Baidu & Uber – Time to pivot

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Both need to change to fare well.


  • Baidu reported good Q4 17 results as it has put the tribulations of the 18 months squarely behind it and is now focused on becoming the preeminent supplier of AI in China.
  • Q4 17 revenues / EPS were RMB23.6bn ($3.74bn) / RMB15 ahead of consensus estimates at RMB23.1bn / RMB13.
  • With its new, more selective ad system in place, advertisers have returned to Baidu pushing mobile revenues to 76% of total revenues, an all time high.
  • 2017 has been a difficult year for Baidu and its strategy is now shifting away from being a fully fledged digital ecosystem to focusing on products and services that are entirely driven by AI.
  • This is why the loss making iQIYI has now filed for an IPO and I suspect that 2018 will see some movement around the ownership of its other loss-making e-commerce venture; Nuomi.
  • Baidu’s main AI assets are Apollo (autonomous cars) and Duer OS (digital assistant) and in both of these, it is far and away the leader in China.
  • How these will be directly monetised is less clear at this stage, but it is clear that:
    • First: AI will have a major impact on the ability of ecosystems to differentiate their digital life services over the next 10 years.
    • Second: Baidu is the undisputed leader in China with both Tencent and Alibaba miles adrift despite protestations to the contrary.
    • This puts Baidu in a very strong position to partner or licence to the have nots in Chinese AI (which I think is almost everyone).
  • Hence, with the core business now looking to be back on an even keel, I think Baidu represents a cheap entrance to what its likely to be the biggest investment theme of the next decade.


  • Uber reported headline figures for Q4 17 that showed some progress but, in my opinion, not nearly enough given its precarious position in the US market.
  • Q4 17 revenues and adj-net income were $2.2bn / LOSS $1.1bn compared to $2.01bn / LOSS $1.46bn in Q3 17.
  • This is good progress but given the sizes of the losses in Q3 17 and the fact that they increased meaningfully from Q2 17, I suspect that there was a lot of low hanging fruit.
  • Revenue growth remains strong at 66% YoY but all of the momentum at the moment remains with Lyft which I see as being on the cusp of causing Uber real problems.
  • Uber is still dominant in its home market (USA) with 66% share but this is substantially down from the 80% that it held at the beginning of 2017.
  • Ride hailing businesses are marketplaces and as such are subject to the rule of thumb that I described over two years ago which still seems to be holding firm.
  • 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).
  • Hence, I see 2018 as the time when Uber needs to begin looking at making some money and at the same time ensuring that Lyft bleeds badly just to stay in contention.
  • Uber needs to neuter Lyft now because when it comes to autonomous driving, Lyft is a long way ahead via its relationship with Waymo.
  • Should things stay the way they are, then Uber could be in real trouble once autonomous vehicles start making a real appearance in the market.
  • Fortunately, this is still some way off but the threat is there and 2018 needs to be a year where Uber re-establishes its dominance in the home market especially after embarrassing loss of both China and Russia.

Didi & OEMs– Bikes to cars

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Data will be the key to differentiation.

