Venture Bytes #38 - Is Uber-Ola Partnership Next?

Is Uber-Ola Partnership Next?

Uber announced last week that it will be scaling back in Russia by spinning off its local operations to form a new entity majority-owned by Yandex, the incumbent rival. The deal involves Uber’s ride-hailing and food-delivery services in Russia, Azerbaijan, Belarus, and Kazakhstan, folding into the new firm along with Yandex’s own taxi app, which also operates in Armenia and Georgia. Both brands will continue to operate, but the driver-side apps will be merged into one. The goal of the new company is to combine Yandex’s local expertise in search, maps and navigation with Uber’s global experience in ride-sharing to provide sustainable localized services.

This announcement comes on the heels of the company’s exit from China in 2016, which saw Uber merge its China operations with Didi Chuxing, the dominant ride-hailing service of the country. As part of that deal, Uber picked up a 20% stake in a combined entity with Didi Chuxing that is valued around $8 billion today. Unlike the partnership deal with Yandex, Uber does not have an active involvement in the day to day operations of Didi Chuxing.

If these two actions are the template for Uber’s international growth, it is not a stretch to expect a similar arrangement in India with Ola, the incumbent ride-sharing app. After spending nearly $1 billion in China, the company hoped to repair its reputation by becoming a market leader in the second-most populous nation in the world. Until now, however, India has proven to be a challenging market for Uber to penetrate. The company currently operates in 26 cities with 250,000 drivers on its platform, Ola on the other hand, provides more rides per day than any other player in the country, and serves 102 cities with nearly 450,000 drivers in its network. Launched in 2011, two years before Uber entered India, Ola amassed knowledge of the domestic market, enabling it to scale up quickly. According to market data, Ola has a 15-20% lead on Uber in the world’s third-largest ride-hailing market.

Service differentiation is particularly challenging in India, as both Uber and Ola have similar offerings, accept either cash or card, and retain a 20% commission per ride. For instance, on March 3, Uber started a new category of services under bike taxis and Ola announced the same within 24 hours.

Furthermore, the Indian ride hailing market is highly fragmented and largely unorganized. The participants compete on price and the major players in the industry - Uber, Ola, EasyCabs, Meru and others – collectively enjoy just 10% of the $15 billion valued market. Capturing market share is the end goal for the major players, which has led to a growth-above-all-else strategy, putting a path to profitability second. Localizing the service is absolutely essential and Uber is playing catch-up on that front.

The current conditions in India look like déjà vu for Uber, harkening back to China and Russia. Will Uber follow the same playbook in India? Given Uber’s recent management turmoil, the growing impatience of its early investors, rising competition from Lyft, and continued losses, we believe the odds favor a tie-up with Ola.

Bitcoins and Tulip

Noted investor Howard Marks’ recent comments about the rise of Bitcoin stirred a pricing controversy last week. In a memo to clients, he noted, “digital currencies are nothing but an unfounded fad” based on a “willingness to ascribe value to something that has little or none beyond what people pay for it”. Marks maintains that Bitcoins have no underlying value, no intrinsic value, and the greater fool theory is powering the exponential price appreciation - essentially a pyramid scheme.

I disagree. A pyramid scheme involves deception, it brings people in with false promises and forces those people to perpetuate that dishonesty, growing the pyramid. Bitcoin, while confusing to the outside observer, is certainly not based on deception. Though the relative anonymity of cryptocurrencies has attracted some illegal use, their fundamental applications cannot be ignored. Marks also compared Bitcoin’s value to that of the Tulips during the “Tulip Mania” in 17th Century Holland. Unlike the Tulips, which were simply a status symbol, Bitcoin has real-world applications in the modern digital economy. Most importantly, it is based on the blockchain, a strong underlying technology with potentially wide-reaching, revolutionary ramifications.

The blockchain is a distributed ledger hosted on a completely decentralized network, allowing for the exchange of cryptocurrencies. Its redundant, decentralized nature ensures that every transaction is recorded accurately across the entire chain, drastically decreasing the possibility of fraud at any point on the chain. Indeed, the value of the blockchain and its applications is only just emerging into the public consciousness, and as it is applied in new and innovative ways, it will drive that faith in cryptocurrencies higher as well.

Pyramid argument aside, is the price of Bitcoin purely speculative as Marks implies? The answer here is a matter of perspective, and depends on your faith in the future viability of blockchain technology. For those who believe Bitcoin’s price is mainly driven by excitement and the fear of missing out on the next big thing, a valid argument against Bitcoin certainly exists. After all, few retailers accept cryptocurrency, and Bitcoin is seen as a shady “dark web” ordeal in popular culture. It is safe to say mainstream adoption of cryptocurrencies is a few years off.

While it is difficult to say what Bitcoin should be worth, it is certainly worth more than Marks admits. Bitcoin and cryptocurrencies aren’t going through a crisis, just growing pains. As greater emphasis is put on cybersecurity and internet privacy, more people will value a currency that offers anonymity and faces no regulation. There are many who truly believe in the potential of this new technology and how it could secure and drive much of the web infrastructure around the world one day. For those of us, the value of these internet currencies function as an index of the value we attribute to the blockchain, which will only increase as mainstream America catches on.