Pando

Welcome to the new Uber-Didi duopoly, suckers! The three options Lyft has left

By Sarah Lacy , written on August 2, 2016

From The Travis Shrugged Desk

That moment when Didi and Uber announced they are banding together to divide up ridesharing around the world effectively leaving Didi’s “partners” Lyft, Ola, and Grab out in the cold.

We’ve all seen that moment in reality shows. When one powerhouse builds a coalition against another powerhouse, and then last minute throws all those allies under the bus and shrugs, “That’s the game.”

These words from Didi’s Jean Liu -- who had previously admired Lyft’s nice guy image -- in an internal email said it all:

[Uber] has done better than any Silicon Valley company in China...Uber has been a grand rival and we have had an epic battle...We raged an earth-shaking war, and when we join hands, our love will last till the end of time. 

As I wrote yesterday, this is why you don’t take “venture capital money” from another startup. It’s the same reason publishers shouldn’t rely on the Facebook algorithm. Unless someone’s reason to exist is making you rich, you are likely to get fucked over.

It strikes me the most screwed out of Didi’s “portfolio” is Lyft.

Ola is challenged, and nowhere near as dominant as Didi was in China. And we’ve written before that Indian consumers don’t seem to prioritize backing a local company over an American one. But it’s still one of the most high profile and well funded Indian Internet companies of this cycle, and according to most estimates the market leader. Also, there are certain challenges to building a business in India, and Uber certainly isn’t focusing its efforts there.

I’d make the same argument for Grab. Southeast Asia is a huge market, but a fragmented one with a lot of payment and logistical challenges. Grab and Didi have been the closest of the group, and those markets are close enough geographically that we could well see Didi form a partnership or just acquire Grab outright.

Who knows? Maybe buried somewhere in this duopoly is that Didi gets to rule more of Asia than just China?

But Lyft is the “partner” truly left out in the cold. Lyft was already challenged, and this creates two new big problems: Uber has more cash to spend now that it’s not burning billions per year in China and Lyft just lost at least two investors who were incentivized to help it beat Uber. So, a cash problem and a cash problem. Not what you want when competing with the company that’s raised more capital than any other private company in Silicon Valley history.

Lyft and Uber essentially have the same product. In major cities, most drivers drive for both, and the apps are nearly identical, the pricing pretty much the same. The party that wins in these situations is the party who throws the most money at winning. We saw already this year that when Lyft capped its spending at $50 million per month, its growth slowed.

Now, Lyft has had the advantage until now of not burning billions a year in China. But now Uber can focus more of its warchest and attention on the battle in the US.

Where does Lyft go for capital needed to keep up? Well, likely not two of its recent deep-pocketed backers Alibaba and Didi. They participated in Lyft’s D, E and F rounds. Coatue (also a Didi and Grab backer) hasn’t invested in Lyft since the D round, and its traditional VCs long since stopped re-upping, according to Crunchbase.

That leaves its recent love affair with big existing auto makers. General Motors lead Lyft’s F round, and it was reported earlier this summer that Qatalyst was hired to get Lyft another deal like this. So far nothing has been announced. But those companies are more interested in where things go in a self-driving car world, not fighting a near term multi-billion dollar subsidy battle with Uber. They don’t have nearly the deep pockets Didi and Alibaba did, nor the deep pockets of the Saudi Government.

Some have speculated Lyft may get acquired outright by an automaker. While I don’t think we can count automakers out in the self driving battle, I don’t see the two as an Uber killer, let alone a Google, Apple or Tesla killer. It’s an odd clash of cultures, and Lyft supposedly being acquired to perform as the aggressive scrappy disrupter is like hiring a tiny kitten to take out a killer gang of rats in the back yard.

Instead Lyft has three options. Let me be clear: They aren’t great options. They may not even be likely options. They aren’t necessarily options in Lyft’s control. I absolutely hate one of these options.

But these are the only ways I see that Lyft-- and all the work the founders and employees have put into it; the billions of dollars investors have put into it-- stays a meaningful part of the coming inflection point of self-driving cars.

We know this after yesterday: Lyft will struggle as a stand alone company. Uber is about to crush it with a bag of money, several of its largest recent investors have effectively abandoned it with this Uber-Didi tie up, and investors in a would-be IPO will be rightfully concerned about the coming inflection point and Lyft’s ability to compete.

Put it this way: Uber already will be challenged to compete with Apple (maps, phones, brand, way more money), Google (maps, phones, gigantic hardware lead, way more money) and Tesla (gigantic hardware lead + sales infrastructure lead, brand, more money). There is a reason Uber is spending more than half a billion dollars building its own mapping product. It’s gotta have some knife beyond a driver network and a mashup of APIs to bring to this gun fight.

Uber has given up building its own hardware and given up China. It knows.

But to modify my earlier metaphor, if Uber is a kitten in this rat gang backyard fight, Lyft is a hamster. A baby hamster who's never run except on his wheel in a controlled environment.

