it together – The Uber-Lyft war Interaction failure is especially important for on-demand platforms. Imagine a consumer requesting for a service and the service never arriving. Imagine, in turn, a producer receiving a request, preparing to fulfill that request, only to find that the request gets canceled. In both cases, the consumer or the producer may decide to abandon the platform.

This is exactly what Uber had in mind when it waged its war on Lyft. Unethical as that was, I’d like to focus on that to glean lessons for building the next Uber for X.

In some of the largest cities we see drivers drive for both Uber and Lyft, and other competitors. It’s not uncommon for these drivers to switch between the two platforms multiple times a day. With a limited supply of drivers in a city and the cost for a driver to connect to an additional platform so small, we see drivers multihoming on both Uber and Lyft. This has naturally led to intense competition between the two companies and Uber infamously resorted to a playbook to create interaction failure on Lyft using questionable tactics. Uber decided to target interaction failure on Lyft, by contracting third party employees to use disposable phones to hail Lyft taxies. Before the Lyft taxi arrived at its pickup location, the Uber-contracted employee would cancel the ride. With so many cancelations on the Lyft platform, drivers would become frustrated driving for Lyft and, in some cases, switch over to Uber. Lower drivers would lead to further frustration for consumers as they would have to wait longer for their requests for cabs to be fulfilled, eventually spurring them to abandon the platform. This loop is illustrated below.

More requests cancelled Higher Driver Abandonment

Fewer ride requests

Longer waiting times for travelers

Higher Traveler Abandonment

When multihoming costs are low, producers and consumers will connect to many platforms. With multiple platforms sharing the same producers and consumers, it is difficult for a business to build defensible networks. Thus, it is difficult for a clear winner to emerge in the market. With many platforms operating and defensibility low, interaction failure becomes a key factor in determining long-term winners.

What does this mean for you? If you’re building the Uber for X, you need to ensure that you’re tracking a metric that helps you determine the degree of interaction failure on your platform. Freelancers that don’t get business within X days, requests that don’t get satisfied within Y minutes, may all be indicative of interaction failure. The exact measure of interaction failure will vary by platform, and the importance of tracking interaction failure will, in turn, depend on the multihoming costs.

Tweetable Takeaways If you’re building the Uber for X, focus on the interaction failure metric. Building the Uber for X? Multihoming could destroy your startup. This is the science behind why Uber sabotaged Lyft.

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