Month: April 2019

The Uber IPO filing (and Lyft just before it) made me think about all the speculation that they’re waiting for self-driving cars to come along and save their bacon.

Which made me think a bit about what might change when self-driving cars become practical and widespread. So let me put on my speculative futurologist hat for a moment and do my best Isaac Asimov imitation (and if you’re wondering why, try and read this absolutely wonderful story about self-drive cars, which he named automatobiles).

The thing is, like most big changes in technology, a self-driving car isn’t just going to substitute the driving and navigation functions of a human driver. Effectively a self-driving car is a form of robot. It will have a fair bit of processing power, high speed access to live information (not just navigation and maps) and the ability to process commands. The moment you think of it as an intelligent mobile entity rather than just a driverless car you realize it may change how we look at transportation.

For instance, if a self-driving car – let’s call it an automat in honor of Asimov – can accept instructions, plan a route and be at various points at specific times, keeping track of vacant seats and so on, why should we each own one? Simpler to hail one and have it show up at my door or go to a designated pickup location. If I want to go somewhere quickly I can specify that I want the entire car to myself and am willing to pay a premium for door to door service, urgent service and exclusivity. If not, I can book a seat on a scheduled service like a bus and walk a bit to a standard waiting point. There are all kinds of permutations and combinations possible to trade-off cost, convenience and exclusivity.

All of which sounds a lot like Uber, so people might think that’s when Uber comes into it’s own.

However, think about this. Why would the rest of the transportation industry wait around and keep buying regular cars, leaving automats for Uber and Lyft to buy? Taxi companies, car rental companies, bus companies can all shift to automats. If less people buy personal cars maybe even the car makers and dealers will shift to this kind of car rental model instead of selling them. Owning a fleet of vehicles takes a very different business model from that of the ride-hail app companies, but it is pretty much the same model that all the conventional transport companies have had all along.

If Uber and Lyft were to continue doing what they do now, it would hinge upon using excess capacity from private cars and selling that capacity at slightly above the variable cost so that owners are incentivized to make their cars available. So, if people continued to buy cars in an automat era and decided after they’d been dropped to work that the car could be made available for public use, then potentially a ride-hail app ecosystem could continue. Potentially it could be priced lower than regular cabs and transport services if owners are willing to recover just slightly more than the variable cost. However if the ride-hail companies owned their own fleet, their economics are no different than the other players in the field so they won’t be able to sustain a different pricing model.

The fundamental problem is that ride-hail companies haven’t changed the economics of transportation. Automats will, but they’ll change it for everyone so that won’t confer any advantage to the ride-hail companies.

Here’s the important thing to remember about Uber (or Lyft, Didi, Grab… you name a company) – at the end of the day, it’s just an app. Not unique, not hard to replicate and certainly not worth 120 billion dollars.

This past weekend I had occasion to visit Inner Mongolia. Now, of course, Inner Mongolia is part of China and is probably quite different from Mongolia proper, but long ago it was all open land belonging to the tribes of the Mongols that united under Genghis Khan and created the largest empire on Earth, stretching all the way from China in the East to Central Europe, taking in Persia and parts of India, Pakistan, Afghanistan and other countries along the way.

Legend has it that the world almost became a global Mongolian empire – their armies were poised to conquer Hungary when Ogodei Khan – Genghis’s son and heir – died. The generals all had to return to Mongolia to decide on their new leader and once they left, they never returned to continue their conquest of Europe.

The reality is slightly more nuanced. Before Genghis Khan, the Mongols were divided into several tribes who often fought each other. They lived a nomadic life, pitching their yurts to make camp and moving regularly with the grass and the seasons. Genghis was the first to unite all the tribes into one great army and start invading the neighbouring countries. However, while it was relatively easy to be a marauding force that thundered in on horseback, looted, plundered and then left, it was quite different from settling down and running an empire. This was a dichotomy that the tribes never quite got over. Ogodei’s death resulted in a tussle for the position of supreme leader and more importantly, for a clear vision and future. Were they going to continue expanding their empire or go back to being nomadic horsemen who rode into battle mainly for short term plunder? The tribes splintered into four (later five) khanates, and over time the people they’d conquered absorbed their rulers and eventually overshadowed them.

Would it have been a bad thing if the Mongolian expansion had continued? By all accounts, Genghis Khan was a pretty enlightened leader, proscribing undue violence by his troops, enforcing a standard civil code across all citizens of his empire and absorbing the conquered people into his administration. Perhaps if they’d conquered the world and let their Persian and Chinese administrators (and Hungarian?) run it, they’d have gone back to the grasslands to ride free and roam the land.

Today, their boundless grasslands are all marked with barbed wire fences to demarcate farm holdings, the grass is not native to the region but something the Chinese government has planted which has a better yield. Yurts come complete with a proper toilet, hot and cold water, floor heating and wifi – and by the way, they are all semi-permanent structures with a fake tent covering on the outside. Genghis Khan would turn in his grave if he saw it.

Today, Inner Mongolia is mainly populated by Han people – the ethnic majority of China. They run the tourist attractions, the horse riding, the tourist friendly yurt experience, the “local” restaurants, the desert treks…everything. We saw perhaps 3 Mongolian people over the 3 days we were there. Where their forefathers once thundered across endless grasslands on their sturdy ponies, putting fear in the hearts of all who saw them coming, the Mongolian people are now a footnote in history.

Why did they fail? Perhaps because, as in the modern world, it’s relatively easy to go in as a disruptor, but what happens when you succeed? Do you have a plan for going from marauder to administrator? Do you have a plan for what happens when you become the one everyone is trying to disrupt? Most companies don’t – they succeed in a certain role and when success forces them to change that role they don’t necessarily know what to do and how to adapt. The pages of business history are full of examples and I’ve written about a few of them elsewhere in this blog – Apple, IKEA, Google and others are all more similar to the long vanished Mongolian Empire than they know. Disruptors about to be disrupted.

 

I was reading about the bankruptcy filing by adtech firm Sizmek and was blown away by how big a business it was. Sizmek serves 1.5 trillion ad impressions yearly, with a user base of 20,000 advertisers and 3,600 agencies globally. Yet it couldn’t make a profit, prompting its lead private equity investor to cut off further funds and leading to a bankruptcy filing.

In the meantime, Uber and Lyft are gearing up for their IPOs, Uber apparently expecting a valuation of 120 billion US$ and Lyft a more modest 23 billion. Apparently NYSE has “Won” the Uber IPO while Lyft will go to Nasdaq.

Neither Uber nor Lyft has ever made a profit, at this point there is no projection that they will. Yet “winning” their IPO is considered a major prize.

Will regular folks be beguiled by the glamour of these companies and buy up their IPO at these valuations? If so, it would be a travesty. Companies like Sizmek served a real need, clearly got themselves a large share of the market and still didn’t get their business right in order to turn profitable. Eventually they ran out of rope and had to declare bankruptcy. These consumer facing app startups, on the other hand, never seem to run out of funds, investors are eternally willing to fuel an ever more unbelievable valuation and put money into them.

Which makes me think success and failure here has nothing to do with the basics of the business. If you manage to get enough large investors aligned with the need for a startup to exit successfully, then it will defy all business logic and get there somehow, kicking and screaming.

I’d love to be proven wrong but I suspect we’ll see Uber and Lyft continue their journey to an unrealistically overvalued IPO, their current investors will be laughing all the way to the bank and a few years from now, their soon to be shareholders will all be weeping copiously into their handkerchiefs – heck they’ll need big towels to soak up all the tears.

Which is ironic because Sizmek’s road to profit might not have been as impossible as the one ahead of all these ride-hail startups.