Similar tack by subsidising drivers to keep fares

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similar tack by subsidising drivers to keep fares down, by rapidly expanding into new cities and by launching new services, such as the delivery of food and other items. Investors like to see the company in terms of Facebook. When the social network accepted an investment from Microsoft that valued it at $15 billion in 2007, a time when it had not shown any real propensity to make money, this was decried as folly. When it filed to go public at a valuation of around $100 billion in 2012, accusations of madness came back, based on worries about the company’s ability to adapt to the mobile phone. Today Facebook has a market value of more than $360 billion. A fear of missing out on the internet’s next Facebook-sized hit is a big factor in the flood of capital into Uber’s coffers.
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Investors’ bullishness is bolstered by Uber’s position at the intersection of three linked disruptive trends. First is the emergence of asset-light business models. The cost of expanding is far lower for a startup that does not own its own cars or consider its drivers employees. Second is the shift to the sharing economy, which underlies the success of peer-to-peer services; a system that lets people do as much or as little as they like attracts workers. The third is that consumers, especially young consumers, are increasingly happy to pay for access to things, rather than own them outright. The average cost per mile of UberX is probably around $1.50 (€0.84/km). It already costs more than that to own a car in some places. In New York City, car ownership works out at around $3 a mile. All told, about 14% of people in the urban centres of America’s top 20 metropolitan statistical areas (MSAs) may find it cheaper to use UberX at current rates than to own a car, according to Rod Lache of Deutsche Bank. The more Uber can bring costs down, the more widely it will compete with car ownership. Mr Lache reckons that autonomous cars might bring the price per mile down to 89 cents or less—below the average cost per mile for car ownership across all 20 top American MSAs. From the fire roads to the interstate Cost is not the only reason someone would give up a car; convenience and time matter, too. Like Amazon, though, Uber understands that low prices hook customers and is trying to push them down more. In San Francisco the price of an UberX ride is half what it was two years ago. An UberPool costs around half of an UberX ride. Even without an interest in forming habits, though, Uber would have little choice about low prices—because it has competition. The switching costs for both passengers and drivers are relatively low, which means new entrants can buy market share by subsidising trips and earnings. The same exuberance that has driven up Uber’s valuation has also given its rivals the resources with which to attack it.
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Lyft, with 20% of the American market to Uber’s 80%, is spending an estimated $50m a month to increase its share, and in many places it has been succeeding (see chart 2). Uber has had to pay out to avoid losing
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  • Fall '13
  • Inditex

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