Uber's strategy right now is to maximize horizontal integration across as many markets as possible. They're leveraging cheap credit and an infusion of private money (mainly from Middle Eastern investors looking to diversify their portfolios) to expand as quickly as they can in local transportation.
This growth, combined with their subsidization across all their products, is producing huge near-term losses. However, I think it's a prudent investment. Uber needs to solidify its moat in an industry that offer little in terms of differentiation beyond price. By trying offer as many services as possible, Uber's trying to make itself the go-to hub of local transportation, and in doing so, start to change its role from a dispatch middleman to a full service transportation platform.
And so, I think in the years following IPO, we'll slowly see them reduce their efforts for horizontal expansion and slowly turn the lever back towards profit. This will happen slowly and differently across markets, with price rises starting in regions they have the strongest foothold, but will slowly trickle across all markets. The hope for them is that through this rapid expansion, they've bought enough leverage to raise prices without losing too many customers.
It's interesting how little of this strategy involves providing a better service. But I don't think they're alone or even special from this perspective (e.g. similar to the rise of Microsoft).
I think the prevalence of "business strategy", as opposed to product/service improvement, in the growth of corporations, warrants much more scrutiny than it gets. After all, corporations should serve society - how do strategic mergers, acquisitions, lobbying, PR do that?
Good for Uber, but I'm disappointed as a customer. I did extensive travel overseas in Qatar and the Careem app was excellent. They had a clear local strategy with local customization to capture users. For example
- [Local flavor] Using a button called "Yallah" instead of "Go"
- [Local Knowledge] Pre-coding airport pickup locations (unlike Uber which had you try and figure it out directly with drivers, who often did not speak English.)
- [Local Knowledge] Understanding that many parts of the world do not have street addresses!
Essentially. I'm not endorsing it, but Uber's strategy is the classic monopoly strategy. It reminds of nothing more than Standard Oil giving it's competitors a "good sweating."
As an end user of Careem, I'm waiting for the impending doom of price increase and bad service.
Uber and Careem are the only two service providers in my country (Pakistan); before Uber entered, the prices were quite high because Careem had no competition and they cashed in their monopoly. Uber entered the market and caused a price war driving prices per km down significantly and causing both providers to add new features to cater for the local market as well. However, Uber is usually thought to have a low quality of service here; drivers on their network quite literally abuse the platform; they will refuse to drive to the destination if they don't want to go there; they will use tactics to get the ride transferred from them if it's not profitable enough for them. The end result is that the customer receives a slightly cheaper but vastly inferior service from Uber. Compared to this, Careem's quality assurance and customer care is a winner.
With Uber buying Careem and eliminating competition, I can't imagine how much pain it is going to be to call a ride now, if they absorb Careem's customer-base completely and close its app. I thought there were anti-competition laws that prevented this from happening; I guess they don't apply if both the companies are foreign and the deal is happening overseas.
The rules still apply if both companies are foreign and the deal is happening overseas. The competition regulator in all the territories the companies operate need to give their approval. Take the Disney Fox deal as an example. The Brazilian regulator required that Disney divest it’s sports offerings in Brazil alone because otherwise the combined company would hold all the football rights.
If you’re wondering why the competition regulator in your country didn’t stop this particular deal there are a few possibilities.
1. They’re funded so poorly they don’t have the resources to investigate the impact.
2. They did investigate but Uber gave enforceable assurances that consumers wouldn’t be impacted.
3. Uber bribed the regulator. Not saying Uber engages in such behaviour on the reg, but it’s possible.
I think that would be because Uber has some USD 24 billion invested in it while Lyft has raised nearly USD 5 billion (figures from Crunchbase). With deep pockets, Uber's right move is to spend fast and monopolize as much of the market as possible. They do this by buying out competitors or offering massive discounts on their pricing to out run their competitors. They can afford to figure out how to be profitable later.
Doesn't this, so close to their purported IPO, fly right in the face of what they consider to be their network effect? Why would they need to buy competitors if not because it's expensive for them to compete against local upstarts who own a smaller market?
