Just two months in, stationless bike share is clearly resonating with Seattle riders. Ridership is far higher than previous efforts, bikes are making their way to underserved communities, and more companies are jumping into the fray with brightly colored rides.
The city is on the one hand promoting it as a key part of urban mobility (Pronto 3.0!), while on the other making it clear that this is just a pilot. Bike friendly Councilmember Mike O’Brien has said he’s “skeptical” of the business model.
So what is the business model? The Pronto debacle seems to have made it clear that the city has no appetite for publicly-subsidized bike share in the near future, so it’s on Ofo, LimeBike, Spin and the rest to make it pencil on their own.
This is not a business blog and I don’t care where venture capitalists spend their money, but since bike share is evolving into a key part of our transit infrastructure, it’s worth thinking about whether they’re on solid ground. Are bike shares the fidget spinners of urban transportation? Or will they be here for the long haul? Here’s Bloomberg on the state of the business in China, where bike share is a full-on fad:
“It’s like a trophy to own a big sharing internet company in China,” said Mark Tanner, founder of China Skinny, a Shanghai-based consultancy. “From a business point of view it makes no sense.”
For now, profit remains elusive. Despite the uncertainty around the bottom line, all are spending heavily on promotions and discounts in a race to build scale. And things may soon get crazier.
The most basic question is whether the underlying economics are solid. Promotions and discounts aside, my understanding is that the bikes cost a few hundred dollars to make and generally recoup those costs in Seattle with a few months of usage. That doesn’t include operations (rebalancing, repairs, etc.) but it seems like the basic math might work out, assuming ridership stays constant as the volume of bikes ramps up.
But a business that grows organically and makes a little bit of profit is what the tech folks dismiss as a “lifestyle” business. Venture capitalists generally want to gamble on potentially transformative companies (see Google, Uber), knowing that most will fail. And there’s plenty of venture capital in bike share. So what makes for success on venture capital terms? How might these companies generate profits on a large enough scale to pay back their investors?
One way would be to have some sort of transformational technology that rivals can’t match. That seems unlikely. Bikes are commodities, as are apps and GPS sensors. Any small technology advancement that one company offers, others can and will match. Data mining might be relevant here (and more advanced sensors on the bikes open up some interesting possibilities), but it’s hard to see how that turns into a sustainable advantage.
Another way to achieve profitability would be via network effects. Facebook and Uber both connect people (Facebook connects your friends, Uber connects drivers and riders) in a way that’s hard for a new market entrant to match. But again, there’s no real network effect in bike share.
The final way – mentioned in the Bloomberg article above – is through scale. By focusing relentlessly on the customer experience and leveraging lots of VC money, a company might grow so big that it starts to have marketing and operational advantages, to the extent that the bike manufacturers start building the bikes to the company’s specifications (Think Walmart). If one company’s bikes are everywhere, it’s not even worth installing another app. You’ll just sign up for an unlimited plan and be done with it.
In the meantime companies will continue to add new features to make us happy. It’s remarkable how fast both Spin and Limebike started offering cash-only options, for example. They’ll also sign up businesses who want to offer employee perks. Who knows, bike share might one day come free with your gym or Amazon Prime membership.
At some point, however, the market will saturate and consolidation will begin. The smaller players will probably push for some kind of open standard so that bikes can be discovered and rented in a single app. The bigger players will probably resist (think Kindle vs. ePub).
Eventually, mergers will happen. Car2Go is apparently in merger talks with ReachNow, and I wouldn’t be surprised if a similar consolidation happened in bike share soon.
In the meantime, enjoy the ride.