25 Aug 2014

Uber's Potential

Over the past few months, Uber has been in the news for many reasons -- their stratospheric $18.2 billion valuation was just one of many controversies the company found itself in. But these should pale in comparison with the significance of their most recent announcement -- the Uber API.

Before analyzing the impact of this announcement, it would be useful to define Uber as a product. Some find comfort in specificity and view Uber as a "taxi booking and ridesharing app". Even Uber's website has the following description -- "Rideshare, Taxi & Taxi Alternative app". While this description is useful for today's customers, I've often found that being less specific is far more helpful to understand a product's ultimate potential. If we use that as a guideline, Uber is actually a platform connecting transportation providers with potential customers, i.e. people who need an on-demand logistics service.

Because of its appeal to drivers, Uber could face a situation where supply outstrips demand. This idle capacity represents an untapped revenue opportunity. The eventual goal of Uber's API is to find new use cases and expand their user base from potential taxi customers to potential users of an on-demand logistics service. Uber's vision for their API can be seen in their recent experiments as they have already tested a courier service, a grocery delivery service, a drug store delivery service and a moving service in various locations.

Uber's initial list of partners signals a conservative roll-out, targeting use cases where an add-on taxi service could be valuable -- for example, booking a dinner reservation, a hotel, an airline ticket, etc. But as more developers begin to use the API, use cases could expand to include anything that requires last-mile connectivity. Of course, the fare for last-mile logistics is unlikely to be as high as it is for a taxi service, but the volume of requests is likely to be much higher. Also, this revenue will be purely incremental as Uber would be filling idle capacity at zero incremental cost.

Finally, it is interesting to note that we have only attempted to understand the API's impact on demand. If Uber is successful in expanding use cases, they may also be able to attract a wider range of transportation providers on the supply side. This would then create a feedback loop and drive more demand with even more diverse use cases. Uber's ice cream truck could very well be a sign of things to come.