Investments have been flooding into bike-sharing, with Shanghai-based Mobike and Beijing-based Ofo as main players, including funds from ride-sharing giant Didi. But bike-sharing is nothing like ride-sharing warns Peking University professor Jeffrey Towson on his LinkedIn page. Five arguments.
Bicycle-sharing does not have a network effect.
Ride-sharing (i.e,. using cars) is awesome because it has a powerful competitive advantage via a two-sided network. Basically, each additional rider increases the networks’ value to the drivers (i.e, more customers and they are closer by.). And each new driver increases the value of the service to each rider (i.e., shorter wait times, more cars available). So bigger platforms actually have a superior service offering to both populations. And the market usually collapses to the leading companies quickly (Uber and Lyft in the USA, Didi in China, Ola in India, Grab in SE Asia, etc.).
Additionally, once the market has matured, it is very difficult for a new entrant to break in. If you then want to launch a ride-sharing service, you will have to offer the same big driver network and short wait times as the dominant competitors from day one. But to get all those drivers, you have to offer them a big customer base. It’s the multi-sided platform “chicken-and-egg” problem but with entrenched competitors. This type of indirect two-sided network effect also happens in home sharing (AirBnb), credit cards (Visa, MasterCard), app stores (Apple, Google Play), auction houses (Sotheby’s, Christie’s), and even shopping malls (sort of).
But none of this happens in bicycle-sharing. There is no second population of drivers using the platforms – and providing the cars (which are the key assets). You just need to put lots of bicycles around town. Each new rider does not add any value to the other riders, nor to a population of drivers.
Bike sharing is basically a commodity b2c service. It is a traditional merchant business. Being bigger helps somewhat but it is still fairly easy for a new entrant to enter. All you would need is about 30,000 bicycles (Ofo currently has about 95,000). That would cost about $2.5M. So this is a cheap and fairly easy business to enter, which will impact long-term profitability.
However, in the short-term companies like Ofo and Mobike should do really well. They are offering an innovative new service and are first-movers in a massive market.
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