  • If Didi does to automobiles what it has done to bikes, then the outlook for the car makers in their new alliance with Didi is grim indeed.
  • Didi, the dominant Chinese ride-hailing company has announced a broad alliance with 12 car makers to create a China-wide electric car sharing network.
  • The main partners are the Renault-Nissan-Mitsubishi alliance, Geely Auto and BAIC.
  • The initial plan is to create a car rental network where drivers can rent an EV for any amount of time directly through the Didi app.
  • I presume that as autonomy becomes a reality, that this will end up merging with Didi’s core business of ride-hailing as the two services will become indistinguishable from one another.
  • The alliance would be a combination of Didi buying a number of vehicles from the 12 car makers as well as allowing the car makers themselves to make their own rental schemes available through the Didi app.
  • This is where it gets very murky, as the details of how this service will work is likely to determine whether the vehicle makers retain some brand or are commoditised into metal-box-on-wheels-manufacturers.
  • Car makers today have 4 points of differentiation which are:
    • First: Performance which relates to the power and quality of the engine and drivetrain.
    • In an electric vehicle, all the IP and differentiation the vehicle makers has in this area becomes virtually irrelevant.
    • Second: Form factor which is the look at feel of the vehicle as well as the design and luxury of the interior.
    • When it comes to renting vehicles, this is also unimportant as vehicles are rented in categories where form factor differences within a category are not very relevant.
    • Third: Brand which is almost always about ownership of a vehicle and is therefore much less relevant in rental.
    • Fourth: the Digital Sensor Pie which refers to the data that the car generates.
    • RFM research has found this data offers a substantial potential revenue opportunity (see here).
    • This will require the car maker to maintain complete control over the data that their vehicles generate as well as have a direct relationship with the driver of that vehicle.
  • In an electric vehicle rental system managed by Didi, it is quite possible that each one of these four points of differentiation will no longer apply, leaving the car makers as pure commodities.
  • This is exactly what Didi has done to the bike sharing start-ups Ofo and Bluegogo (see here) and should Didi manage the service entirely under its own brand (as it does with bikes), then there will be nothing to distinguish one vehicle from another.
  • Didi already has a very strong grasp of the value of data and so I suspect that it will be pushing to retain the data generated by the driver and vehicle.
  • Hence it will be Didi that sells any subsequent services or follow-on products to its users renting vehicles from its app rather than the car makers.
  • I continue to think that the future looks pretty bleak for the car makers unless they can figure out how to entice users of their vehicles to engage with their digital services.
  • Time is fast running out as the digital ecosystems are also keen to engage car users and so far, have a far better idea of how to achieve that despite still being completely locked out of the data the vehicles generate.
  • This is the one ace that the car makers have, and it needs to be aggressively played if they wish to retain a seat at the table in their industry as it rapidly digitises.

Autonomous Autos – Dark horses.

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Waymo’s lead shrinks to 5 to 1.

  • Analysis of autonomous testing data submitted to the California DMV for 2017, reveals that Waymo is still out front, but GM Cruise has improved massively with Nissan holding onto its No.3 position.
  • The best measure of an autonomous driving solution remains how often the driver has to take over to correct shortcomings in the autonomous driving software.
  • Regulations in California require those that test in the state to submit this data but typically, they all submit it in different ways (see here).
  • There are also different types of disengagement such as when the car is going to hit something (critical) or when the safety driver feels uncomfortable (ordinary).
  • Furthermore, companies test their cars in different conditions meaning that the data can really only be used as indication.
  • However, the contrast between the have’s and have-nots is so stark that meaningful conclusions can still be drawn by parsing the data submitted.
  • In order of performance the data for 2017 shows:
    • No. 1 Waymo (Google) is now only 5x better than its nearest rival compared to 8x in 2016.
    • However, Waymo’s performance has only improved marginally with 5,596 miles per disengagement in 2017 compared to 5,128 in 2016.
    • Waymo has still driven more miles than anyone else but its lead in miles driven has dropped from 155x its next rival to 2.8x.
    • Curiously, Waymo drove 45% fewer miles in 2017 (353K) compared to 2016 (636K).
    • No. 2 GM Cruise comes from nowhere to comfortably take the no.2 position with 125K miles driven with 105 disengagements (1190 miles / disengagement).
    • This is 5x more than Waymo, but GM Cruise drove all of its miles in downtown San Francisco which it argues is the most difficult environment within which to operate an autonomous vehicle.
    • I would argue that it is certainly the most complex but also the slowest, giving the computer much more thinking time than it has on suburban street or a highway.
    • Either way, this is an impressive performance and for the first time, there is a credible challenge to Waymo’s dominance.
    • No. 3 Nissan which is the other dark horse in this race with 5007 miles driven and 24 disengagements (209 miles per disengagement).
    • Last place Mercedes which saw a meaningful deterioration in its performance during 2017.
    • In 2017 Mercedes had nearly 1 disengagement for every mile driven compared to 2 per mile in 2016.
    • It is possible that Mercedes decided to test in more challenging conditions in 2017 which caused the deterioration but regardless, it is the laggard in the race for an autonomous car driving solution.
  • Those that drove the most miles (Waymo and GM Cruise) still had the best performance, again underlining that the key to artificial intelligence (the heart of all autonomous driving systems) remains the amount data collected (see here).
  • Uber and Tesla have no data for 2017 as they did not test in California but given the distractions that Uber has suffered in 2017 combined with the ongoing trade secrets trial against Waymo, is likely to have meant that it has not improved much on its dreadful performance in 2016 (see here).
  • I am certain that Waymo is the best because it began working on autonomous driving in 2009 (far earlier than anyone else) and in the last 2 years has also driven substantially more miles than anyone else.
  • I continue to believe that there is not much point in rushing to get an autonomous driving solution to market as I still do not expect the market to be ready for autonomous vehicles much before 2028 (see here)
  • Consequently, those rushing to market may find that they have a solution but no deployments.
  • This could easily result in a number of viable solutions being available once the market is ready, making sitting on the sidelines for now a wise choice.
  • I suspect that this is why Google and Waymo are currently pushing to do a number of large long-term deals for technology as their lead over the rest of the market has already passed its peak.

