Uber – Home Alone

Middle East looks like another exit.

• Following its ignominious exit from South East Asia, Russia and China, Uber is now in discussion with Careem that I think would effectively see it exit the Middle East.
• This will further concentrate Uber’s fortunes in USA and Western Europe where the chief rival remains the resurgent Lyft.
• Uber has said that it is still committed to India (see here) but I think that a very clear trend is emerging here.
• This trend is that in markets where there is viable competition, Uber is either being forced out (China and Russia) or pushed towards consolidation (South East Asia).
• However, in Western Europe there is no strong challenger so where it is permitted to operate, it is likely to continue to do so.
• The one exception is USA where Uber’s annus horriblis in 2017 allowed Lyft to come within spitting distance of causing it real problems.
• The economics of ride sharing are the same as for online market places which are a winner takes all market.
• When looking at online market places, my 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.
• Coming into 2017 Uber had 80% share and a 20% cushion before Lyft could really start causing it some problems, but this cushion has now been reduced to just 5% as Lyft is now claiming market share of 35% (see here).
• If Lyft continues to gain share, it could quite quickly be able to prevent Uber from making money at home which must now be a priority for the 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 Uber’s no. 1 priority in 2018 has to be to keep market share above 60%.
• If it falls below 60%, then it may no longer 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.
• These economics also explain why Uber has had to exit international markets where it faces viable competition, as in each case it was below the magic 60%.
• In these cases, it faces a bloodbath of cutthroat competition which despite being very well funded, it simply cannot afford.
• Given that Careem is pretty small, Uber may end up taking it over but its negotiating position is not that strong as Uber is blocked from operating in one of the most important markets: UAE.
• Whatever the outcome, the Middle East is likely to remain a side show for Uber, with the real issue being the development of market share at home in USA.
• The biggest beneficiary of consolidation is Softbank which has an investment in almost all 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 smaller the addressable market becomes for Uber and the more concerned I become with its ability to live up to its $70bn valuation.