Harry here. After the recent Uber-Didi Chuxing truce, there’s been a lot of talk about what will happen to Lyft? The deal will obviously hurt Lyft’s chances a little bit, but I don’t see any reason why rideshare will be a winner-take-all market. There is too much money at stake and, while there’s a lot that Uber does well, there are also a lot of areas they’re struggling in. Smaller and more agile companies can and will target those shortcomings, and although it may be tough to surpass Uber, there’s definitely room for multiple players.
Today, RSG senior contributor John Ince takes a look at Lyft’s future, some Uber IPO talk, and an interesting court decision in Seattle.
It’s Uber’s world — does Lyft have a future in it? [San Francisco Chronicle]
Sum and Substance: Can Lyft survive as the Avis of ride-hailing, a perpetual No. 2 to Uber’s global dominance? Or is on-demand transport a winner-take-all market that will doom a smaller company like Lyft to irrelevance? The question of Lyft’s future has re-emerged in the wake of its reported hiring of Qatalyst Partners, which specializes in helping tech companies find buyers and investors. Add to that Uber muscling in on Lyft’s key partner for global expansion, and the future doesn’t look rosy for the company with the iconic pink mustache.
“There’s a weird bravado in the startup space that all these markets are winner-take-all,” said Max Wolff, chief economist at Manhattan Venture Partners, an investment bank specializing in late-stage private companies, which has facilitated some investments in Lyft but doesn’t have a stake in either Lyft or Uber. “Very few markets ever have a single, stable monopoly unless it’s granted by the government. It’s good to be the king, but even in places with a clear, monumental king, there are other companies eking out a good living.”
Uber polished its crown by joining forces with China’s Didi Chuxing last week to create a virtual monopoly for ride-hailing in China, with Didi taking over Uber’s China business. The Chinese company had invested $100 million in Lyft last year, and the two had formed a global anti-Uber alliance along with India’s Ola and Southeast Asia’s Grab. Didi now has a $1 billion stake in Uber, and Uber owns a fifth of Didi.
Lyft is smaller than Uber by nearly every measure: private market valuation ($5.5 billion for Lyft versus $68 billion for Uber); money raised (Lyft, $2 billion; Uber, $15 billion in equity and debt); and cities served (Lyft, 200 in the United States; Uber, 450 cities worldwide). Lyft believes it will achieve a natural duopoly in the United States. “Consumers want choice; they want to be able to open both apps and see who’s closer and who’s cheaper,” said a source close to the company who was not authorized to speak on its behalf.
My Take: This is the question of the hour in the ridesharing world: what will happen to Lyft? Carolyn Said of the SF Chronicle is one of the most astute observers in this space, and she seems to be suggesting that Lyft is going to survive in some form. Perhaps they’ll be acquired by GM, who already have invested $500 million in them. Perhaps they’ll continue to compete with Uber and continue bleeding red ink. Perhaps they’ll find some other creative solution that we haven’t considered. Say what you will about Lyft – they’re a resourceful bunch. What do you think will happen to Lyft?
Why Uber Might Stalk an IPO Sooner Rather Than Later [Wall Street Journal]
Sum and Substance: Uber Technologies Inc.’s recent sale of its China business for $1 billion while acquiring about 20% of rival Didi Chuxing Technology Co. has been widely hailed as a potential step toward an initial public offering. That is true. Uber Chief Executive Travis Kalanick has said the company was losing $1 billion a year in China; eliminating those losses makes an IPO more likely. But it also masks much of Uber’s motivation to go public in the next 18 months.
Here’s another factor: the likelihood that Uber’s revenue growth will soon slow significantly, if it hasn’t already. Since Uber’s shareholders aim to fetch the highest possible price for the company, it is better for Uber, which remains unprofitable, to go public before its growth slows too much. If Uber times it right, it can make investors in public markets believe it is a good buy—even at a valuation greater than its most recent $68 billion.
“The challenge from an IPO perspective is, Uber is going out at something above $65 billion, so it’s hard to pitch that as a growth story,” says Anand Sanwal, chief executive of CB Insights. This isn’t just about the law of large numbers. There are reasons to think Uber’s growth has slowed or will soon slow. First, Uber may be close to saturating the U.S. market for its primary ride-sharing service. Market researcher eMarketer predicted in May that the rate of growth in the number of Americans who use a ride-sharing service will shrink to 7.2% in 2018, from a projected 13.3% in 2017. Of course, existing riders may use the service more often.
But that alone might not be enough to justify Uber’s current valuation. Uber touts a recent Pew finding that 15% of Americans have used either Uber or rival Lyft Inc., suggesting both companies have much room to grow. But the same study found that Uber’s core ridership is a narrow slice of the U.S.: young, urban and wealthy, with access to mass transit, taxis, car-sharing services like Zipcar and amenities within walking or biking distance.
The upshot: Uber’s explosive growth to date is effectively the low-hanging fruit of the ride-sharing market, in both revenue and profit. To continue growing at its current pace, Uber will need to penetrate suburbs and second-tier cities. Residents there are sparser and have fewer complementary transportation options, meaning they won’t yield as much revenue or as many per-capita rides as bigger, denser cities.
My Take: Lot of good points in this article. Timing an IPO right (along with pricing it right) is a key determinant of success for a company’s financial future. Uber’s investors are chomping at the bit. They want liquidity. They want some tangible return on their money before the growth rate starts to slow down. There are a lot of questions market hovering over Uber’s future – especially with over 70 lawsuits pending. I’m betting that Travis Kalanick is going to accede to his investors wishes sooner rather than later. What do you think?
