Will Uber use its $360M war chest to become the exact thing it hates?
We now know that Uber has raised $361 million, valuing it $3.5 billion. The company today confirmed it has closed a new round and put the figure at $258 million, with Google Ventures, Benchmark, and private equity group TPG getting in on the new round. According to AllThingsD, the total figure was larger, because it included shares bought from existing investors.
So what’s Uber going to do with all that cash?
Here’s a fair bet: Attempt total domination.
With this much new cash in the bank, it’s a given that Uber is going to expand aggressively. The company is already in North America, Europe, and Asia, with the Middle East, Latin America, and Africa on the way. It’ll need plenty of capital to fund those moves. It’ll also have to save some pennies for lobbying and fighting regulation.
But if we know anything about Travis Kalanick and his unapologetic Libertarian ideals, his expansion plans promise to be bolder than just that. Aggression is something Kalanick, who has called his competitors clones and “corrupt,” all while brazenly defying regulators, does very well. When a guy like him raises this much money, you know someone is going to end up covered in blood.
Uber is well on its way to owning the market for black-car bookings. That part of its business is so profitable that it subsidizes its other lines, including the lower-end UberX service, which (most commonly) uses black Toyota Priuses to pick up customers and competes not only with taxis, which in San Francisco are 10 percent more expensive than Uber’s cut-price service, but also ride-sharing startups such as Lyft and Sidecar.
With Uber’s anti-Lyft “Shave the Stache” billboards in San Francisco, it’s also clear that the company is not going to hold back if it senses a chance to crush its competition. Now that it has a $250 million war chest, it likely sees an opportunity to own the market not only for black-car services, but also for ride-sharing and taxi bookings. Uber wants the whole damn lot.
So what’s one way it might use its cash influx to achieve that goal? We’ve caught wind of an intriguing, and potentially game-changing, possibility. Uber could be set to buy its own fleet of cars. On the face of it, that might seem crazy, but we’ve been hearing persistent whispers that suggest that’s exactly what Uber is going to do.
The thinking behind this theory is that UberX, the company’s taxi-killer, doesn’t have a demand problem – it has a driver and supply problem.
On the first point, to reach true scale Uber has to at some point lock in its drivers. Under the current arrangement, Uber’s drivers are on contract and are therefore not beholden to the company. That dynamic affects the company’s ability to control pricing and delivery and has led to situations like the one seen during Hurricane Sandy in New York last year, where Uber implemented “surge pricing,” resulting in drastically increased fares for people who were trapped in the city with few other transport options. Uber blamed much of the predicament on its need to entice drivers to work in the extreme conditions.
The other point revolves around the fact that, in San Francisco at least, UberX is faster and cheaper than using a taxi, and a more pleasant experience to boot. But if UberX enjoys those key advantages over taxis, how come there are still taxis on the road? The answer, it seems, is that there aren’t enough UberX Priuses on the road to keep up with demand.
One of the big investors in Uber’s latest round is the private equity group TPG, which purchased 775,092 shares at $114.03 each, for a total of about $90 million, according to filing documents uncovered by AllThingsD. Benchmark, on the other hand, also partook in the round, buying 105,324 shares at a considerably more expensive $142.54 each.
One theory suggests TPG got a bargain for the shares because it will raise a large amount of debt for Uber and underwrite some of the risk. Uber could then use that debt to buy a whole lot of cars and then lease them to drivers, thereby addressing its supply problem and giving it a leg-up over its competitors.
This theory might not be as far-out as it originally seems. Consider what Kalanick told a CNBC interviewer at the Sun Valley conference last year. In response to a question about potential partnerships with auto manufacturers, Kalanick had this to say:
We have a huge amount of demand that’s growing very fast. We need to make sure that our partners – these are sometimes small businesses, essentially small businesses, limo companies, sometimes with a fleet of one or two cars – we need those guys to invest in cars. So we need to streamline the supply chain. That means at some point getting auto manufacturers, working with auto manufacturers to get that supply online really quickly. So if I need a thousand Priuses in the next month, and they all need to be black, let’s just say, I need to find a thousand Priuses that are black and I need to get financing and leasing type options for our partners streamlined so they can come on very quickly.
What’s another way to get 1,000 black Priuses into circulation very quickly? Own them.
In a blog post, Kalanick wrote about how the combination of Google Ventures and TPG as investors is like “bits” and “atoms.” Google, he said, would provide “strategic connectivity to their product initiatives” and technological expertise, while TPG can provide operational and regulatory know-how in “atoms”-based industries.
The interesting thing about that is that Uber until now has been very much a “bits”-only company, which has given it the ability to skirt the regulatory troubles that come with being classified as a transportation company. By positioning itself as a technology company rather than a transportation company – by not owning vehicles and contracting drivers rather than employing them – Uber has been able to stay within the technical boundaries of the law.
If Uber does come to own its own fleet of cars (“atoms”) not only would it compromise its regulatory advantages, but it would also become just the sort of company that it purports to disrupt – a venture that, in common parlance, is known as a “taxi company.”
We’d then be faced with the prospect of Uber, with a competitive advantage gained in part through not being subject to the same rules and regulations as incumbent competitors on the taxi side, sucking up much of the oxygen in the market, especially now that it has hundreds of millions of dollars to put its aggressive expansion plans into high gear. For as much convenience, comfort, and swank that Uber’s service affords consumers, it seems reasonable to be concerned that Kalanick’s company could one day come to claim an outsized stake in such an important market.
To be clear, this theory is based on speculation, so make of it what you will. We haven’t been able to confirm the rumored impending car purchases with other Uber investors, who have been on "lockdown" since news of the funding broke. We have also reached out to Uber for comment, but the company declined the opportunity.
But from Uber’s perspective, and with Kalanick’s reputation for unadulterated and uncompromising free market zeal, it does not take much stretching of the imagination to envisage such a direction for the company. Uber certainly has the will to embark on such a monopolistic mission. Now it also has the resources.
There is an “Animal Farm” joke in here somewhere – something about the idealistic upstart eventually becoming what it once fought so hard against – but the potential ramifications are not all that funny. If Uber did come to own its own fleet and was successful in squeezing out the competition across all tiers – taxis, ride-sharing, black-car bookings – then “surge pricing” might be a term that the whole world has to get used to fast.