To be clear: I love Lyft. I use it several times a week. This isn’t a value judgement; it’s reality. Like that moment on the reality TV show: Lyft trusted Didi, and Didi has cut its own deal and sealed Lyft’s fate. If this inflection point and the competitors involved weren’t coming, Lyft could just muscle it out Box-style as a solid number two. But even Uber is the underdog in the coming fight.

Here’s the worst part: Drivers don’t care. Earlier on our Pando subscriber group page Christian Perea from The Rideshare Guy blog, asked if he could help on getting the driver POV for this story. I asked him to ask drivers if they would rather see Lyft grind it out as an independent or see Lyft merge with a larger player. After posting in several forums and Facebook groups, here’s what he said:

So far, nobody seems to notice or care about it. Most are excited that Uber "lost" to a Chinese company...As far as I can tell most drivers don't really see the implications of this as much as they see Uber losing a battle in a far away place. 

Whoa, nelly. If Lyft’s big advantage is being nicer to drivers, that isn’t super reassuring.

These are Lyft’s three best options, in my view:

Sell to Apple, Google or Tesla for near any price. Lyft does have valuable assets for these players. Lyft Line is a great product that should tie into Google’s vision in particular. It has an installed base and a lot of experience with traffic and behavior patterns. Those may never be worth more than they are now. Far better than selling them to an old automaker who doesn’t remotely understand how to build a tech, software, or service company, is bringing those strengths to a tech company that has absolutely determined it is gunning for this market with self driving cars.

Sadly for Lyft, these aren’t easy deals. Google Ventures is an Uber investor, indeed Uber is one of its largest successes… on paper. That hasn’t stopped Google from effectively deciding to compete head on with Uber in the future. But buying Lyft might be a step too aggressive.

Apple is equally weird with it investing $1 billion in Didi which now has swapped board seats with Uber. But Didi has 17 investors. This conflict is weird, but not unnavigatable.

Tesla is oddly enough the long shot of the three. The culture fit is weird, the deal is premature given where Tesla is in this fight, and Tesla is digesting Solar City-- a controversial deal already.

Personally, I’d love to see any of these deals happen. Google is the most formidable fit in my view. Google has long looked at self-driving cars as almost a municipal public transportation alternative-- and that’s how Lyft has long looked at the world as well.

Google and Lyft both have a folksy, value-driven vibe, not the polished high end brand of an Apple or Tesla or the “baller” aspirations of an Uber.

Uber buys Lyft. Uber was very much the “Lyft” of China. And Didi ultimately decided it would get at least a 20% premium by becoming the monopolist of the world’s largest ridesharing market. It was a way to throw money (and equity) at a problem now to get the outcome that probably would have occurred inevitably at some point.

The question is: Does Uber look at the US market the same way giving the coming rideshare fight?

If Uber bought Lyft now, it’s won the US market wholesale in this round. It’s way stronger positioned as an acquisition target or a competitor or even an OEM partner of every old world automaker going forward. And Uber owning Lyft combined with having solved the China problem in exchange for a potential Alibaba-like upside makes an Uber grand slam IPO almost inevitable. Even Emil Michael couldn’t fuck it up.

Uber can also spin this as “We’ll learn from Lyft and build a more driver friendly company.” In reality they can do whatever the fuck they want to drivers and riders because they’ll own almost every city. That in turn makes their economics even better. They can focus solely on self driving cars, on the remaining international fights, or whatever they chose.

This is highly unlike Uber, but Uber is clearly having to pick battles at this point.

This is the smart thing for Uber to do. It is also the most horrific outcome for me personally. Until this point, people like me who boycott Uber for personal or moral reasons have had an easy second option. People like me would simply have to sit out a ridesharing world or cave to Uber. Another reason for Uber to do it, because it has only threatened so many people’s families. Most of the people who have stubbornly clung to the Lyft highroad would cave rather than go back to driving and cabs.

Now that China is settled, this would be the final loose end for Uber to tie up before the coming fight. Lucky for me, Uber is likely too arrogant to do it.

Lyft and Postmates merge and go for ultimate efficiency/logistics play. This is the absurd Hail Mary of the three, but I still think it’s more interesting than Lyft going to a Detroit automaker.

The reason that Uber wants to get into delivery of food and goods is to maximize the efficiencies of cars and human drivers, to offset the challenging economics. Postmates is the leader and probably doesn’t want to sell to Uber any more than Lyft does-- at least among the rank and file workers.

There is a shot that Postmates and Lyft could merge together and focus on building something orthogonal to Uber as the self driving world struggles to come into regulatory reality. If it’s ten years off-- as several experts have speculated-- that’s a long time to make driver economics work. A company that focuses on humans routing everything around major US cities in a way that Uber can’t with its on-going international struggles and self-driving ambitions.

Postmates-- which has also hired Qatalyst-- may have no interest in a deal like this right now. It may be eyeing a buyout from a grocery and food delivery giant like Amazon, or even Uber, and may not want to squander that opportunity. It depends on where the founders’ heads are.

Do they want to continue to fight for independence or -- like Didi-- cave to a world dominated by the largest cash-rich players?

The one thing Lyft has to do is make a big move and be decisive. Or I fear it starts to become a private Twitter: A beloved product that larger players can out compete and out spend into irrelevance.