Two months before Hail-o called it quits in North America, the NYC Taxi and Limousine Commission (TLC) was transported to bizarro world. Black Car industry insiders at the NYC TLC watched a furious Josh Mohrer, Uber’s NYC GM, leaving the TLC after lobbying to preserve the old-school regulatory regime. Uber, often equating regulations to cronyism, pioneered violating those same rules just 3 years earlier in its quest to build the largest car service in NYC. But times changed since Lyft had come to NYC: Lyft was offering $500 to each Uber driver that would also take their rides – a practice historically disallowed according to a former TLC assistant commissioner. (Uber has now reportedly reversed their position yet again).

Lyft is borrowing from Uber’s own playbook. In many ways it plays perfectly to Uber’s strength: Uber has dominated the fundraising game so it prefers expensive competition. Paying incentives to drivers and passengers is a tactic where Uber can outlast anyone. Lyft can annoy them, erode their profitability, and may even be able to endure. But other lesser clones like Hail-o simply do not have enough powder to fight this type of battle and now have a high risk of a funding shortfall in their next round. Investors know that those clones will always be out-gunned. Trying to compete when the game is buying market share is a losing proposition.

Despite the strength of this position, there is something curious – almost incumbent-like — about Uber’s appeal to regulation during this latest battle.

Uber shares the model of many VC-backed startups. They are willing to compromise near-term profits with the goal of reaching a profitable market position nirvana. Uber is now the largest single player in the world-wide ground transportation market. In a world where the pace of innovation is so fast and where they face the imminent additional financial scrutiny of an IPO, Uber has extra motivation to graduate from a startup buying market share to the incumbent reaping profits.

With this shift to incumbency, the wars of buying marketshare will dwindle. There may still be skirmishes but the market is begging for alternative forms of competition. Incumbents, after all, are meant to be disrupted.

The Structure of the New Incumbents

Uber and its clones are effectively building a full-stack startup: recruiting and managing the drivers, providing the intermediary software, and acquiring the clients. Investors in Uber are really investing in a car service with a software company layered on top. Uber’s high valuation is predicated on the assumption that they’ll have a large market with healthy margins, although the car service industry historically has been a tough, low-margin business.

This tension has some praising Uber as the next Amazon, while others think they are waging an unsustainable and capital-intensive battle to lead a low-margin business.

Compare other full-stack examples: Webvan and Amazon. Webvan re-created all of the existing infrastructure of a grocery store from scratch in addition to their unique infrastructure needed for ecommerce. Webvan artificially inflated the costs of a commodity portion of the stack, and in the end could not maintain a viable business. By comparison, Amazon used the web to achieve scale and drive down costs of the commodity part of the stack: Amazon has lower cost of goods sold than a conventional bookstore, and lower distribution costs than their ecommerce competitors.

Ironically, in their quest to buy market share Uber has driven up the costs of highly commoditized portions of the stack: recruiting drivers, maintaining cars, ensuring insurance compliance.

As CEO and co-founder of Whisk I have watched Uber’s success and thought deeply about avoiding their vulnerabilities to further disrupt this market. Rather than build a full-stack startup, Whisk is becoming the infrastructure to mobile-enabled ride delivery – more like Sabre and less like JetBlue or Virgin. With this dramatically different model, Whisk is competing in New York, the largest taxi and for-hire vehicle market in the US (40% of current total US volume, according to analysis of data from the Taxi Factbook, Market Data, and the NYC TLC). We have achieved double-digit month-over-month growth, while having raised about 2% of Uber’s capital — a position that requires us to compete through further disruption rather than buying market share.

Cheap, Cheap, Cheap Customer Acquisition

The go-to acquisition model of Uber and every ground transport app so far has been direct-to-consumer credits. Talk to anyone with an Uber, Lyft, Hailo, or another similar app, and you will find that they likely received $25–30 when they signed up and $10-$30 for every referral they generate. These costs are on top of frequent stimulation e-mails and program spend. Add this up, and you find a total acquisition cost of $100+. You can see more examples of Uber’s high customer spending here and here.

Whisk has taken a lower-cost model for acquiring customers by replacing industry infrastructure. All passengers are already getting rides from someone: the existing car services and taxi companies. In fact less than 5% of rides in NYC are requested via smartphones now, according to Taxi Factbook and NYC TLC data. So it’s not surprising that a midsize NYC car service will have 100,000 customers even though they have no functional mobile app. By replacing their infrastructure, Whisk can activate enough users to achieve the equivalent of $10M of acquisition cost. While Uber and its clones pay to shift demand around, Whisk has almost eliminated the cost of customer acquisition by building on top rather than reproducing the commodity portions of the stack.

Money to Burn and Drivers to Churn

Ground transportation is a service, not just a technology. Uber’s hoards of independent contracting drivers means that Uber is responsible for recruiting, managing, training, and monitoring thousands of drivers directly.

Having thousands of drivers on our infrastructure ourselves, we frequently encounter drivers coming in and out of the Uber fold. They frequently report, “My friend and I received $500 each after he told me to sign up.” In addition to $1,000 signing bonuses, Uber frequently spends $300+ on driver enablement (giving iPhones and training), and incurs nearly $200 of soft costs of advertising for a driver who may turn over in as quickly as 2 months. If in their wars to recruit drivers, Uber sustains 10% quarterly driver churn in a modest metro with a 1,000-driver base, they would incur costs of $600k / year. That is the equivalent of the gross margin (20%) of $3M in fares, just to get to breakeven. And that is just the beginning; one NY Brooklyn livery reported driver incentive payments approaching $5k per driver from one of the clones who is getting more desperate to attract drivers. You can read some examples of Uber driver recruitment initiatives here, here and here.

By contrast, just like Opentable doesn’t need to recruit chefs to provide restaurant reservations, Whisk doesn’t need to recruit drivers to build a car service; we just need to recruit car-service partners to our platform. These partners feed their drivers with their existing, entirely different book of business, which dramatically exceeds that of the current market for on-demand rides. Some drivers earn their entire expected take-home pay ($200-$300 /day) with a few hours of corporate work.