Uber to Seal $3.1B Deal to Buy Careem This Week
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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.
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?
- [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!
Uber does this in many countries. Perhaps not yet in Qatar.
In other words: sell at a loss, run all the competition out of business, then raise prices?
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.
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.
This is unlike social networks, like WhatsApp, where the network effect is truly global since people often have friends and relatives in distant cities.
https://hbr.org/2019/01/why-some-platforms-thrive-and-others...
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.
My understanding was that they only had a few billion dollars left and were burning > 1B a quarter.
And they are still not profitable right?
On what basis exactly are they going to IPO? What's the angle for buying shares of a company that is losing so much money?
For "investors", they are gambling that either the shares go up before they sell or that Uber builds a profitable business after they buy.
For example Uber's last quarter revenue was $3 billion on some $14 billion in bookings, with a loss of about $800 million.
$14 billion is revenue
$3 billion is their earnings after driver costs.
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.
Gross cash: $6.4 billion in unrestricted cash ($4.8 billion at end of Q3 2018, $4.4 billon in Q4 2017)
But it won't be blocked. Uber and Careem share common investors (aka Saudi) and this would be a huge win for them.
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).
[0]: https://www.cbinsights.com/research/saudi-arabia-pif-tech-in...