Christopher S. Tang
In June 2014, Wall Street Journal announced that Uber and Airbnb are two most valuable startup companies in the world. With less than 6 years of existence, their valuations have shot up to $18.2b and $10.0b. What do they have in common?
Many praise Uber and Airbnb for using the mobile / internet platform to disrupt the traditional taxi and rental markets by providing cheaper, faster, and better services. First, they are cheaper because these two companies use an innovative business model that “connect” the buyers (passengers, tenants) and the sellers (drivers, renters) by leveraging the smartphone capabilities (real time locations, mobile/online payments, digital images) without incurring huge upfront investments. By cutting the middlemen (taxi companies, rental agents) and by reducing advertising costs, Uber and Airbnb can share these cost savings with the buyers and the sellers. Consequently, passengers save more and Uber drivers earn more. This is not surprising, but what is surprising is that Uber fare is getting cheaper and Uber drivers are earning more over the last three years (Figures).
How can this happen? Network effect is one driver, and efficient operations is the other driver. As more passengers embraced Uber in major cities such as Los Angeles, New York City, and San Francisco, more Uber drivers entered the market. Consequently, more Uber drivers on the road, the waiting time for passengers and the idle time for Uber drivers become shorter. Just like Southwest airlines with quick turnaround time, passengers get faster service and Uber drivers earn more with shorter idle time due to higher utilization (Figure).
Finally, as a fan of Uber and Airbnb, I find the service is actually better. The two-sided rating system provide incentives for Uber drivers and Airbnb renters to provide good services because higher ratings can get them more businesses. At the same time, I need to behave as a passenger and a tenant so that I can continue to enjoy cheaper, faster, and better services created by these two winners!