Is Softbank after world domination of the ride-hailing industry?

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With 500 million miles traveled per month back in 2016 in the US alone, ridesharing services such as Uber and Lyft have clearly demonstrated their growing importance within the mobility sector. Recently, Uber and its Chinese competitor Didi Chuxing became the world’s most valuable unicorns, with an estimated combined valuation of USD 56 Billion (Source: CBInsights). Although neither has as yet generated profit, they continue to attract investors. One of them stands out: Softbank and its CEO Masayoshi Son. With investments in all major global ride-hailing providers, even in the same market, the question begets to be asked: what is Softbank’s end game for this industry?

Ride-hailing as the perfect match between flexibility and cost

Being undeniably convenient, ride-hailing services have emerged as the millennial alternative to owning a car. To cover a rising demand in different markets, a variety of services were established in the past decade and subsequently, fueled by venture capital went through a series of mergers & acquisitions. As of now, the big players are:

  • Uber
    Core markets: North & South America, Africa & Europe
  • Lyft
    Core market: USA
  • Didi Chuxing
    Core market: Mainland China
  • Ola
    Core market: India
  • Grab
    Core market: Southeast Asia

More than 5 billion Uber rides till date, 20 million daily rides with Didi, 7 Grab bookings per second and more than 800,000 Ola drivers are numbers that speak for themselves. Even small players like Lyft (still) come up with significant metrics like a total number of 23 million users.

The Great Game

The Great Game (Source: Forbes)

However, not all of these players stick to their core markets and wait for profits to come. The race for global ride-hailing dominance is well underway and it remains questionable, whether all of these players are going to survive.

The power game behind the scenes

Platform business models have taken over the rankings of the most valuable companies in the last decade; it comes as no surprise that ride-hailing platforms have raised considerable investments, jointly raising more than $50 billion (Source: Crunchbase). As the intrinsic value of these services to the consumer is highly dependent on the immediate availability of drivers, scaling fast is crucial to their success. Thus, competition between platforms is fierce, as the value of their network increases with every additional driver. In theory, once a platform has achieved so-called critical mass in terms of supply (in this case drivers), entry barriers for new market entrants are enormously high as the market leader profits from self-reinforcing network effects, although switching costs continue to remain low. Platform markets are eventually destined to become highly concentrated over time (so-called winner-takes-it-all markets). However, while Uber lead the pack so far, none of the providers has reached true global scale. Uber as the biggest player, failed to secure the Chinese market back in 2016. Winning in an undifferentiated platform with well-heeled competitor resulted in strong pressure on all sides. This ended up with both providers, Uber and Didi losing money with every ride. It was, in all honesty a lose-lose situation, one fueled by seemingly unending capital. It has been a similar story in Russia: Uber was not able to conquer the market and eventually had to collaborate with a local competitor, owned by the largest local technology company Yandex resulting in a minority-ownership for Uber.

Uber’s failed market entry in China and their history in Russia serve to illustrate the limitations of today’s market power of ride-hailing providers. The resulting price wars have however reshaped the ride-hailing industry with the harshest consequences for traditional small-scale taxi services. They cannot compete with investor-filled pockets of ride-hailing providers that can operate on negative margins over years. The consumer on the other hand finally has seen a steep increase in availability, affordability and service level, attributes unheard of in the legacy taxi industry. Nevertheless, fueling price wars is certainly not, what Softbank intends with their investments in the ride-hailing industry.

Investments in ride-hailing startups from 2013-2018

Investments in ride-hailing startups from 2013-2018 (Source: Crunchbase)

As late-stage investments bear fewer risks than early stage investments, share prices of well-established startups are usually quite high and limit investors’ financial capabilities to invest in multiple companies in the same sector. Softbank however has built up holdings in numerous ride-hailing service providers active in most parts of the world. Starting with Ola and Grab back in 2014, they next invested in Didi, right before their competitor takeovers culminated in a $1 billion investment in Uber in January 2018. Among the mentioned five players, only Lyft is as yet untouched by Softbank. So what strategy underlies Softbank’s investments in companies that all compete in winner-takes-it-all-markets?

‘Softbank wants to play pope in the ride-sharing app world’

Looking at the operators, one can outline two main alliances: Uber on the one side, Didi, Ola, Grab and Lyft on the other. When Uber failed to grow in the Chinese market, they were offered a 20% share of Didi, which they accepted. Didi, on the other hand, obtained minor equity holdings in Uber. While Didi’s investments in all its biggest competitors is at least questionable, from competition point of view; Softbank’s investment in Didi (20%), and separate investments in Uber (15%), Grab (60%), and Ola (30%) surely are not meant to fuel an appetite for long-term competition. It is an obvious ‘centralization-of-power’ strategy, underlined by plans to transfer all their ride-sharing stakes to a single nucleus, Softbank’s Vision Fund.

Softbanks strategy comes at the customers’ expense

With their latest investments, Softbank now controls an alarming amount of power within the strongly growing ride-hailing industry. What consequences will this development have for the consumer? In a nutshell, the overall market setup is straightforward: There are multiple providers, offering the same undifferentiated service with only pricing as a potential dimension to compete on. In platform market theory, with current price wars, only one provider will survive this game in a given market.

Revenue in the Mobility Services market

Revenue in the Mobility Services market (Source: Statista)

In fact this price war aims at weeding out competitors not controlled by Softbank. However, as soon as only players controlled by Softbank are involved prices will and can increase again due to lack of competition. It is certainly not in Softbank’s interest to let their companies perform in a low profit puppet show. Consumers are most likely going to suffer in order to pay Softbank’s margins in the future. Ride-hailing platforms have already shaped customer preferences and it is too late to consider a world in which we do not demand and use ride-sharing services any longer.

A party that is potentially capable of stopping this unfair game is the governmental body. On the one hand, it has the ability to create price regulations in each market, on the other hand it is capable to regulate Softbank via cartel laws on a global level. It is supposed to be in the governments’ interest to regulate the market as these privately managed players have been entering an industry that used to be regulated by the government for years and because Softbank’s holdings pose a distressing threat to fair competition in the mobility sector. In order to protect consumers, comprehensive regulation of players like Softbank on a global scale of the ride-hailing industry would be necessary.

In conclusion, one can ultimately expect Softbank to continue their aggressive market consolidation strategy towards global dominance. It is in their interest to push other players out of the domestic markets in order to increase prices and make each of their investments more profitable. This winner-takes-it-all approach maximizes margins and keeps Softbank in control of them – at the expense of consumers.

— Authors: Yannick Hackbarth (Linkedin) & Joseph Noronha (Linkedin)

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