Ola Cabs: The “Copy-Cat” beating Uber at its own game in India.
Ola Cabs, which built its business model on Uber’s success in the US, is significantly ahead of Uber in India with estimates suggesting an almost 80% market share to Ola. How could an India based start-up beat a giant like Uber which has expressed a strong intent to win the Indian market? What lessons can be learnt from the Ola success for other players planning a similar strategy? Is this initial success of Ola Cabs sustainable in the long term?
Context:
The Indian market provides a huge opportunity for online cab aggregators with estimates suggesting growth levels of 30%-50% month-on-month. This has led to an intense competition to win in the market and billions of dollars of investments in this space. The two major competitors in this space are the $100Bn valued and global firm Uber and the $5Bn India based Ola Cabs. The results to date are quite surprising – Ola Cabs, which built its business model on Uber’s success in the US, is significantly ahead of Uber in India with estimates suggesting an almost 80% market share to Ola. How could an India based start-up beat a giant like Uber which has expressed a strong intent to win the Indian market? What lessons can be learnt from the Ola success for other players planning a similar strategy? Is this initial success of Ola Cabs sustainable in the long term?
Building Business Through Indirect Network Effects:
The success of the cab aggregator business model, like any other two-sided market place offering, depends on the ability to scale both the users of the service and providers of the service. There are strong indirect networks effects in the model where the higher users on the platform lead to higher drivers coming onto the platform as they can get more rides which in-turn drives a higher number of users who can now access the cab service in a more convenient and faster way.
Ola Cabs has been extremely aggressive in capturing both sides of this market. They priced their offering at a very attractive price (at the levels of auto rikshaws – a 3 wheeler typically used for local commute in India). In parallel, they started to incentivize drivers heavily to ensure they do not leave the platform in the initial periods when not sufficient users were on the platform.
Value Creation:
Ola Cabs has been very successful in creating value through their business model. The users were able to get a much better and convenient mode of transport for an attractive price. The drivers were earnings higher than they normally do due to Ola’s high incentives. Where Ola differentiated themselves to create value was through the customization of the business model for the Indian customer:
i. Ola used smaller hatchbacks for their attractive price which was an instant hit with customers. This also helped them to bring a lot of drivers onto the platform as such hatchbacks were a much larger portion of the Indian Market. Uber on the other hand announced their entry by providing premium cars to attract consumers at a higher price which was not as successful.
ii. Ola created value to customers who did not use / were not comfortable with sharing credit card details by having a pay-with-cash model which significantly expanded the user base and allowed them to create value for a larger customer base
iii. Similarly, Ola understood the relatively low smart phone penetration in India and had an option of booking cabs through their call-center – another area where Uber still lags
iv. For drivers, Ola was the first to come up with apps based on local languages for the drivers who were not educated in English and could not use the traditional English app of Uber
Value Capture:
Ola has been able create a lot of value through their business model but yet unable to capture any value for themselves given the intense competition and their fear that Uber will take market share. The pricing of Ola for the customers is low. In addition, the incentives to drivers are such that they get paid 3-4x the value of a trip that they ply. Ola has put itself in a precariously delicate situation to create value for the customers and users but is unable to capture any of it because of the intense competition they set-off with Uber through their pricing and incentives to drivers.
Will Uber be Able to Win in India:
The learning from the US is that there can be 1 large player and a close second. The market gives the opportunity to grow without getting into a price war. Ola, like most Indian consumer start-ups, missed this and has put themselves in a position where they need to burn cash to maintain their share. However, the moment Uber and Ola stop a price war and move to a fair pricing Ola has its significant share which will help it capture a lot more value than Uber can. The question now is whether Ola can continue to raise cash till that happens (not difficult given the support they enjoy from SoftBank, Accel Partners, GIC etc) or will Uber, with its own huge cash pile, drive Ola out of business and aim to capture share. Whichever it is, the biggest winner, for the time being, seems to be the user in this battle for indirect networks effects!
Hooray for network effect-driven competition benefitting the user!
Your points about why Ola was able to beat Uber were very interesting, and highlighted to me the importance of context-specific platform investments. I think people generally think that “platform R&D” (to borrow the term from the simulation) is always a generic push in the same direction. However, with Ola it seems like they’ve made R&D investments specifically catered towards the Indian context, whereas Uber has tried to adapt better to a credit card- and mobile-heavy userbase. Consequently, Ola has become more entrenched in India, while Uber has become more entrenched in places like the US.
So given that Ola’s model clearly works in India, it’s surprising that Uber is unable to just copy the same India-specific R&D investments to have better results against Ola, especially given that India is a huge priority for Uber and Uber has a lot more cash to work with. The problem, however, doesn’t seem to be “symmetric”: if we think that over time India will converge towards the US in terms of credit card and mobile penetration, I don’t think Ola would have a hard time mimicking Uber’s R&D investments to better cater towards that crowd. Perhaps it is a general fact that as long as you a) get the customers first, and b) continue changing your product based on your customers’ changing needs, you’ll be able to continue benefitting from the network effects.