It’s time for Uber to show it’s more than just a glorified taxi company [Quartz]
Sum and Substance: Uber’s quest to conquer the global ride-hailing market is starting to come undone. On Monday (Aug. 1), Uber ceded China to Didi Chuxing, the country’s most popular ride-hailing service, ending a lengthy and expensive battle. Wednesday brought another setback. Didi and Softbank are reportedly set to invest up to $600 million in Grab, Uber’s chief competitor in Southeast Asia.
Uber’s $62.5 billion valuation largely rests on expectations that it will be the global leader for a new mode of shared transportation. But the events of this week have called that outlook into question. China was the holy grail of Uber’s ride-hailing ambitions, with a potential market estimated to equal, if not exceed, the rest of the world combined. Even if the Middle Kingdom ultimately proves an outlier, Uber may have a tough time reassuring investors of its path to global ride-hailing dominance when it lost the battle there so publicly and so quickly.
More than ever, Uber needs another compelling reason to justify its lofty valuation. Fortunately, it already has one: logistics. While Uber is best known for moving people, it has also slowly been building out services that transport goods. It has UberRush, a delivery platform for small businesses (and, in New York, also a messenger service), as well as UberEats, a food delivery program much like Grubhub. Both Uber and Lyft are also trial partners in a program to deliver groceries for Walmart.
My Take: Is Uber really worth what some investors are betting it is? It appears that their investors’ infatuation with everything Uber is finally starting to get a dose of reality. When history writes the story of Uber, the China exit / sale to Didi may be viewed as the inflection point. The Didi deal wasn’t really a bad deal for Uber, but it opened Uber up to second guessing.
Now it appears the second guessing is extending well beyond China to the U. S. operations and their business model in general. Considering they entered with nothing in China only a few years ago, and came out with over a billion in cash and 20% of what will likely be Asia’s largest redialing company, we shouldn’t be too rash in our criticism of Uber.
I’m not convinced that logistics in the answer for Uber. There’s intense competition in this space and I just don’t see that Uber’s assets translate well here. As a driver do you want to spend your time looking for downtown parking spaces that don’t exist so that you can make a few bucks delivering food or some other commodity? I’m just not sure there’s an easy answer to the question of how Uber justifies it’s $68 billion valuation.
Uber and Lyft Won’t Be Happy About This Seattle Court Ruling [Reuters via Fortune]
Sum and Substance: A federal judge on Tuesday dismissed a lawsuit against the city of Seattle over a landmark law which allows Uber and Lyft drivers to unionize. Seattle last year became the first U.S. city to pass a law giving drivers for ride-hailing apps, as well as taxi and for-hire drivers, the right to collectively negotiate on pay and working conditions. The litigation unfolded amid a national debate over what level of benefits are owed to workers in the so-called “gig economy.” Both Uber and Lyft vigorously opposed the measure, arguing that existing federal labor law trumps local legislation.
Uber and Lyft Drivers Can Now Unionize in Seattle: The U.S. Chamber of Commerce, a federation of more than 3 million businesses, filed a lawsuit in March and asked a Seattle federal judge to suspend the ordinance. In a ruling on Tuesday, U.S. District Judge Robert Lasnik sided with city officials who argued that the lawsuit was filed too early because the ordinance had not yet taken effect, and who said the chamber did not have legal standing to sue because it was not directly impacted.
My Take: The nightmare scenario for Uber and Lyft just took one step closer to becoming a reality. If drivers start organizing, it’s anybody’s guess what happens to this industry.
Cheap fares fueled the rise of ride-hailing. But that can’t last forever [LA Times / Associated Press]
Sum and Substance: In the fight for more customers, drivers, and market share, ride-hailing companies have in recent years embraced a simple but powerful strategy: cheap rides. Uber, Lyft and other firms have used their ample venture capital backing to subsidize drivers and lower fares, igniting a price war that has benefited passengers at a great cost to the companies themselves. It’s a policy so common that customers have come to see heavy ride discounts as the norm, but it’s also now facing new questions after Uber opted this week to cede the Chinese ride-hailing market to fierce competitor Didi Chuxing.
If Uber, which is valued at $62.5 billion, is no longer sinking a billion dollars a year into artificially keeping fares low in China, will it redirect those funds back home to fend off competitors such as Lyft, Juno and Via with even more subsidies than before? Or is it a sign that fare subsidies are flat-out unsustainable, with Uber’s retreat from China serving as proof that the strategy doesn’t work? “A company like Uber has to balance two things: gaining market share while also demonstrating to investors they can turn a profit,” said Arun Sundararajan, author of “The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism,” who noted that as the ride-hailing industry matures, the race to the bottom makes less and less sense.
User growth may have been the dominant metric for success 18 months ago, but if the last year is anything to go by, investors are now demanding a path to both profitability and an initial public offering of stock — one that is likely to remain blocked if Uber continues to spend the way it did in China. “The U.S. is the market investors are looking to as proof that Uber’s model can be profitable in a way that justifies its valuation,” Sundararajan said. “It’s going to be hard to get to profitability if they sustain a price war with Lyft.”
My Take: I tell this to my passengers all the time: “If you like Uber / Lyft fares, enjoy them while they last.” This fare war isn’t going to last forever. It can’t. Uber and Lyft are both losing too much money. Uber lost $1.7 billion on $1.2 billion in revenues in the first three quarters of 2015. Lyft is losing $50 million a month. These are not comforting numbers for anybody who wants these companies to survive over the long term.
Readers, what do you think of this week’s round up?
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-John @ RSG