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Groupon doesn't have a network effect. Uber has a VERY strong network effect. In fact, it has the type of network effect that can keep its advantage over compet

by pitnips 11y ago

Groupon doesn't have a network effect. Uber has a VERY strong network effect. In fact, it has the type of network effect that can keep its advantage over competitors (see Facebook versus Google+).

flexie 11y ago
What network effect? How does my friends using Uber force me to use Uber as well? I see it more like a toilet paper or shampoo thing: My friends might recommend Uber, but other friends would recommend Lyft, and others a local competitor. There is nothing that locks me in. We can disagree and I can live with them using Uber and me using some other service for years. Unlike Facebook, Uber is easily replaced. I can't convince my friends to change to a Facebook competitor, but for Uber I don't have to. I don't lose out by using an Uber competitor. With Microsoft in the 90s I couldn't share or read documents if I used a competing OS. I literally had to use Windows. Right now, Uber is paying lobbyists and lawyers squirming around the issues with braking taxi laws, labor laws, tax laws etc. And they are paying for marketing to teach us to order cabs using apps. And then, local competitors can make apps that are as good and the business model is easy to compete with. If I travel to London I might not know what the local competitor of Uber is called and I may wanna go with Uber or a conventional taxi. But back in my city, Uber is just one of a bunch, soon one of many. That's, by the way, a difference from AirBnB who is only used by people who are out of town.
- pitnips 11y ago
  More users (i.e., your friends) drive higher service levels (more Uber drivers and quicker service times, which spirals). There is no "forcing," just as no one "forces" you to have a Facebook account. If you want bad service (long wait times, high prices) then your argument makes sense. However, the more people that use Uber will lead to better service levels and lower prices. Drivers benefit by minimizing wait times and being able to depend on the money. And if you went to London, you get the convenience of not having to download a local app. You simply use Uber (what you're used to, what you depend on, what you trust), and you have one less thing to worry about in your travels.
  - curiousjorge 11y ago
    No it doesn't have any speakable economic moat built around it. Like the parent comment mentions, it's just one of the many possible ways to get around the city, there's no cost of change. >However, the more people that use Uber will lead to better service levels and lower prices. That would be very bad for Uber. Lower prices would mean that they are constantly operating at a loss against traditional taxis and other competitors or apps. Your argument fails to support that there is a network effect that would raise the cost of switching to alternative means of transport and incorrectly assumes that uber is able to operate at a loss constantly as the network size grows. Take a look at the airline industry. The first guys to do it are nowhere. Everyone is undercutting each other because customers are not locked into one airline and are price sensitive.
    - pitnips 11y ago
      There's as much difference between Uber and the airline industry as there is in a $10 ride home versus a $250+/person flight. Uber doesn't own any cars. How would better service and lower prices be bad for Uber? It wouldn't. The more activity they generate, the better off they are. They simply get a cut off everything. It would be wiser to compare to VISA/MasterCard. Those are software companies with huge network effects similar to Uber. Could anyone just go out and create their own payment network? Sure. Are prices per transaction competitive? Sure. Do VISA and MasterCard make a TON of money? Absolutely. And in this case (the more accurate comparison), the first guys to do it are still the main players, and they haven't needed to truly innovate in decades. I think a lot of people tend to forget that these valuations aren't just some people out there being euphoric about the future. These valuations come from experienced investors, using real money, making thoroughly calculated guesses.
      - curiousjorge 11y ago