Didi – In the saddle.

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Didi can crush the bike sharing upstarts.

  • In China where the bicycle is an integral part of daily transport, Didi has leveraged its shareholdings to ensure that user loyalty accrues to Didi rather than to its partners Ofo or Bluegogo.
  • If successful, I think this will reduce both Ofo and Bluegogo, and even Mobike to commodities thereby preventing them from making money, resulting in their eventual absorption by Didi.
  • Didi is the dominant ride hailing service in China which is now virtually unopposed since Uber was unceremoniously ejected from the Chinese market (see here).
  • From a vehicle perspective this has left Didi in a great position in China but as is so common, government intervention to protect the taxi industry has caused real problems.
  • In order to drive for Didi in Shanghai or Beijing, a driver has to prove that he lives in the city within which he drives.
  • This may not sound like a big deal until one looks at the demographics of the urbanised workforce in China.
  • Around 40% of the workforce of both of these cities reside outside of the city and in the younger, lower-paid part of the workforce, that number is much higher due to the high cost of housing.
  • For example, prior to the enactment of this regulation, less than 3% of Didi’s Shanghai drivers had the necessary residential registration to qualify as drivers.
  • I suspect that that Didi’s Beijing drivers showed similar characteristics and that other major Chinese cities also have a large migrant workforce.
  • The net result is that supply of rides has been drastically reduced meaning that the price of those rides will inevitably increase while the quality (wait time) will decrease.
  • Rising prices and lower reliability is likely to drive many users back into the arms of the taxi industry thereby achieving exactly the result for which the rules were created.
  • Furthermore, Didi has also been under assault from cycling services competing against the shorter rides that it offers.
  • Within the cities, bad traffic and a culture of cycling has meant that short journeys are often best taken by bike creating pressure on demand.
  • This explains Didi’s interest in bike sharing and it has just launched an update that includes the bike sharing systems of both Ofo and Bluegogo as an option within its app with no branding.
  • As far as users are concerned, this appears as a Didi service and Didi has been able to do this through its significant shareholding in Ofo and the fact that it rescued Bluegogo from bankruptcy at the end of 2017.
  • This means that Didi users will have no reason to use either the Ofo or Bluegogo app and because Didi will do them both, there will be more supply available in a single place.
  • It is quite possible that Didi will also have more supply than Mobike, meaning that even as a hold out, it will also feel the pressure from this move.
  • Consequently, it from a user perspective the Didi app should be able to offer a better user experience which will obviously commoditise Bluegogo and Ofo even more (see here).
  • The combination of its 400m+ ride hailing users and the scale of putting the services of Ofo and Bluegogo together may even allow it to overcome Mobike.
  • The net result is that Didi is well positioned to do to the nascent bike sharing industry what it did to Uber in China.
  • The caveat of course is the user experience but as long as Didi is at least as good as Ofo or Bluegogo individually, then I see no reason why it should not end up as the dominant shares transport provider in China.
  • Mobike will need to act quickly and bring something special to its service in order to avoid real pressure.

CES Day 0 – Car show

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No Planes, no trains, only automobiles.

  • By far the strongest theme at CES 2018 is the digitisation of the automobile with drones, VR and so on fading somewhat into the background.


