Uber – Dominoes.

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Another international market falls.

• This time the market Uber has ceded to local rivals has double the population of USA meaning that, more than ever, it must eradicate the threat of Lyft at home to succeed.
• Uber will sell its operations in South East Asia to local rival Grab, for which it will receive a 27.5% stake in Grab.
• South East Asia is a very fast-growing market where around 45 million rides are taken every day which are split between: Grab, Uber, Ola and Didi.
• This marks yet another ignominious retreat for Uber and while it says that it remains committed to India and Japan, I think that a very clear trend is emerging here.
• This trend is that ride hailing will end up being dominated by a single local champion whose goal is to re-shape the private hire industry in its respective market.
• This leaves Uber with USA and a smattering of European markets who lack a national champion and instead are relying on regulators to keep Uber at bay.
• I suspect the end result will be that Uber ends up being a domestic provider of ride hailing and various deliveries with a series of minority stakes overseas.
• This is where the problems begin as Uber really let its position slip in 2017; its annus horribilis.
• Uber’s internal turmoil in 2017 allowed arch rival Lyft to gain enough market share at home to be on the cusp of causing it real problems.
• This lapse allowed Lyft to improve its market share to 33% from 20% at the beginning of 2017.
• This left Uber on 66% which based on my rule of thumb for network-based businesses, is still enough to eventually win the market, but its margin for error has been substantially reduced.
• This rule of thumb states that a company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making profit (see here).
• Coming into 2017, Uber had a 20% cushion before Lyft could really start causing it some problems, but this cushion has now been reduced to just 6%.
• If Lyft continues to gain share, it could quite quickly be able to prevent Uber from making money which is now a priority for the new management team.
• Furthermore, Google is now Lyft’s biggest backer as it represents the best way for it to get its self-driving technology (Waymo) to market.
• This gives Lyft very deep pockets making it more than capable of slugging it out with Uber.
• This is why, more than making money, Uber’s no. 1 priority in 2018 has to be to keep market share above 60%.
• If it falls below 60%, then it may not have the scale advantage over Lyft to make money, no matter hard it tries.
• Hence, USA market share is the key metric to watch in 2018.
• The biggest beneficiary of these events is Softbank which has an investment in all most of the large ride hailing companies and will see less of its investment dollars burned on the bonfire of cutthroat competition the more it can reduce competition.
• With every passing retrenchment, the more concerned I become with Uber’s ability to live up to its $70bn valuation.