In Part 1, I gave my explanation for why several of China’s digital giants (Meituan, Ctrip, Alibaba) have jumped into ride-sharing recently. In this part, I give my best answer to:
Question 2: Can they win? Can they break into Didi’s ride-sharing business?
My answer (thus far): They can definitely enter successfully. But winning long-term will be much more difficult and expensive.
Didi and Uber get so much attention – and such high valuations – because they scale easily and have a clear network effect. And that is how you win big in digital / platform businesses. Build a platform, get lots of users, increase their activity and then build in network effects. That’s Alibaba, Google, Facebook, Tencent and others. There are other powerful aspects to these businesses but this is the big one. Note: It is actually really hard to succeed at this.
Looking at Didi a couple things jump out:
- It can scale easily and rapidly. Recent regulations have made joining as a driver more difficult but they can still add relatively quickly. This is important. Recall, Google famously took down Yahoo in search by figuring out how to automate the rankings of webpages.
- It increases in value to its main users (riders and drivers) as it get bigger. A ride-sharing platform with more drivers is more valuable to riders (shorter wait-times, more options, usually lower rates). And this is mostly true for drivers as well (although at a certain point you get too much competition as a driver).
- It has powerful barriers to entry. Entering this business against Didi is very difficult because you have a chicken-and-egg problem (more on that below).
There are also other advantages you can have in these types of platforms (data network effects, economies of scale, switching costs, etc.). So how formidable the barrier to entry is depends on the type of business – and on who is looking to break through it.
So can Alibaba (Autonavi), Ctrip or Meituan break into Didi’s ride sharing business in China? Yes, these digital giants can enter successfully.
A bit more theory.
One problem a new entrant faces with these types of businesses is the chicken-and-the-egg problem. To get into ride-sharing, you need riders. But to get the riders you need drivers. But to get the drivers you need riders. So getting started is difficult even when you are the only player.
But it’s much worse when there is a dominant incumbent. Not only do you have to fight them to get in. But you also, by definition, offer a worse service until you can match them in scale. If you are 5x smaller than Didi, your riders have 5x fewer cars to hail. And longer wait times. Similarly, the drivers have 5x fewer potential riders, which means longer down times for them. And it sometimes means they will charge more (so both higher prices and longer waits for riders). Breaking into Didi’s China business for a start-up is very, very difficult.
But in this case, we are not talking about start-ups. We are talking China’s other digital giants. The wall is not as daunting for them. Here is what I predict they will do:
1. They will leverage their customers and data.
You don’t have a chicken-and-egg problem if you already have one side of the platform in place. For Ctrip and Meituan, they definitely already have the service customers (i.e., the riders). They just need to get the drivers.
2. They will target micro-markets.
In theory, the bigger platform has superior service (more hotels offered, more merchants accepting your credit card, etc.). But sometimes you can build most of the benefits of a platform in a small market. For example, Facebook famously entered the social media business against much bigger incumbents (Myspace, Friendster) in this way – by focusing on just Harvard University (a micro-market) and then other universities. For students at Harvard, the Facebook service offered most of what they wanted and was competitive in that small market against much bigger rivals. Facebook then created lots of these micro-markets at universities and then eventually combined them into a bigger platform.
It is worth pointing out that ride-sharing is mostly a local service. You don’t need to offer rides in Beijing to people living in Wuhan when they are trying to get home in the rain on a Saturday night. You can offer a lot of value of the big national competitor just by having lots of drivers in Wuhan at that time. Note: this is not the same in say hotel bookings (Ctrip, Airbnb) where you really do need to offer at least the whole country to compete.
3. They will seed the platform.
These big companies could use their cash to hire a bunch of drivers and cars themselves. And they can then just offer these to their users. Ctrip is basically doing this by offering its own cars on its platform right now.
4. They will do linked business models.
This is something I do a lot of research on. How digital companies use their data, customers/users and/or cash from one business to support another. Linked businesses (and capabilities) can be very difficult for non-linked / pure play businesses to compete with.
For example, Amazon is difficult to compete with in online retail because it offers subsidized delivery. It offers fast, cheap delivery that causes the company to lose something like $4B per year. But its web services business is a cash machine that generates about $8B (approx.) in cash flow per year, which it uses to support this. Any pure retailer without another linked business like this simply can’t offer a competing delivery option in online retail.
Watch for these companies to link ride-sharing to their other businesses in a way that is difficult to replicate.
Those are my four predictions for what I think will happen. However, there are a couple of other moves I am keeping an eye out for:
- They could piggyback other platforms. Alipay needed both consumers and merchants to launch as a payment platform. But Alibaba already had both of these groups linked in their marketplace. So Alipay just piggybacked it. Paypal famously piggybacked eBay to get started in the same way (mostly against the wishes of eBay).
- They could do a big bang. They could do some big event to get attention and try and jump start their platform.
- They could start a money war. This is what a lot of people are watching for. These companies could use their cash and fund-raising ability to fight. Chinese ride-sharing was famous for its money war between Kuaidi and Didi – and then later between Didi and Uber. The market leaders used investor cash to subsidize drivers (and lower prices to consumers) in a fight for scale and market share. And this was important in the early days because getting to a critical volume of rides was necessary for a functioning platform. We could see the new entrants restart these money wars.
A final point.
Getting in is just the first step. Competing successfully long-term is a separate issue. And competing against Didi could be very expensive.
When you enter a market with a dominant, entrenched competitor, how they respond is a big deal. So the question is “what will Didi do?”.
If you enter Shanghai or Beijing in ride-sharing, I think Didi will respond with all guns blazing – and will fight you till the end of time. Those are the core markets of their core business.
However, if you start with airport pick-ups for your hotel bookings in Xinjiang and Tibet, what would Didi do? I think they might let it go. There is a famous business case of how Rupert Murdoch broke into TV broadcasting against dominant CBS, NBC, and ABC in the USA. By coming into through independent broadcast stations and not attacking their core business, the incumbents let it go. He didn’t threaten their core business. And he got in and launched Fox, which became the fourth US TV network (before broadcast network got disrupted).
So after successful entry, I would be looking at two questions:
What is the competitor response?
Who has more sides to their platform?
A two-sided platform with two user groups (i.e., buyers and sellers on eBay) usually beats a traditional vertically integrated business with one user group (i.e., customers at a traditional retailer). A three-sided MSP generally beats a 2-sided MSP. And so on.
Usually, the more user groups you have (and sides to your platform), the more ability you have to create interactions between these users. And you have more ability to alter the pricing, business model and economics of your services. A video-sharing platform (users are content creators, content consumers and advertisers) has a hard time competing against Tencent, which has both video sharing and social media (i.e. Wechat has tons of user groups). So this is the other factor I would look at longer-term. Who has the more larger and more robust platform.
Overall, I would expect any fight with Didi for ride-sharing in China to be a brutal long-term fight – and very expensive. Entering this business is doable – but taking and keeping substantial market share would be difficult.
That’s my take. Thanks for reading. -jeff
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