  • Byton is an electric car start-up run by Europeans (ex-BMW) but financed and headquartered in China.
  • From the very first moment Byton had a tough hill climb as it was not so long ago that LeEco muddied sentiment towards Chinese EV start-ups with a glitzy event that was swiftly followed by a precipitous crash.
  • Byton’s launch looked very similar (including the gaffs) but it was at the badly attended Q&A event that my scepticism was partially dispelled.
  • Byton is not really about making an electric car as building one of these is going to be considerably easier than the internal combustion variety.
  • Instead, Byton has focused its efforts on solving the fundamental problems that arise when one attempts to digitise the vehicle.
  • These include addressing the issues that arise with traditional product cycles where the infotainment unit is 4 years out of date the minute it hits the market.
  • RFM research (see here) has uncovered a series of fundamental problems with the way OEMs design and build cars and to its credit, Byton has come up with a credible solution to all of these issues.
  • However, what it does not have is scale as its current $800m or so in funding (including the ongoing $350m B round) will take it to just 100,000 vehicles manufactured each year.
  • This is tiny volumes meaning that the bigger OEMs will be able to offer a better specification of EV than Byton at a lower price.
  • This means that Byton must differentiate itself on the digital experience that it offers which will be more difficult than it sounds.
  • The true Digital Life of the automobile requires the combination of both the Digital Life Pie on the smartphone or tablet and the Digital Sensor Pie (see here).
  • As an OEM Byton, will have full access to its Digital Sensor Pie but it will need to take that in context with the data generated by the Digital Life services of its users on their other devices.
  • In China, this means dealing with the BATmen and in the West, this means Apple and Google.
  • Byton is likely to go with an SDL like approach that uses an API to project smartphone apps and data onto the dashboard which requires the makers of those apps to support Byton.
  • This will be a tough sell as the volumes are so low that convincing developers that Byton is worth the effort will not be easy.
  • That being said, its innovative approach to the dashboard seems to be driving a lot of interest which might help it to drive support for its proposition.
  • Byton has clearly put a lot of thought into its vision, but now it must execute and this is by far the hardest part.


  • At Baidu World, it was clear what most of the audience was interested in as about one third of them left as soon as the presentation moved away from autonomous driving.
  • I find this to be somewhat short sighted as when one is considering the importance of AI in Baidu’s future, I think its Duer OS platform is far more important.
  • This is because Apollo is just about cars while Duer OS is about everything else and also includes cars.
  • Baidu’s AI is centred around Baidu Brain (which does what it says on the tin) and Baidu Cloud which is where Baidu Brain lives.
  • There are two main platforms based on Baidu Brain which are Apollo, its autonomous driving effort and Duer OS which is Baidu’s equivalent of Amazon Alexa, Cortana, Google Assistant and so on.
  • Baidu has upgraded Apollo to version 2.0 (which I think is still pretty basic) as it can now drive on quiet urban roads bringing into line with what most of its Western competitors have been testing during 2017.
  • It also announced real vehicles with Chinese partners Cherry and King Long (busses) and Los Angeles based mobility provider Access.
  • Baidu also gave impressive growth figures for the traction of Duer OS and backed that up with a series of partner announcements and new devices.
  • The combination of Baidu Chinese search graph and its leadership in Chinese AI makes it by far the leading digital assistant contender in China which was clear for all to see when looking at the demos.
  • Baidu has also internalised the importance for cross device capability and its presence on phones, cars, TVs, speakers, lights, projectors, a mirror, a home robot and headphones is pretty comprehensive.
  • This gives the user the ability to interact with his devices from any of the others which is something that the Western leaders have yet to properly demonstrate.
  • However, Duer OSs’ international ambitions remain quite limited as it has launched a product only for Japan with Japanese language support but of English, Spanish and so on, there is no sign.
  • Baidu has extended its leadership in AI in China but remains a fairly distant second behind Google which I still see as the global leader.
  • That being said, Baidu’s recent travails have made it arguably the cheapest way to invest in AI in the global technology sector.

RFM 2018 – Top 5 at CES.

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RFM’s top 5 issues likely to prevail at CES and 2018.

Artificial Intelligence

  • I expect Artificial Intelligence to get top billing again this year as the both the hype and the flow of capital show no sign of abating.
  • Consequently, 2018 is likely to be a year of more feverish investment and hype making it more important than ever to separate real AI from those that are simply using statistics.
  • The three big AI problems remain mainly unsolved (see here) and RFM has concluded that progress in 2017 was very slow despite plenty of noise being made to the contrary.
  • I have no doubt that AI will become crucial for ecosystems trying to differentiate their Digital Life services from one another and the gap between the haves and the have nots is widening.
  • Google has distanced itself further from its competitors and in my opinion remains by far the leader in this field.