        The fact that they don't own any car proves there is no barrier to entry. If they had their own self driving cars it would be a very different story but since they don't own any of the assets like an airline does, the barrier entry is nil. To start an airline you need large investments (you need to rent or purchase airplanes, crew, fuel). To start something like Uber does not require the same investment in assets, there is no such cost apart from copying the app and offering lower prices as soon as Uber begins to raise prices. Nothing suggests they are like Mastercard company, rather the logistics company line is a better explanation of their high valuation. But network effect or lock in? It simply doesn't happen by purchasing more assets because the customer simply does not care in a price sensitive market.
paulgb 11y ago
I wouldn't call it network effect, it's just a market. They need riders and drivers, just like Groupon needed buyers and businesses, but the fact that my friends use Uber doesn't stop me from trying Via. My Via driver the other night was telling me about how he drives for Uber on weekends. The switching costs are very low for both the rider and driver.
- pitnips 11y ago
  But it is a network effect. The more people that use the service, the better that service will be. If only a few people used Uber, there would only be a few drivers. This would lead to high prices and poor service levels. The more people that use Uber, the more drivers there are, and the lower the price and better the service. That leads to consolidation to those services with a high number of users, and those services will be the only ones that survive, hence the network effect.
  - curiousjorge 11y ago
    I don't think you understand what network effect is. A network effect is where the network raises the costs of switching to another network significantly that they are locked in. ex. FB and your friends. There is nothing that suggest Uber has a network effect that locks in a user to use Uber. You are talking about a quality effect from the assumption that more assets will lead to a lock in effect but it's hopeful at best. There are no barriers to entry to erode future Uber profits if they make money and no perceived cost of using new entrants services or existing ones.
    - pitnips 11y ago
      Well, I think you don't understand what a network effect is. From Wikipedia, "A network effect is the effect that one user of a good or service has on the value of that product to other people." It's as simple as this: the more users Uber has, the more drivers it will have. The more drivers Uber has, the better the service and the lower the prices. Therefore, a greater number of users leads to greater value of the product (service) to other people. "You are talking about a quality effect from the assumption that more assets will lead to a lock in effect but it's hopeful at best." I think you're totally missing here. Why is everyone talking about Uber and not Lyft or some other company? Why would anyone switch from Uber to another app if he/she is happy with Uber? Why don't you or anyone else write an app and go create a network of drivers? Because no one will switch, that's why. And that's the effect of the network. Facebook didn't have any more assets than Google+, except for the users. How is this any different from the "quality effect" you are talking about?
prostoalex 11y ago
But it's localized network effect. Taxi drivers and consumers in Moscow or Barcelona are not going to switch right over just because #1 taxi app in San Francisco just arrived in their market. If a yellow cab owner from NYC decided to expand to Tucson or Kansas City, you'd expect him to do okay with his background in the ins and outs of the business, but expecting total domination based on his knowledge of NYC market is bit of a stretch.
- pitnips 11y ago
  It's a localized network effect only if they are isolated to local areas. However, most people in the U.S. (especially outside of SF) only have Uber, so the network effect grows stronger as consumers only need one app regardless of the city they are in. I'm not sure I understand your yellow cab comparison. With Uber, no one needs an understanding of the local markets (aside from the laws, which can be done at the corporate level). Uber just shows local drivers how to make money, and they take a cut because they have a strong technology, brand, and user base. As far as international expansion, I agree it would be much tougher. But even if they aren't successful outside of the U.S. (which I still think they will be), they will cash in billions.

