What Is a Sustainable Competitive Advantage? Competitive advantage is measured by profit share — a company’s share of an industry’s profits. This definition means that a competitive advantage is impossible if an industry lacks profitability. And based on the financial results of Lyft and Uber, there are no profits to be had in the ride-sharing industry. For instance, Lyft posted a $900 million loss in 2018 and Uber topped that with a $3 billion loss from operations. The problem with ride-sharing — a so-called two-sided market — is that there are low barriers to entry and the switching costs are low on both the supply side — the drivers — and the demand side — consumers. As a result, the industry features “numerous players offering virtually the same services. They are in a spending arms race to draw new drivers and consumers, bidding up ads on Facebook and Google and forking out hefty bonuses to new drivers,” according to the Wall Street Journal. Uber’s market share lead is a pyrrhic victory since the company is losing money. Nevertheless, those market share gains provide an opportunity to highlight the fundamental problems with its strategy by examining where Uber falls short on three key elements of competitive advantage. 1. Giving customers more bang for the buck When people buy things, they compare different suppliers on a ranked set of factors. For Amazon customers those factors, or customer purchase criteria (CPC), include price, fast delivery and reliable service. Consumers choose Amazon because it does better than its competition on these CPC. My experience suggests that ride-sharing CPC include how long riders must wait for a driver, whether the fare is competitive, and whether the driver is competent and unlikely to do something nasty. Lyft’s ability to increase its U.S. ride-sharing market substantially when Uber was suffering from its period of worst public attention in 2017 suggests that Uber has been losing out on that third factor. Indeed, Uber’s prospectus highlighted this problem noting that “in 2017, the #DeleteUber campaign prompted hundreds of thousands of consumers to stop using our platform within days. Subsequently, our reputation was further harmed when an employee published a blog post alleging, among other things, that we had a toxic culture and that certain sexual harassment and discriminatory practices occurred in our workplace.” Lyft gained market share as a result of its perceived superiority over Uber on that third criterion. In May 2018, Lyft said its U.S. ride-sharing market share had increased to 35% from 20% in the fall of 2016, according to CNBC. Sadly for Uber, its new CEO Dara Khosrowshahi, has not made these problems disappear. For example, an April 4 New York Times article documented passengers getting into a car that they thought was an Uber — but was in fact driven by a criminal. And on April 13, the Sun Sentinel wrote about an Uber driver arrested for attempted sexual battery. 2. Harnessing capabilities to win at scale Winning and keeping customers — especially when a company has millions of them — depends on doing certain things well. For Amazon, such capabilities include offering a wide selection of products and services, operating an efficient supply chain to fulfill orders; and providing excellent customer service. Uber’s prospectus documents what sounds like a brilliantly conceived collection of capabilities — which it dubs the Liquidity Network Effect. The basic idea is that as the number of drivers increases in a new location, Uber’s market coverage improves which reduces average wait times and attracts more consumers. The boost in demand increases the volume of trips which in turn increases driver utilization — attracting more drivers and cutting fares. 3. Sustaining competitive superiority Uber’s advantage — it clearly dominates the U.S. ride sharing market — is not sustainable because investors are willing to fund rivals who compete away all the profit in the industry and more. The capital lets rivals replicate Uber’s basic strategy while charging low fares and paying up for drivers. For example, Lyft raised over $4 billion since the start of 2018—including more than $2 billion in its March 29 IPO—”and lured numerous riders as Uber struggled with scandals that hurt its brand. Lyft has also aggressively offered discounted fares in recent months,” according to the Journal. This put the brakes on Uber’s growth. For example, in its S1, Uber said that its revenues have been diminished due to “heavy subsidies and discounts by our competitors” which the company has been matching “in order to remain competitive.” In the last quarter of 2018, this price war cost Uber growth in the revenue it gets from ride-sharing. For instance, total fares paid by riders rose 9% but its adjusted revenue — which tracks Uber’s share of rider fares paid was unchanged, according to the Journal. The total bill paid to drivers and restaurants by Uber Eats customers rose an impressive 20% while Uber’s share of those revenues tumbled 14% during the quarter. And that trend is likely to persist — Uber expects that its “take rate” — its share of the customer payments — will “decrease in the near term,” after having improved over the past few years, noted the Journal. Since Lyft is suffering from a busted IPO — its shares have fallen 32% from their first day peak of $88 — and Uber is in danger of suffering a similar fate; it remains to be seen whether public investors will be willing to continue to fight this money-losing battle where scale does not confer pricing power or lower costs. The share prices of these companies could rise if they can grow revenues much faster than investors expect. But since they compete in inherently unprofitable markets without sustainable competitive advantage, investors should look elsewhere for public equity profits.