Google vs. Amazon

  • The battle of the digital assistants is likely to heat up this year and Google is clearly determined not to repeat the own goals of 2017 that allowed Amazon to dominate the market with an inferior product.
  • Signs of this are everywhere at CES with the Las Vegas Conference Center and the casino monorail fully decked out with entreaties to use Google Assistant.
  • Last year Google was nowhere to be seen at CES but this year I am hoping to see the results of its H2 2017 efforts through the inclusion of Google Assistant support by smaller developers in their smart home products and services.
  • Although, Amazon dominates the market for devices it is capturing only a tiny fraction of the voice requests as 91% of users that interact via voice use a smartphone compared to 17% that use smart speakers (see here).
  • Data is the life blood of AI and the data strongly suggests that Google is collecting far more than Amazon thereby ensuring that Google Assistant will continue to distance itself from Amazon Alexa in terms of ability.
  • If Google manages to close the gap in smart home this year, I think that this will put Amazon on the back foot and on a trajectory towards losing the smart home to Google.

Smartphones – Bezels, folds and the race to the bottom.

  • Bezel-less screens have become table stakes at the high end of the smartphone market meaning that 2018 will see this feature increasingly moving into the mid-range.
  • Samsung created the bezel-less market just like it did for large screens and now it must now look for something else.
  • The issue is that the Android user experience suffers from serious shortcomings compared to iOS meaning that it must offer othe features to compete at the iPhone price point.
  • Samsung has had foldable screens for some considerable time but poor yield and a lack of interest has meant that they have never been launched.
  • I have long seen the potential for foldable screens as a tablet form factor that can be folded away and slid into a pocket has the capacity to fundamentally alter both the tablet and laptop markets.
  • 2018 may be the year that Samsung feels ready to finally launch this as its options in terms of maintaining differentiation in an increasingly crowded bezel-less market are looking thin.


  • The theme of digitisation in the automobile is in full swing but 2018 is likely to be another year where hopes and dreams substantially outstrip reality.
  • RFM’s analysis has shown (see here) that OEMs and tier 1s have not really digested the degree of change that is required for them to remain major players in their own industry.
  • For example, by locking the development cycle of the infotainment unit to the rest of the vehicle, the industry has ensured that units for which users pay thousands of dollars for, are four to five years out of date and hopelessly outclassed by $150 smartphones.
  • This combined with the almost universally awful user experience offered by automotive infotainment units puts the OEMs at risk of becoming also-rans in their own industry.
  • It also leaves the door wide open for ambitious new-comers like Byton which has launched an EV and Digital Life experience which shows some signs of having been given a lot of thought to the experience issues plaguing the vehicle.


  • With the exception of AR, very little is likely to change for both virtual reality and wearables in 2018 as the issues that hold them back remain unresolved.
  • Wearables are still a solution looking for a problem while the health use case continues to be limited by the quality and reliability of the sensors that they use.
  • Hence wearables will still be a recreational health and fitness market where users soon tire of their devices and consign them to cluttered junk drawers.
  • I would still be placing all of my attention on the companies that are working on making medical grade sensors that are both cheap and reliable to wake this segment from its slumbers.
  • I still see no real use case for VR beyond high-end gaming and events as the technical issues of cables, nausea and so on are still being worked on.
  • This leaves AR which I think is going to have a good year in the enterprise.
  • In the enterprise, the user experience matters less and the productivity use cases for AR in particular functions are numerous and demonstrable.
  • This is why many AR companies have pivoted towards the enterprise leaving Magic Leap as one of the few that is left struggling along in consumer AR.

Faraday Future – First to fall.

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FF looks certain to fail. It won’t be the last.

