Mobike vs. Ofo – Blood soaked economics.

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Here comes another bloodbath.

• Another battle is brewing over ride hailing but the fact that it is bicycles rather than cars will make no difference to the blood-letting that is likely ensue.
• The big contenders in this space are both Chinese, headquartered in Beijing comprising of Mobike backed by Tencent and Sequioa and Ofo backed by Alibaba and Didi Kuadi.
• This is coming to head now as Ofo has just raised a massive $700m following on from Mobike which raised an almost-as-massive $600m last month.
• Both of these companies are going to use the money raised to expand overseas in what is likely to become a brutal battle to become the go to place to rent a bicycle.
• Mobike and Ofo offer a docking station free rental service making it much more convenient for users as they can leave the bicycle wherever they choose.
• Mobike is currently the leader with a presence in 100 Chinese cities, 100m registered users and up to 25m trips being taken on busy days.
• Ofo has a presence in 150 cities with 6.5m bikes in the market but I think it is stretching itself much more thinly than Mobike.
• This is because to get to same level of usage every Ofo bike would need to be rented nearly 4 times every day.
• Furthermore, in Singapore, where both services are present, Ofo bikes are much harder to find compared to Mobike indicating a much thinner spread across more locations.
• This is also because the Ofo app does not tell the user where its bicycles are to be found which is something that needs to be rapidly fixed if Ofo wants to have a chance of competing successfully.
• Outside of the blood-soaked economics (see below) these schemes have two big problems.
  • First: theft and vandalism. Neither Ofo or Mobike have said how much their bicycles cost to make but it is clear that they are not nearly as robust or as thief-proof as the much more expensive but bomb proof bikes to be found in many Western cities.
  • This means that they are far more prone to vandalism and theft which Ofo has particularly suffered from to date with poor locks and no GPS tracking.
  • Second: capacity management. It is not uncommon for users to all want to go in the same direction at the same time.
  • This causes problems in ensuring that enough bicycles are available at the right place at the right time which becomes infinitely more complicated with no docking stations.
  • Furthermore, Mobike and Ofo bikes have been found in trees, blocking pedestrian paths and clogging up parks when the weather is nice.
  • While one can get away with this to some degree in China, municipalities in the West are unlikely to allow it to happen.
  • For example, Bluegogo (another Chinese bike sharing start-up) was forced to shut down operations in San Francisco for exactly this reason.
• These are all problems that can be solved, but the biggest problem of all is likely to be how the economics of this business are likely to work.
• Bicycle renting is a commodity business where the barriers to entry are simply how many bicycles one can buy and make available on the streets.
• The net result is that now that both companies have a huge treasure trove of cash to invest, they are likely to go on a massive user recruitment drive.
• This means free rides and discounts in order to encourage loyalty.
• As long as one company is not more than twice the size of the other in any one location, then neither will make money resulting in substantial cash drains at both players.
• I suspect that both companies are likely to target the same international cities (like Singapore) which will result in a bloody struggle until one gives up and leaves or is acquired by the other.
• In the meantime, this is great for users who have access to plenty of cheap transport, but the minute there is only one dominant player left, prices are likely to rise.
• It is not so great for investors who will be footing the bill for winning as much share as possible, but given that this battle is effectively Tencent vs. Alibaba, is not as if they can’t afford it.