Venture Bytes #46 - NYC Slams the Brakes on New Registrations

NYC Slams the Brakes on New Registrations

If it ain’t broke, don’t fix it! So goes the saying and we couldn’t agree more. The New York City council ruled to place a year-long cap on registration of new vehicles for ride-hailing businesses. This comes against the backdrop of worsening congestion, low driver wages, and the decimation of the once-thriving taxi industry, all of which, the pro-ban lobby believes has been caused by the explosive growth of for-hire vehicles. Those against the cap cited potential price increases and challenges commuting to and from outer boroughs, but to no avail. The cap will not apply to wheelchair-accessible vehicles, nor vehicles serving an area demonstrating need in a way that does not increase congestion. This ruling affects Uber, Lyft, Juno, Via and other ride-hailing apps operating in New York City.

The popularity of ride-hailing apps has been remarkable. Not only New York City but most major cities are grappling with the meteoric rise of the apps. One common theme in all these cities is that the popularity of the apps is coming at the expense of the existing public transportation systems – subways, transit buses and the yellow cabs – which are all seeing a decline in ridership. In the process, the apps and the local politicians are facing the wrath of the entrenched lobbies.

Leaving the political and socio-economic arguments of this new law aside, if the cap goes into effect, which is likely, we believe the revenue impact on the overall ride hailing market and Uber in particular in NYC will be minimal - roughly 6% of its total consolidated revenue base. Improved productivity of the current pool of drivers, expansion of UberEATS, the company’s delivery business, and the addition of electric bikes and scooters on its platform will offset partially, if not fully, the lost revenue from new registrations.

We crunched the numbers to get a rough sense of the impact. The estimates are rough approximations based on available market data and should be viewed as baseline numbers.

• Using the 2017 actuals of 160 million NYC ride-hailing bookings and an average trip fare of $24 as the base case, the aggregate NYC ride-hailing revenue is roughly $3.8 billion. Given that total US ride-hailing revenue was $13.1 billion in 2017, NYC made up 29% of the total US ride-hailing revenue in 2017.

• Based on data from multiple sources including Statista, New York Times, and SherpaShare (a ride-hail driver support platform) and our reasonable extrapolations, the growth rate for ride-hailing vehicle registrations from 2015 to 2017 was roughly 25%. As of mid-2018, there are approximately 100,000 registered ride-sharing vehicles in NYC. Thus, 2019 will miss out on 25,000 potential new car registrations for ride-hailing services.

• Given the total NYC ride-hailing revenue of $3.8 billion from 100,000 registered vehicles, we can surmise that average annual revenue per vehicle is approximately $38,400. Multiplied by the 25,000 lost new vehicle opportunity, the NYC market impact quantifies to approximately $960 million.

• Uber has 52% market share in NYC, according to our estimate. Accordingly the company’s lost revenue opportunity will be $500 million. On a total consolidated revenue base of $8.0-$10.0 billion, depending on which year we consider, the missed revenue opportunity will be roughly 6%, offset partially, if not fully, by improved productivity and expansion of other businesses such as UberEATS.

UberEATS Business is Ramping Up

In response to the upcoming regulation, Uber seems to be ramping up UberEATS. In August 2017, UberEATS had just over 21% of the US food delivery market, followed by DoorDash at 15%, Postmates at 9%, Caviar at 4% and Amazon at 1%. UberEATS was second to GrubHub, the parent company of New York’s highly successful Seamless. As of 2017, GrubHub held a nearly 50% market share.

Uber recently changed its delivery fee structure to a scaled system between $0 and $10 based on location and restaurant, compared to its previous $5 flat rate model. Given that the change came on the day of the vehicle cap announcement, it seems like Uber is making a push for more of the NYC market to recoup its opportunity cost in ride-hailing. UBS forecasts the global market for online food delivery to be worth $365 billion by 2030, up from $35 billion in 2018. Given that NYC makes up 29% of US ride-hailing revenue, we’re assuming a similar market share for food-delivery, if not greater.

Ultimately, the exact cap on ride-hailing vehicle registrations remains to be seen. The sheer opportunity cost of losing ~25,000 vehicles will almost definitely be a hit to the market’s gross revenue, albeit marginally. However, the restriction on supply – especially with growing demand – should catalyze a productivity boost among drivers. The implementation of a minimum wage, which is also being considered, will likely drive Uber to drop drivers who don’t meet productivity goals, further boosting revenue per vehicle. This productivity boost may take some time to develop, and we believe that’s why Uber is ramping up its food delivery business. Additionally, Uber recently acquired JUMP, an electric bike-sharing startup native to San Francisco, but already operating in NYC boroughs outside Manhattan, providing a new and valuable revenue stream.

Going from Copycats to Innovators, Chinese Startups Are Turning the Tables

China is accused of shamelessly cloning U.S. tech firms and business models. According to the New York Times, intellectual-property theft accounts for over $600 billion in losses per year in the US. Copy to China (C2C) is a term commonly used to describe Chinese companies copying the business model of successful foreign businesses. But some experts are saying that U.S. companies are now ‘borrowing’ from China more than ever before. C2C has been upended by a wave of American companies looking to China for inspiration. Copy to America (C2A) could become the next wave.

While Silicon Valley companies still attract the most startup funding in the world, Beijing and Shanghai are quickly closing in. According to data from CB Insights, the two cities have attracted $72 billion and $23 billion, respectively, since 2012 as compared with Silicon Valley’s $140 billion. The US still has the most share of unicorns (47%), but that share has decreased 7% since their last analysis in May 2017. China’s share increased from 23% to 30% in the same time frame. Of the roughly 200 startups on their list, 76 Chinese startups (excluding Ant Financial ’s $150 billion valuation) had an average value of $3.8 billion while the 121 US companies averaged $3.5 billion.

Chinese cities are also increasingly dominating in mega-deals worth more than $100 million, as well as the multibillion-dollar IPO of companies. Of the 10 most valuable private companies in the world, five are now based in China, including ride-hailing giant Didi Chuxing, phone-maker Xiaomi (which went public recently) and e-commerce site Meituan-Dianping (which recently filed to go public in Hong Kong).

The differences are far greater when it comes to maturity times, or exits to public markets. The leading Chinese unicorn startups hit milestones much more quickly than their U.S. counterparts. The startups have achieved a level of efficiency and reliability that make their progress more predictable and the investment opportunity more rewarding.

Underlying China’s rise are a number of economic trends, including a growing tech-savvy middle class and a wave of U.S.-educated Chinese nationals returning home to work in China’s tech industry. According to China’s Ministry of Education, more than 432,000 overseas students returned to China in 2018 alone, representing 80% of all students. Additionally, there are 753 million mobile phone users, many of whom access the internet only by phone. Widespread reliance on phones, combined with a lack of a credit infrastructure in China have led to an explosion of creativity in payments, as well as in ‘social commerce’ that mix social media with transactions at a level not seen elsewhere.

A prime example of China shedding its copycat reputation is in the bike-sharing business. Mobike, a Chinese bike-sharing app built in 2015 rapidly gained popularity in Beijing and Shanghai. Similarly, content and short-form video apps, next-gen retail concepts like automated convenience stores and vending machines, and micro-lending, were first introduced in China. To further underscore the growing independence and innovations at Chinese startups, the Y Combinator accelerator is expanding into China.

Is it the dawn of a new era? It appears so based on recent trends. Move over C2C. C2A has arrived.