  • The saga of Faraday Future may soon draw to a close, which combined with the blacklisting of its biggest investor (Jia Yueting) on China’s national debtors’ database, is a strong indication that this group will never produce a vehicle.
  • Faraday Future was one of the first Chinese companies to follow Tesla’s lead into electric cars but it has been quickly followed by others such as Nio and Byton, all of whom have big ambitions to benefit from the shift from petrol to electric vehicles.
  • However, the last two years for Faraday Future has been a litany of woe which I continue to think will result in the complete collapse of the venture.
  • It turns out that building vehicles (even electric ones) is quite difficult and when one is beset on all sides with law suits and angry creditors (see here), one ends up with huge turnover of management.
  • This means that virtually no attention is being paid to the development of a vehicle and certainly no production.
  • Furthermore, I think Faraday Future has very little chance of raising any more money as no investor in his right mind would back a company with the following characteristics:
    • First: Its main backer has been put on a credit blacklist for failing to pay RMB462.1m that he owes to Ping An Securities.
    • Jia Yueting is currently residing in the US and appears unwilling to return to China.
    • Second: Faraday Future’s sister company LeEco is stranded in limbo after having to abandon all of its international ambitions due to over extending itself and getting into financial difficulty.
    • The shares of the parent company Leshi Internet and Information Technology have been suspended in Shenzhen since May 2017.
    • Third: Previous employees report that the company barely has enough money to pay its staff and that financial controls and systems are inadequate for a company of this size.
    • Fourth: Faraday Future’s recent hire Stefan Krause who was brought in to sort the financial situation out left the company after just 6 months having demanded changes that were not to the liking of Jia Yueting.
  • Furthermore, there are now serious doubts as to whether Faraday Future will ever make it to the new and smaller manufacturing facility in Hanford, California.
  • This was the new and smaller location after the much bigger site in Nevada never broke ground as the contractor was not paid.
  • All of these problems come before the difficulty of designing and producing a vehicle which is something even Tesla has difficulty with.
  • Tesla is a global brand and is very well known but even this company has great difficulty in reaching scale and is still burning billions of dollars in cash.
  • Consequently, Faraday Future should serve as a cautionary tale for electric vehicle start-ups who have got in on the electric and autonomous vehicle hype and now have to live up to reality.
  • I even remain cautious about Tesla because its lack of scale and cash flow could mean that it gets crushed when the big OEMs start producing electric vehicles in big numbers.
  • I remain exceptionally cautious on the Chinese electric vehicle start-ups who have done very little so far and have everything to prove.

Uber – Annus horriblis

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Even at $54bn, no shortage of sellers.

  • While attention is focused on SoftBank’s moves to take a 13-15% stake in Uber, the deterioration of Uber’s fundamentals is a warning that its dominant position may already be slipping.
  • Q3 17A revenues were $2.01bn up 21% compared to $1.66bn in Q2 17.
  • However, net losses grew faster with Q3 17A net losses at $1.46bn, up 38% from the $1.06bn it lost in Q2 17A.
  • This represents a deterioration in net margins to a loss of 73% from a loss of 64% in Q2 17A.
  • Given the year that Uber is having (see here) it is possible that the losses have been increased by non-operational items such as compensation payments and restructuring.
  • However, these headline figures come from an investor communication (via Bloomberg) which typically will exclude costs and benefits that come from non-operational sources.
  • Hence, I suspect that the 870bp decline in margins is operational in nature and represents a deterioration in the company’s underlying performance.
  • This should be of huge concern because if its home market is going to descend into a bloodbath of cutthroat competition, then Uber is going to be raising a lot more money and most likely at much lower valuations.
  • I am quite surprised to see such a deterioration as despite Lyft’s recent increases in share, Uber is still hugely dominant in its home market, USA.
  • So far in 2017 Uber’s lack of focus has led to Lyft being able to confidently expect to improve its market share to 33% from 20% at the beginning of the year.
  • This leaves 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%.
  • Uber’s figures are implying that Lyft is beginning to impact Uber’s ability to make money which I think is a real problem.
  • Google is now Lyft’s biggest backer as it represents the best way for it to get its self-driving technology (Waymo) to market.
  • As of Q3 17, Google has $100bn of cash on its balance sheet giving Lyft potentially much deeper pockets than Uber.
  • This combined with how much it has closed the gap on Uber over the last 9 months, means that Lyft is now a real threat.
  • To me, this is a much more important issue because if Lyft is able to impact Uber’s financials, it means that its hallowed status of market dominance has already been lost despite my rule of thumb.
  • This is critical because Uber’s $70bn valuation compared to Lyft on $11bn is based on its dominance of the market and the unassailability of its network effect.
  • Consequently, I feat that the real valuation of Uber may be far lower than even the $54bn that SoftBank is offering existing shareholders to purchase some of their stock.
  • These investors include Benchmark and Menlo Ventures who may have already have arrived at this view and concluded that $54bn is a great exit price.
  • Hence, I still expect there to be no shortage of sellers at this lower valuation.

Uber vs. Lyft – Blood in the water

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This is Lyft’s best chance to catch Uber. 

