“Never get involved in a land war in Asia.”
That, famously, is “one of the classic blunders” cited by Wallace Shawn’s Vizzini in The Princess Bride, just seconds before he dies of iocane poisoning. And if “getting involved in a land war in Asia” means “competing against domestic giants to gain market share in China,” then that’s a blunder which the likes of Google and Facebook have both managed to avoid. Uber, on the other hand, did get involved in the land war, and now it’s declared defeat.
On Sunday, news broke that Uber has thrown in the towel and reportedly decided to merge with China’s biggest domestic ride-sharing company Didi Chuxing. That Uber is giving up on competing with its larger competitor in China only serves to underscore what everybody already knew: that if you’re an American company, and your business model is based on having a monopoly among smartphone users, then you’re not going to make it in China. China is not only quantitatively much bigger and more important than any other market in the world, it’s also qualitatively so.
The end of the story of Uber China, however, is not just about Uber, or China. It also marks the end of the world’s most aggressive business model: the idea that if you’re willing to lose billions of dollars, you can use that money to gain such an unassailable market share that eventually you will be able to go out and effectively print as much money as you want.
That model is undeniably powerful. If a multi-billion-dollar corporation like Uber or Amazon makes it clear that it is willing to spend whatever it takes to win a dominant market position, then only a handful of companies have the wherewithal to even dream of competing with them. But, it turns out, Didi Chuxing is one of those companies.
Uber and Didi were sworn enemies until today; Didi even made sure to invest in Lyft, just to make that clear. But now that Uber and Didi have joined forces, in a deal which reportedly involves Didi investing $1 billion of cash into Uber, the arms race in China can come to an abrupt end. No longer will both companies spend billions of dollars in an attempt to bleed the other one dry; now just one company will have an inviolable monopoly position in the most important market in the world.
Is that good news or bad news? Well, it depends in large part on who you are.
If you’re a shareholder in Uber, or in Didi, or in just about anybody associated with either company, then this is good news. Uber’s shareholders have been pushing a deal along these lines for a while. Uber has reportedly been profitable in developed markets for a year now, and if it is no longer going to be losing money in China, then with this one deal it can shift from a money pit into a cash cow.
If you worry about a company as large as Uber being privately held, rather than listed on a public stock exchange, then this is also good news. Uber’s losses in China were the last thing keeping it from going public, and now that they have disappeared, an Uber IPO in the next year or two seems inevitable. Hundreds of investors have put billions of dollars into Uber over the past seven years; finally, they will now see the light at the end of the tunnel – the return on their investment – that they have been waiting so patiently for.
If you’re an investment bank salivating at the prospect of being able to take Uber public, however, then maybe it’s worth keeping the Champagne on ice for the time being. Yes, Uber is almost certain to go public reasonably soon. But that doesn’t mean it’s going to sell a lot of stock. When Facebook went public in 2012, it raised more than $16 billion. But prior to that, it had raised a relatively modest $2.4 billion in total. Uber, by contrast, flush with its latest $1 billion from Didi, has now raised a staggering $16.25 billion in private markets. It had some $4.15 billion in cash this time last year; since then, it has reportedly raised another $9.15 billion, give or take.
No matter how much money it has lost in China and globally, and no matter how much it intends to invest in projects like self-driving cars or mapping the world, it is now in the enviable position of never having to raise another cent. Uber doesn’t need to go public in order to raise funds – if it ever needs more cash, it can just tweak its fares upwards to become more profitable. Instead, Uber needs to go public in order for its shareholders to have a market they can cash out into. That means it doesn’t need to sell a lot of shares in its IPO, and its bankers might not make a fortune.
If you’re the kind of capitalist who believes in the salutary effects of competition, then this is clearly bad. Uber is no longer competing with Didi in China; what’s more, it now owns a small stake in Lyft, its main competitor in the rest of the world. Similarly, Apple, which recently invested $1 billion in Didi, now owns a small part of Uber. Everything in the transportation start-up world is getting a lot cozier.
On the other hand, if you’re the kind of capitalist – someone like Peter Thiel – who believes that innovation consists in creating new monopolies, then this deal is likely to make you very happy. It won’t need to pass muster with any antitrust authorities outside China, but it will certainly decrease the chances that Uber will face real competition anywhere else in the world.
If you’re the CEO of a unicorn – a private venture-backed startup valued at more than $1 billion – then this deal is probably bad news, especially if you’re still losing money. It marks the point at which even Uber, the company which turned raising seemingly limitless private funds into a veritable art form, finally decided that enough was enough, and declared that it had no interest in continuing to fund ongoing losses. “Getting to profitability is the only way to build a sustainable business,” says Uber CEO Travis Kalanick. Which is another way of saying, to all the other unicorn CEOs out there: you’d better have raised all the money you need, just like we have, because it’s now time to start making profits. That model you had of losing money today only to make it back tomorrow? Well, tomorrow’s now arrived.
And what if you’re just a regular person who uses Uber? In the short term, you probably won’t see much change, even in China. But already there are signs that Uber is becoming more opaque in terms of its pricing: its fare schedules are getting harder and harder to find on its website, and in the case of UberPOOL, they don’t seem to be available anywhere at all. In other words, Uber is giving itself as much leeway as possible to raise prices without anybody really being able to notice. Once Uber’s a public monopoly, with intense pressure to increase earnings every quarter, its shareholders will want it to raise fares for riders, while increasing its own share of the take, at the expense of drivers.
So long as Uber has been losing money, it’s essentially been subsidizing the transportation needs of everybody who uses it. But that won’t last forever. Indeed, it probably ended today.