Uber is in Estonia for two reasons: For PR, and to kill Taxify. But the price war it has kicked off just in time for the weekend rush isn't how they're hoping to get the Estonian start-up. It's part of Uber's typical strategy in every market it enters. It will blow over, eventually resulting in higher prices.
Uber’s strategy has been to enter a market at low prices, lower them even more for marketing reasons, and then let prices rise again, very steeply in some cases, once the capital assigned to a specific market entry dries up.
Rule 1: Grow fast and pretend not to understand questions about profits
Like it is the case with plenty of start-ups that are trying to grow very quickly, Uber’s business model isn’t concerned with profit as much as with the perceived size and value of the company.
Such a start-up, as long as there are no significant profits, is attractive because of high valuation and fast growth, but in terms of its dependency on investment it works a bit like a pyramid scheme.
In the beginning, the start-up needs to convince those it wants funding from that there’s a real perspective to its business, that there is a chance for profit in the long run. Driven by initial investment, the company expands, and tries to repeat the same feat again and again. But soon the notion of profit doesn't matter all that much anymore.
Rule 2: Keep the snowball rolling
Every step of the way, the business depends on perception. The more it can create the impression of being popular and really unstoppable, the better it looks to new investors. Once it has gone through a few invest-expand cycles, there then comes the point where people start talking about its valuation.
The higher its perceived value (remember, profits are still secondary at this stage) and the faster its growth, the bigger the capital injections. Venture capitalists and other investors equip it with the cash it needs to enter new markets.
Uber enters a new market with a bang, stirs up the taxi business (which, mostly by its own fault, is among the dirtiest in most countries), and lobbies approachable politicians. It gets a lot of attention, thanks to court cases and regulatory debates as much as the carefully cultured Ayn-Randian arrogance of its “disruptive” executives.
But once the capital allocated for a particular market entry dries up, prices have to rise. And overheads still have to be covered.
Rule 3: Keep it simple at all costs
Uber needs to keep its costs low and its business simple. This means that in virtually every market, issues come up that it would really rather not spend its time and money on. In the U.S., Uber now employs a trustbusting law firm to deal with drivers’ unions. It fights battles against regulations that would make it liable for at least part of what can happen to its drivers and passengers.
The attitude of Uber and its CEO Travis Kalanick is very nicely expressed in the fact that Uber fought the claims of parents whose 6-year-old child had been killed by an Uber driver; or against being made liable in a case in India, where a woman had been raped by an Uber driver.
Still, investors are crazy about Uber. As start-up investment tracker Anand Sanwal was recently quoted on Bloomberg Technology, “There is insatiable appetite for Uber stock”. The snowball keeps rolling, despite monthly losses in the billions of dollars.
Rule 4: As long as you’re the loudest, you don’t need to be the best
Why are they here? Estonia is interesting for two reasons. If Kalle Palling’s rideshare bill becomes law, it becomes an argument for Uber and an example how a company of the so-called sharing economy can be successfully regulated. After all, it’s businesses like Uber who are the future, at least everybody thinks so. And having the prime minister and a committee chair of one of the world's foremost digital pioneers to show around can only help.
The other reason why Uber is here is because there’s a potentially serious competitor located right here in Tallinn. Taxify have built their business on cooperation with existing taxi companies. Their angle was from very early on to verify and check their drivers, make sure they have the required insurance and meet all legal conditions, and that way offer a quality service to the customers.
Earlier today, Taxify’s Martin Villig told one of my colleagues that despite the price war Uber has just kicked off in Tallinn, the Taxify drivers who are not going along with the price dumping are still getting a lot of work.
That’s a bit like the decision who I’d have drive my mother to the airport. Do I call a firm I don't know and that might screw her over? The driver might take the scenic route, and she’ll end up late. No, I’d rather call one of the big and expensive firms. Because they’re reliable and trustworthy. For that, I'm happy to pay a premium.
Uber is in Estonia for PR, and to deal with Taxify
Except for those who ride with Uber for a particular reason, be it wanting to be fashionable by association or because the ride is cheaper or the service simpler, people’s first reflex is to go with what they know, and with what they trust.
If Taxify’s business model follows this principle - and it does - the relatively small Estonian contender becomes a potentially serious long-term competitor for Uber. They may not grow as fast, but they are solid, and they don't have to dread the moment they won't be able to secure billions worth of investment anymore.
No one knows what will happen with Uber in the long run. Right now, it’s popular. The snowball is rolling, the investors are buying in. But there are no profits in sight. At some point the cost of its overheads will start eating into the cash they have available to keep building their pyramid.
And what happens then, nobody knows. But it’s very likely that Uber wouldn’t be able to stir up artificial price wars to hype itself for long. And at that point, Taxify’s quality can beat Uber’s quantity.
Uber is here for PR; to turn those it can lobby into advocates of its cause. And it is here to deal with Taxify, one way or another.