The Economics of Bike Sharing


BY HUEY LEE & NICHOLAS LUI

Six bike-sharing companies backed by billions in venture capital are engaged in an all-out war for our little red dot.

The battle began a year ago: oBike entered Singapore in January 2017, with the iconistic ofo following closely on its heels. Since then, GBikes, Mobike, SG Bike and most recently, pun champion Baicycle, with a fleet of white (白, “bai”) bicycles, have all entered the market. They’ve introduced a viral product that is cheap (just 50 cents for 15 minutes), easy to use (smartphone-based and dockless), and convenient (rent anywhere, park everywhere). Every user is a cycling advertisement zooming past plodding commuters. It’s no surprise how quickly the brightly coloured bicycles have become a part of the local landscape.

So cheap how to make money?

At first glance, the business model of bike-sharing companies seems illogical. Most firms charge around $2 an hour, absurdly low compared to the $8-12 rates at East Coast Park. That’s not even taking into account various promotions and special offers, resulting in companies like ofo offering free rides essentially all the time. How can these companies afford such rock-bottom pricing?

The answer lies in the companies’ ample coffers. Singapore-based company oBike raised USD $45 million in its series B round last year — one of the largest amounts in Southeast Asia. But that amount is paltry compared to its veteran Chinese competitors: Mobike and ofo, which raised USD $600 and USD $700 million respectively.

The capital raised allows for a scorched-earth business strategy: growth first, profitability second. Facebook, Instagram and Twitter didn’t have a clear monetization strategy for several years. Uber, Lyft, Grab, Didi Chuxing and their competitors have raised and spent billions battling each other in cities across the world, all while remaining millions of dollars in the red. Bike-sharing companies are following the same playbook: reel in users, establish their dominance, and worry about revenue later. To achieve that, firms rapidly burn through venture capitalists’ funds, setting rock-bottom prices to win market share and force their competitors to quit, leaving the last company standing with a monopoly.

The most likely outcome to the struggle for market dominance is an extension of the status quo, where the market is controlled by the “Big Three” – ofo, Mobike and oBike. While the bursting of funding “bubbles” will prompt the exit of smaller companies, funding for the “Big Three” is likely to prevail. ofo and Mobike are backed by big-name companies, such as Alibaba and Tencent, while oBike, being the current market leader, can leverage on its reputation and its Singapore roots in acquiring funding. In an oligopolistic industry, however, the question remains as to whether the firms will collude with one another or continue to engage in a dangerous game of brinkmanship.

Collusion is certainly possible. The bike-sharing industry is saturated with big-name firms that entered early and capitalized on first movers’ advantages. The incumbents already have a huge head start in bicycle ubiquity, user base and brand recognition. Even though bike-sharing’s network effects are not as strong as ride-sharing, new entrants will still need to expend massive capital to match this head start and convince consumers that they offer a superior product. This massive capital is unlikely to be forthcoming, considering the incumbents may already have bled bike-sharing venture capital dry. With high barriers-to-entry and disproportionate control of the market by the “Big Three”, tacit collusion may happen, resulting in prices increasing across the board.

However, a competitive outcome is more likely. Having invested large amounts of money, big-name venture capitalists want bike-sharing companies to achieve nothing less than a winner-takes-all outcome. In other words, outcompete your rivals until you consolidate market share. This is evident in China which has a more mature bike-sharing economy than Singapore. China’s bike sharing market is dominated by Mobike and ofo. Despite entering the market more than 3 years ago, the two companies are still engaged in fierce competition, fervently raising capital while keeping prices depressed. For one hour of riding, the standard rate is only between 1 to 2 yuan (0.20-0.40 SGD). The final outcome is therefore contingent on which company can maintain its loss-making prices for the longest time. However, that is the not the end of the story. If ofo and Mobike merge, as rumored, the bike-sharing industry will become a monopoly as home-grown oBike and other smaller firms cannot hope to compete against the combined might of the two Chinese giants.

Chut this kind of pattern, how to huat?

Investors in bike-sharing firms believe in this model and are betting that their firm will be the eventual winner. This putative winner, having acquired all of its rivals, or having pushed them out of the market, could then raise bike rental prices and possibly turn a profit.

