Distilling market noise into market sense

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Uber API launch validates the “Gurley scenario”

[With the release of Uber’s API, their ploy to achieve world domination has just gotten a lot more probable. The Uber API allows developers to add physical transport to apps as easily as ads or push notifications. Uber as a TaaS (Transportation-as-a-Service) platform.]

After Uber’s Series D round in June, a captivating discussion ensued about the valuation of the ride-sharing company. In one corner, Aswath Damodaran, the NYU finance professor who literally wrote the textbook on company valuation. In the other, Bill Gurley, considered by Forbes to be one of technology’s top dealmakers, and investor in Uber.

In a blog post, Damodaran summarizes the “duelling narratives” (sic) as follows:

“I viewed Uber as a car service company that would disrupt the existing taxi market (which I estimated to be $100 billion), expanding its growth (by attracting new users) and gaining a significant market share (10%). The Gurley Uber narrative is a more expansive one, where he sees Uber’s potential market as much larger (drawing in users who have traditionally not used taxis and car services) and much stronger networking effects for Uber, leading to a higher market share.”

In short, while Damodaran sees Uber as an attractive company, he doesn’t think it’s worth the valuation used in its last funding round. Gurley, however, sees a market potential for Uber that’s 25x as high. With the release of Uber’s API, Gurley’s narrative just got a lot more probable.

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Uber just outgrew the taxi market

Several commentators (including a Gartner analyst) present Uber’s API as a new channel slash marketing tactic to draw new users to the service. While this is indeed one of the end goals, there is much more to Uber’s API strategy.

Uber can get all the users it needs. To grow to its full potential, it needs new use cases more.

Wherever Uber establishes itself, users flock to the system. Usually, when traditional taxi services become aware of their new competitor, controversy ensues, which leads to even more brand awareness. When taxi drivers went on strike in London in June, Uber saw a 850% rise in sign-ups.

Uber itself say poetically that it targets “every app with a map” (thanks Daniel Pink for unleashing that marketing tactic onto the world). In all seriousness, that little rhyme doesn’t do justice to the raw potential for innovation of a ‘bits-to-atoms’ transportation API. In fact, the release of its API might mark the moment that Uber stops being a taxi substitute and becomes truly an on-demand transportation company across a wide spectrum of user needs. Many of these needs we cannot imagine yet.

The Uber API allows developers to add physical transport to apps as easily as ads or push notifications.   Uber as a TaaS (Transportation-as-a-Service) platform, following in the footsteps of BaaS tools. This is possible because all of the ‘infrastructure’ that Uber has built over the past year: users, drivers, and the connection between them through the Uber service and apps.

In the blog post that launched the API, Uber explains: “We’ll never conceive of every great idea, and we could certainly never build them all.” They echo Marc Andreessen, who back in 2007 spoke about addressing “countless needs and niches that the platform’s original developers could not have possibly contemplated, much less had time to accommodate.” The current launch partners and the use cases they represent are but a glimpse of where this is heading. When Uber’s network of co-creators gets in full swing, Bill Gurley’s prediction of widely expanding market will become reality, just as millions of apps – many completely unforeseeable successes – unlocked the market for smartphones.

New use cases are currently focused on the transport of people, but the recent experiments with local delivery of household items makes it clear that it won’t stay this way.

Uber wants it all

The second part of Bill Gurleys valuation argument was that Uber is subject to strong network effects, and hence is set up for a winner-takes-all market share. By releasing its API with an exclusivity clause (barring developers from working with competing services), Uber confirms that this is indeed their intention.

Not only has Uber reached critical mass with strong network effects between drivers and riders. It’s now adding a new network effect, between developers and users, which can possibly grow even stronger. One of Damodaran’s hesitations to accept Gurley’s narrative was that network effects between drivers and riders might be local, i.e. only relevant on a city-by-city basis, and without global effect. This is not the case for the network effects between developers and users. Uber has many competitors around the world, but soon only fellow global players will be able to withstand the competitive heat. This explains the haste with which Hailo pushed forward the timing of its own API release, launching on the same day as Uber.

A lot of the new use cases that the Uber API will spawn, will be scenarios that are not traditionally addressed by taxis. What’s more, taxis will not be able to compete by also providing similar services. They simply don’t have the reach (in users as well as geographies) to persuade developers to adopt a taxi-centric, local solution.

Uber wants world domination, and they’re in an increasingly good position to get it.

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