Friday, 14 July 2017

Blomberg: A shrinking emopire


A shrinking empire  
  Bloomberg 14 July 2017 at 11:02

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Hi all, it’s Eric. Is Uber a global ride-hailing operation or a service for the developed world with some investments in emerging markets tacked on? It’s starting to look more like the latter.

The story was that Uber’s technological advantages were supposed to overpower its competitors. Thousands of software engineers in San Francisco were supposedly building Uber Technologies Inc. a deep “moat”—a competitive advantage that would be the undoing of local competitors. Mix in some buzzy but irrelevant truths about social networks (something, something, network effects something, something, winner-take-all businesses) and you’ve got a compelling pitch.

That hasn’t happened. Instead, local competitors have done just fine. Well, they’ve collectively lost billions, but so has Uber. Local competitors have done fine, relatively.

Didi Chuxing beat Uber. The Chinese ride-hailing company gave away 20 percent of its company in order to get the American nuisance to leave town. Uber ultimately had to acknowledge that it had been bested.

Now, a year after walking away from the world’s most populous country, Uber is leaving the world’s biggest country by landmass. That would be Russia. Uber is taking a 37 percent stake in a new company controlled by local search giant Yandex NV. Uber will again walk away with plenty of upside, while stoppering its losses in a faraway corner of the world.

It seems like a good deal for Uber, which gets more than a third of the unnamed company even though Yandex.Taxi’s bookings were nearly double Uber’s in the region. Uber forked over a one-time payment of $225 million, but it still has cash to spare and gets to reduce its losses for the long term.

It’s impossible to talk about corporate investments like this without mentioning Yahoo!’s prescient deal for Alibaba Group Holding Ltd. This could very well be like that. But ultimately, Yahoo’s investment in another company became more valuable than the company itself, so there’s that.

Uber’s business development team, formerly led by Emil Michael, almost did too well. Fresh off raising hundreds of millions from Alphabet Inc.’s venture arm and TPG, Travis Kalanick told Michael—back when they both had jobs—that Uber would never need to raise money again, according to The Upstarts, a book by Bloomberg’s Brad Stone. Of course, he was way wrong. Uber has since raised more than $15 billion and spent much of that on expansion, especially in China, where it dropped at least $2 billion.

Then, after losing billions abroad without the resounding wins they anticipated, Michael’s team came to the rescue, cutting deals with Didi and Yandex. Uber’s global successes seem to be more defined by deal-making than operational victories. It’s starting to look more like investment firm SoftBank Group Corp. than UPS.

Of course, Uber will still operates in 72 countries after the Yandex deal. London and Paris are two of the company’s most profitable markets. Business in Latin America is growing fast. And Uber wouldn’t have had the leverage to negotiate deals with Didi and Yandex unless it had credible businesses in each country.

India and Southeast Asia remain open questions, but a deal with Ola or Grab seems possible. Investors are talking about it. Uber could just as easily buy one of its competitors instead of taking a stake. With two spinoffs under its belt, Uber might be sensitive about yielding too much of its operational footprint. At the same time, many investors and employees are ready for the company to shift to profitability.

These deals are helping Uber cut its losses, but how big will its empire be if this strategy continues? —Eric Newcomer

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