Uber's network effect is localized to cities. If Uber attempts to enter a market with a strong local player, the local player stands a decent shot at defending since Uber's global dominance doesn't really transfer over to that particular city.
This is unlike social networks, like WhatsApp, where the network effect is truly global since people often have friends and relatives in distant cities.
There's an article I read recently on this very subject. Apart from social networks, it argues that even a platform like Airbnb is much stronger because the network is broad by design, with travelers coming from far away.
Try getting someone to keep 27 different ride hailing apps on their phone, and convincing that person to maintain them all and remember which accounts correspond to which cities.
Uber only doesn't have a national network effect if you view people like software in appraising their potential behavior. Actual human behavior is thus: I have zero interest in maintaining many ride hailing accounts, I have zero interest in having numerous ride hailing apps on my phone, I want as few as reasonably necessary.
If you can get people to keep two or three ride hailing apps on their phone for one country, that's pushing the limits of consumer behavior. They do not want to bother. They also do not want to be negatively surprised by a new competing service, which limits their willingness to experiment when there are existing known solutions. They'll choose well-understood Uber at 75%-85% good enough rather than risk having a bad experience in regularly trying out a new upstart. Actual consumer behavior functions as an enormous competitive moat in fact.
I think it's a very small segment of their customer base that actually requires cab hailing services in 10+ cities. Most people working day jobs will not visit more than that many cities over the course of the year, and Uber possibly serves most of them.
$50b in revenue last year is nothing to scoff at. They have levers for profit but instead re-invest every dollar. Your argument sounds exactly like what people said about Amazon years ago.
Why that $14 billion can not be called revenue is Uber specifically structures it's business to make sure their drivers form no part of the business, instead they insist all their drivers are independent contractors.
They do that specifically to reduce their running costs and hence maximize the profit on their actual revenue.
That would be like saying all iPhone App developers are working for Apple, when in fact all Apple does is take 30% of each and ever dollar these App developer earn in sales.
Likewise Uber just puts it's 30% Uber tax on every dollar it's drivers earn.
$50bn is total bookings, which is impressive. Revenue, I believe is $11bn runrate. But that doesn’t address cash flow depletion. I do believe they have runway though
Cash in this sense means they're not giving away equity of Uber's cap table as means to finance the acquisition. Where the cash comes from is a different story. As the parent comment suggested, this "cash" is likely levered with outside capital.
As great as this will be for the tech ecosystem in the Middle East, this type of consolidation should be blocked for antitrust. It'll be bad for customers and drivers.
But it won't be blocked. Uber and Careem share common investors (aka Saudi) and this would be a huge win for them.
While this is largely true. The Middle East needs large exits like these (e.g. Souq, Maktoob) in order for investors and carpenters to be motivated. The Middle East (except for Israel) is really lacking in this arena.
> Shareholders in Careem, whose backers include Saudi Prince Alwaleed bin Talal’s investment firm and Japanese e-commerce company Rakuten Inc., [...]
Isn't a public Saudi Arabian fund already heavily invested in the Softbank Vision fund, which in turn has invested a lot in Uber? [0] I don't know who the respective principals are of these funds but that seems noteworthy to me (especially at these valuations).
Saudi fund is led by the crown prince MBS. Prince Alwaleed bin Talal is a cousin of the crown prince but definitely not a friend. He was even arrested a few years ago under the order of the crown prince.
This growth, combined with their subsidization across all their products, is producing huge near-term losses. However, I think it's a prudent investment. Uber needs to solidify its moat in an industry that offer little in terms of differentiation beyond price. By trying offer as many services as possible, Uber's trying to make itself the go-to hub of local transportation, and in doing so, start to change its role from a dispatch middleman to a full service transportation platform.
And so, I think in the years following IPO, we'll slowly see them reduce their efforts for horizontal expansion and slowly turn the lever back towards profit. This will happen slowly and differently across markets, with price rises starting in regions they have the strongest foothold, but will slowly trickle across all markets. The hope for them is that through this rapid expansion, they've bought enough leverage to raise prices without losing too many customers.