This is interesting because it perhaps speaks to the cross-country limitations of network effects. Maybe this is to be expected for products that deal with people and regional logistics issues (e.g. Uber/Ola, maybe something like parcel delivery services). But, it also seems to be somewhat applicable to mostly software- or knowledge-based products. For example, Yelp seems to be having trouble expanding to certain non-Western geographies, probably because the customs and needs in other countries are different and not completely compatible with the R&D investments that it has made thus far.
Thanks for this, I enjoyed learning about Ola. Since it seems that the service has an advantage over Uber in terms of cash payments and reserving cars via a call center, why do you think that they can’t raise their rates to capture more value? If Uber doesn’t offer these options, it seems these users would be locked into price hikes because they cannot or prefer not to use Uber.
Is Ola’s success only limited to its first mover advantage? I wonder if the company has any ambitions to move beyond the Indian market. If it’s true that the cash payments and non-smartphone booking are that much of a differentiating factor, it could capture some market share in other territories as well.
Finally, I wonder if Ola has any ambition to get into other services and technology advances like Uber does. Package / food delivery? Self-driving cars? If Uber gets there first, they may be able to compete with Ola on price by a large margin, which could erode some of their current market advantage.
Karthik, thank you for your thoughtful post about Ola Cabs. You pointed out that Uber entered the market by offering high-end cars for premium prices while Ola entered with lower-cost hatchbacks. However, the difference in how the two companies approached the Indian market extends further than cost. Whereas Uber focused on attracting independent drivers to its platform, Ola Cabs began by simply allowing consumers to book ordinary taxis. In a sense, Ola Cabs’ offering was “backwards compatible” with the predominant existing form of hired transport. This is analogous to the approach of new PC operating systems. Retaining backwards compatibility with apps developed for the prior generation encourages consumer adoption of the new OS because it comes with an existing ecosystem (albeit one that is not as “up-to-date” as the OS itself). Similarly, working with existing taxis and taxi companies allowed Ola to rapidly scale the supply side of its platform. This, in turn, has allowed it to more rapidly add users and take a lead in Indian tech-enabled transportation. The downside of relying on taxis is that it’s even easier for taxi companies to multi-home than independent drivers – insofar as Ola’s initial network is built on taxis, it offers a relatively weak network effect. Indeed, Uber has started to also attract taxi supply through its “UberTaxi” offering.
More generally, it is not surprising that Ola has been able to successfully compete with Uber in light of how transportation network effects work. The vast majority of a typical consumer’s transport needs are within the city he/she lives in. As a result, the typical consumer doesn’t care much about the supply density of drivers 50 miles away, let alone the density of drivers in other states or countries. Similarly, the typical driver doesn’t care about user density anywhere other than the confines of the city in which he/she drives. Therefore, the cross-side network effects for an app like Uber are uber-local. In fact, they are among the most local of any tech-based business. Online commerce, for example, has at least national network effects because merchandise can be shipped between merchants and users anywhere in a country with ease. Social networking arguably has international network effects because many users have connections to multiple parts of the world. However, the fact that Uber is the top player in the US is nearly meaningless when it comes to competing in India, at least from a network effect perspective.
Of course, Uber’s global scale may offer it traditional scale economies on the cost/capital-side. For instance, Uber can amortize its tech development costs over a broader revenue pool. However, returns to scale from tech development quickly peter out because tech development costs are minimal compared to the variable costs of operating networks / paying drivers. Uber can also subsidize the development of new networks (like the one in India) with cash from already-profitable locations or externally raised capital. However, a “cost-of-capital”-based advantage is among the least valuable – Uber is no more differentiated on this basis than a Google or even a Ford would be in entering tech-enabled transportation in India.
Given the lack of a transferable network effect and the lack of a clear cost advantage, there isn’t any reason why we would expect Uber to have any advantage in India vs. Ola. If anything, given Ola’s market-specific features, we should expect Ola to do well. However, as you rightly point out, it is unclear whether the network effect will ever truly be “monetizable” in light of the ease of multi-homing for both drivers and consumers…
karthik, great post! I enjoyed very much reading it, particularly because something similar is happening in other emerging economies. In fact I have wrote about Easy Taxi, a similar platform that has been successful in Latin America.
There are many similarities, and I believe that the 4 points that you mention are critical, because they have “disrupted” the market minimizing the disruption (e.g. local languages, call centers).
In addition to the cash concern, I would also be worried about what could happen when all of these “local barriers” start to minimize (e.g. smartphone penetration) and in the same way, the switching costs between different platforms start to minimize as well.