  • With yet another skeleton emerging to hinder Uber, Lyft is increasing its recent fund raising by $500m as I think it has realised that now is its best chance to reel in Uber.
  • Lyft has increased its recent $1bn round that was led by Google and CapitalG by another $500m bringing the total post-money valuation to $11.5bn.
  • The extra money will be invested in passenger and driver products which I think basically means reducing the fares and increasing driver take-home in a bid to gain market share.
  • 2017 has been a great year for Lyft but only because Uber has pretty much had the worst year imaginable.
  • Constant turmoil, management turnover, bad press, unhappy drivers and a series of scandals has led to the company focusing on anything but its core business in 2017.
  • This has taken another downward lurch with the disclosure that it suffered a data breach on 57m users and failed to make the users aware that their data had been compromised.
  • This is exactly the kind of bad press that Lyft can capitalise on when it comes to tempting existing Uber users to consider trying Lyft.
  • So far in 2017 this has been very successful as Uber’s lack of focus has led to Lyft being able to confidently expect to improve its market share to 33% from 20% at the beginning of the year.
  • This leaves 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%.
  • Furthermore, with Google is now backing Lyft as the best way for it to get its self-driving technology (Waymo) to market, this gives Lyft much deeper pockets than it had previously.
  • This combined with how much it has closed the gap on Uber over the last 9 months, means that Lyft is now a real threat.
  • If Lyft can take another 6% or more of market share from Uber, Uber will have lost its hallowed status and as a result I would expect its financial performance to deteriorate materially.
  • All of this plays in Lyft’s favour as Uber’s reputation is now in such a bad state that it has to tread very delicately wherever it goes.
  • This means that the aggressive expansionism that gave Uber its dominant share is no longer possible handing all the initiative to Lyft.
  • I have been very negative on Lyft to date as its position looked hopeless but with Uber constantly shooting itself in the foot has given it a fighting chance.
  • There is no way I can justify a $70bn for Uber given this outlook, and if Softbank is offering this to shareholders to build its stake, I think this represents a great opportunity to exit.

Google – The colour purple.

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Fuchsia could replace Android Auto and Android Wear.  

  • Google’s mysterious operating system Fuchsia is starting to take shape with the addition of a user interface as well as support for programming languages that are used to create both Android and iOS apps.
  • What was first noticed as a few lines of script is gradually reaching the point where it could be suitable to run a large range of digital devices leaving me wondering whether this is its answer to the endemic Android fragmentation problem.
  • Fuchsia was first noticed on GitHub in August 2016 and differs from Android in that it is not based on Linux but on a kernel called Magenta which looks more like a kernel that is typically used for embedded systems such as vehicle infotainment units, white goods and so on.
  • Fuchsia is also a real-time operating system (RTOS) which tend to be used for smaller systems which are typically embedded where response time is critical to the user experience.
  • Windows, Linux, Unix and so on are less time critical and are designed to run multiple tasks at the same time on much more powerful hardware.
  • This is the one thing that makes me question the suitability of Fuchsia to replace Android as other factors make it look a lot like an Android replacement:
    • First, user interface: the user interface (Armadillo) that has been added looks a lot like what one would expect from a smartphone with a touch-based input system and card-based user experience design.
    • Second, Swift support: Recent code contributions by Google indicate that it is working to include support for the Swift programming language which can be used to create apps for all of Apple’s operating systems.
    • This is a significant step as it implies that Google is working to make it as easy as possible for developers to have their apps running on Fuchsia.
    • Developers often develop for Apple before turning their attention to Android due to the better economics that exist for them on iOS.
    • This support could allow them to publish on Fuchsia at the same time with no incremental effort.
    • This kind of support has been promised many many times in the past but no one has really delivered it in practice.
    • Third, obsolescence: looking at the history of Symbian, it became unusable 12 years after its creation as the core upon which it was built become obsolete and impractical to upgrade.
    • Android will be 12 years old in 2019 raising the possibility that it, too, may become obsolete requiring a complete rewrite from scratch.
  • My take home from this analysis is that Fuchsia looks most suited to be used in embedded systems such as vehicles, white goods, machinery, wearables and so on.
  • Consequently, this could be a single replacement for Android Auto and Android Wear, both of which are not ideally suited (because they are Android forks) for the use cases for which they were designed.
  • Hence, I think that it is unlikely that Fuchsia will replace Android on smartphones and tablet, but the possibility is there should Android start to struggle with obsolescence.
  • Given, its current stage of development, I would expect Fuchsia to make a real appearance in 2019 rather than 2018.
  • In order to solve the Android fragmentation problem Fuchsia would need to be closed down by Google and used to replace Android on smartphones which at the moment looks like a big stretch.
  • Therefore, I still think that a complete closing down of Android to become a proprietary OS is how Google will solve the fragmentation and updating problems that are crippling the user experience on Android.