However, demand for bike-sharing is likely to be price elastic: the victor still has to raise prices judiciously or face a shortfall of demand. Public transport and walking are close substitutes to bike-sharing in a pure transportation sense. There are many competing solutions to the last mile problem: MRT & LRT networks are being extended, with the goal by 2030 to make 80% of all residences a less than 10-minute walk from a rail station. Meanwhile, personal mobility devices are also growing in popularity. Bike sharing rates are cheap compared to recreational bike rentals, but merely competitive as a transportation option: travelling that last kilometer will cost you $0.77 in an air-conditioned bus or $0.50 on a bike. Raising prices after consolidating market share may not be viable.

Fortunately, there are many other promising revenue streams.

In Singapore, most bike-sharing firms collect a deposit (SGD 49) before allowing rental. Active users are unlikely to withdraw their deposits because they plan to continue renting. oBike claims to have over a million active users in Singapore, meaning it could potentially be sitting on a SGD 49 million mountain of deposits. This can easily be channeled into further expansion or directed into money markets and other investments to turn a healthy interest.

Another solution is for them to take advantage of their user base and rental system and expand horizontally into delivery and other sharing markets. Offshoots like oBike flash, a delivery service powered by users on rental bikes and Mobike Chuxing, an electric car-sharing subsidiary, could provide the necessary revenue. Firms could potentially retail their sturdy & low-maintenance two-wheelers. Xiaomi-backed Baicycle plans to offer electric bikes and e-scooters, and could potentially offer Xiaomi mobility devices for rental, allowing users to try before they buy. Creating a cashless payment system and profiting from transaction fees à la GrabPay is another option.

Perhaps the most obvious business opportunity involves selling advertising space on the bicycles to eager advertisers. There could be tens of thousands of billboards on wheels, zooming around the island. This partnership could further be extended to data-sharing. As technology companies, bike-sharing firms hold a plethora of data: user demographics, travel patterns, location data, etc. Sharing this with advertising and market research agencies, or allowing companies to offer well-timed coupons & promotions to bikers nearing their establishments could potentially be very lucrative.

Aiya, you just tell me: this one bad or good?

The intense competition has produced products of greater variety and higher quality — bicycles are lighter, rental process is smoother and many now have multiple gears — while still managing to be dirt cheap. Having our bike rides subsidized by corporate giants may seem great in the short term, but there are hidden costs to the current bike-sharing model in the long term. We need only look to more mature bike-sharing markets to see the consequences: in China, bike abuse is rampant, bike graveyards abound and bike-sharing only adds to transportation woes.

Dockless bike-sharing makes docking spaces out of public areas, congesting pathways and littering the landscape with bicycles. Firms take advantage of public infrastructure: rental bicycles are parked in bicycle parking spaces around MRT stations and parks whilst users pedal along roads, pavements and the Park Connector Networks. High bike-sharing usage stresses such infrastructure: bicycles are haphazardly parked for want of proper parking spaces, and pedestrians have to dodge cyclists on narrow pavements, not all of which are equipped for bicycle usage.

While users share some fault, the firms have failed to put in place the right set of incentives and disincentives to correct user behavior, possibly because restricting parking locations affects the convenience of their service. It is true that the government can create more parking spaces, allocate space for cycling paths and deal with abandoned bicycles in canals, drains, bushes and along walkways, but if so, this would have to be done with public money (to be reclaimed later) while the firms shirk their responsibilities. This is a classic example of the Tragedy of the Commons, in which firms ignore the social cost of their services, resulting in the overexploitation of shared resources.

The Singapore government will need to guide the bike-sharing market by forcing firms to internalize the cost of irresponsible bike usage, making firms share infrastructure costs, and working with firms to promote more civic-minded behavior to minimize these negative externalities, while still reaping the benefits of a cheap, healthy and flexible transportation option.

Huey Lee is planning to read law at University College London.

Nicholas Lui is currently pursuing his Bachelor of Economics at Cambridge University.

 

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Image Credit: Image by Chris, used under Creative Commons 2.0 Licensing without adaptation or modification.

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