by pitnips 11y ago

Groupon doesn't have a network effect. Uber has a VERY strong network effect. In fact, it has the type of network effect that can keep its advantage over competitors (see Facebook versus Google+).

flexie 11y ago

What network effect? How does my friends using Uber force me to use Uber as well? I see it more like a toilet paper or shampoo thing: My friends might recommend Uber, but other friends would recommend Lyft, and others a local competitor. There is nothing that locks me in. We can disagree and I can live with them using Uber and me using some other service for years. Unlike Facebook, Uber is easily replaced. I can't convince my friends to change to a Facebook competitor, but for Uber I don't have to. I don't lose out by using an Uber competitor. With Microsoft in the 90s I couldn't share or read documents if I used a competing OS. I literally had to use Windows. Right now, Uber is paying lobbyists and lawyers squirming around the issues with braking taxi laws, labor laws, tax laws etc. And they are paying for marketing to teach us to order cabs using apps. And then, local competitors can make apps that are as good and the business model is easy to compete with. If I travel to London I might not know what the local competitor of Uber is called and I may wanna go with Uber or a conventional taxi. But back in my city, Uber is just one of a bunch, soon one of many. That's, by the way, a difference from AirBnB who is only used by people who are out of town.

pitnips 11y ago
More users (i.e., your friends) drive higher service levels (more Uber drivers and quicker service times, which spirals). There is no "forcing," just as no one "forces" you to have a Facebook account. If you want bad service (long wait times, high prices) then your argument makes sense. However, the more people that use Uber will lead to better service levels and lower prices. Drivers benefit by minimizing wait times and being able to depend on the money. And if you went to London, you get the convenience of not having to download a local app. You simply use Uber (what you're used to, what you depend on, what you trust), and you have one less thing to worry about in your travels.
- curiousjorge 11y ago
  No it doesn't have any speakable economic moat built around it. Like the parent comment mentions, it's just one of the many possible ways to get around the city, there's no cost of change. >However, the more people that use Uber will lead to better service levels and lower prices. That would be very bad for Uber. Lower prices would mean that they are constantly operating at a loss against traditional taxis and other competitors or apps. Your argument fails to support that there is a network effect that would raise the cost of switching to alternative means of transport and incorrectly assumes that uber is able to operate at a loss constantly as the network size grows. Take a look at the airline industry. The first guys to do it are nowhere. Everyone is undercutting each other because customers are not locked into one airline and are price sensitive.
  - pitnips 11y ago
    There's as much difference between Uber and the airline industry as there is in a $10 ride home versus a $250+/person flight. Uber doesn't own any cars. How would better service and lower prices be bad for Uber? It wouldn't. The more activity they generate, the better off they are. They simply get a cut off everything. It would be wiser to compare to VISA/MasterCard. Those are software companies with huge network effects similar to Uber. Could anyone just go out and create their own payment network? Sure. Are prices per transaction competitive? Sure. Do VISA and MasterCard make a TON of money? Absolutely. And in this case (the more accurate comparison), the first guys to do it are still the main players, and they haven't needed to truly innovate in decades. I think a lot of people tend to forget that these valuations aren't just some people out there being euphoric about the future. These valuations come from experienced investors, using real money, making thoroughly calculated guesses.
    - curiousjorge 11y ago
      The fact that they don't own any car proves there is no barrier to entry. If they had their own self driving cars it would be a very different story but since they don't own any of the assets like an airline does, the barrier entry is nil. To start an airline you need large investments (you need to rent or purchase airplanes, crew, fuel). To start something like Uber does not require the same investment in assets, there is no such cost apart from copying the app and offering lower prices as soon as Uber begins to raise prices. Nothing suggests they are like Mastercard company, rather the logistics company line is a better explanation of their high valuation. But network effect or lock in? It simply doesn't happen by purchasing more assets because the customer simply does not care in a price sensitive market.

paulgb 11y ago

I wouldn't call it network effect, it's just a market. They need riders and drivers, just like Groupon needed buyers and businesses, but the fact that my friends use Uber doesn't stop me from trying Via. My Via driver the other night was telling me about how he drives for Uber on weekends. The switching costs are very low for both the rider and driver.

pitnips 11y ago
But it is a network effect. The more people that use the service, the better that service will be. If only a few people used Uber, there would only be a few drivers. This would lead to high prices and poor service levels. The more people that use Uber, the more drivers there are, and the lower the price and better the service. That leads to consolidation to those services with a high number of users, and those services will be the only ones that survive, hence the network effect.
- curiousjorge 11y ago
  I don't think you understand what network effect is. A network effect is where the network raises the costs of switching to another network significantly that they are locked in. ex. FB and your friends. There is nothing that suggest Uber has a network effect that locks in a user to use Uber. You are talking about a quality effect from the assumption that more assets will lead to a lock in effect but it's hopeful at best. There are no barriers to entry to erode future Uber profits if they make money and no perceived cost of using new entrants services or existing ones.
  - pitnips 11y ago
    Well, I think you don't understand what a network effect is. From Wikipedia, "A network effect is the effect that one user of a good or service has on the value of that product to other people." It's as simple as this: the more users Uber has, the more drivers it will have. The more drivers Uber has, the better the service and the lower the prices. Therefore, a greater number of users leads to greater value of the product (service) to other people. "You are talking about a quality effect from the assumption that more assets will lead to a lock in effect but it's hopeful at best." I think you're totally missing here. Why is everyone talking about Uber and not Lyft or some other company? Why would anyone switch from Uber to another app if he/she is happy with Uber? Why don't you or anyone else write an app and go create a network of drivers? Because no one will switch, that's why. And that's the effect of the network. Facebook didn't have any more assets than Google+, except for the users. How is this any different from the "quality effect" you are talking about?

prostoalex 11y ago

But it's localized network effect. Taxi drivers and consumers in Moscow or Barcelona are not going to switch right over just because #1 taxi app in San Francisco just arrived in their market. If a yellow cab owner from NYC decided to expand to Tucson or Kansas City, you'd expect him to do okay with his background in the ins and outs of the business, but expecting total domination based on his knowledge of NYC market is bit of a stretch.

pitnips 11y ago
It's a localized network effect only if they are isolated to local areas. However, most people in the U.S. (especially outside of SF) only have Uber, so the network effect grows stronger as consumers only need one app regardless of the city they are in. I'm not sure I understand your yellow cab comparison. With Uber, no one needs an understanding of the local markets (aside from the laws, which can be done at the corporate level). Uber just shows local drivers how to make money, and they take a cut because they have a strong technology, brand, and user base. As far as international expansion, I agree it would be much tougher. But even if they aren't successful outside of the U.S. (which I still think they will be), they will cash in billions.