Brad Stone, Senior Executive Editor of Global Technology at Bloomberg and author of The Upstarts and The Everything Store, joins Ben & David to dive deep into the Uber-Didi saga, a wild story with far-reaching implications that still aren't fully appreciated by most of the Western tech community. Brad has been the foremost US chronicler of Didi through his reporting at Bloomberg and work on The Upstarts, and shares fascinating insights about its founder & CEO Cheng Wei, how the tech landscape is evolving in China, and lessons & themes that other technology communities around the world can learn from their rapid rise.
Topics covered include:
The Carve Out:
Full Transcript below: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
Ben: Welcome to Episode 31 of Acquired, the podcast where we talk about technology acquisitions and IPOs. I’m Ben Gilbert.
David: I’m David Rosenthal.
Ben: And we are your hosts. We have another guest episode today and we are very, very, very excited to welcome Brad Stone. David will tell you about Brad before we dive in. But I wanted to do a little bit of administrative stuff before. This week’s show is brought to you by Silicon Valley Bank. We were exploring sponsorships here on Acquired and we wanted to do something that aligned with the interest of our listeners and might be a little educational in the process. Here’s a brief Q&A with SVP Minh Le:
Our show focuses a lot on the elements of successful M&A. What’s one thing that you see that typically makes an acquisition successful?
Minh Le: You got to see a lot of different aspects of but, you know, one of the one things that I’ve seen that tends to lead to a good outcome is companies that have gotten to know the target overtime. So where there are, you know, the partnerships that exist and you have a sense of what the culture looks like so that when you think about down the road the integration of the target company is a lot easier when the cultural fit is there and that there’s some alignment with the old leadership and kind of new vision with new leadership.
Awesome, thanks man.
For those of you who are long-time listeners of Acquired, you know about the Slack. But if you’re new to the show, join over 400 other listeners of Acquired for real-time discussion, analysis, and news as it’s happening whether it’s the Snap IPO, Trello a few weeks ago, App Dynamics, a lot of interesting conversation going on there about the M&A world.
And lastly, before we dive in, a big thank you to KUOW, a radio station here in Seattle who has generously let us record in their studio this morning.
Now David, over to you to introduce Brad.
David: Yeah. We are super honored and excited to have Brad on the show today. He is actually our second guest from Bloomberg after a great show with Alex Sherman a couple of months back. But Brad is the Senior Executive Editor of Global Technology at Bloomberg and before that, he covered tech in Silicon Valley for nearly 20 years as a reporter at Bloomberg, Newsweek, and the New York Times. Most relevantly and fun for us, Brad is the author a few years back of the canonical history of Amazon, The Everything Store, which as listeners know we have discussed a lot on this show and has had a big impact on Ben and my thinking. It’s just a great book that we can’t recommend enough. Brad actually has now a new book called The Upstarts which covers the histories thus far of the kind of new generation of defining internet companies, Airbnb and Uber. I’ve heard of those. Ben and I both read it. It’s great. We highly recommend it. We’re going to be talking about a lot of the content within it on this show. But definitely go out and pick up a copy. If you like this show and history and analysis of kind of waves of technology companies, you’re going to love this book.
So, thank you, Brad. We’re super excited to have you here.
Brad: Thanks, guys.
Ben: For listeners in my kind of typical style, I, knowing we were interviewing Brad this morning, just finished The Upstarts last night and I loved it. I mean, I talked a lot about The Everything Store on the episode with Tom Albert. But really, the spiritual successor to that Amazon book and it’s interesting how it really is the next generation of a lot of the sort of same mentality and tactics in Uber and to a lesser extent Airbnb, but in Uber that we saw in Amazon.
Brad: Thank you. Yeah, it’s hard to follow up the story of Amazon because there’s really nothing like it. Somewhere along the journey of trying to find what’s what next, I decided, okay, maybe there isn’t a follow-up. Maybe we can look at the kind of wave of companies and the defining moment in Silicon Valley. And that’s kind of how I stumbled on this sort of dual profile.
Ben: Very cool.
David: Yeah. It’s great. So today, we’re going to talk about something that a story, a merger that probably a lot of our readers know happened recently but hasn’t got nearly I think enough press in the western world at least, and what press there has been has really been, thanks to Brad, he’s been the foremost reporter on this. That’s the merger that happened last fall between Uber and Didi Chuxing – I hope I’m pronouncing that right, I may be butchering it – in China. This is a wild story and there are so many lessons here that I think all of our listeners can take away. And we’re really, really glad to have Brad here to tell us. So, I’m going to tell the story along the way but definitely want to credit Brad. It’s his story and that he did the reporting on. So with that, I’m going to dive in.
So we pick up the story in 2012. Uber has already kind of become a pretty meaningful household word at least in the US and is starting to expand internationally. They’ve gotten word that there’s this company in London called Hailo which started with the black cabs in London, has had a lot of success there and is thinking of, is planning, plotting to come into the US and threaten Uber here. So in response, and Brad talks a lot about this in the book, Uber mounts a really aggressive international expansion campaign. And at the same time, Lyft and Sidecar have really pioneered true ridesharing in the US, not just the black car limo and liberty drivers that Uber started with but true ridesharing where anyone can drive. Uber has responded with UberX and kind of the world is now realizing that the market for ridesharing is orders of magnitude bigger than anyone thought.
Ben: Yeah. And David, it’s worth kind of noting there that in today’s world where we all take UberX’s everywhere or that’s the most common to say when I’m going to take an Uber or UberX, Uber did not pioneer ridesharing.
Brad: In fact, they were reluctant to embrace it. Travis spent a lot of early 2013 trying to get Lyft and another company, Sidecar, shut down in California because he saw it was a disruption and he thought it was illegal. When the California PUC didn’t do anything, that’s when he embraced UberX wholeheartedly.
David: If you can’t beat ‘em, join ‘em.
David: I think that’s kind of Uber’s motto, right?
Brad: I want to say one more thing about Hailo though because there’s an interesting lesson in tactics. Hailo in 2012 promoted the heck out of its international expansion. That was a huge mistake because they not mobilized Uber to grow more quickly in the US and then Uber got to market like Chicago and other cities before Hailo ever really moved on its promise to expand. But Hailo also stirred all this entrepreneurship in China. So what you have to understand these days is there are entrepreneurs all over the world that are watching sites like TechCrunch religiously. It was Hailo and not really Uber or any of the other ridesharing companies that started stirring these companies in China to start competing.
David: Yeah. Thanks for tuning up there, Brad. It’s like you wrote the story or something. That’s exactly what I was going to say, that all around the world people are starting to wake up to the potential of this market and nowhere more than China are entrepreneurs sort of attuned to the size of this opportunity and ready to go after it with just kind of aggression that makes even a company like Uber look tamed here in America.
So as Brad writes about, there are about 30 companies between 2012 and 2013 that got started in China all going after this ridesharing Uber opportunity. One of those companies gets started by a young entrepreneur named Cheng Wei who at the time was a 29-year-old salesman at Alibaba in Guangzhou. And he had been kicking around some entrepreneurial ideas with his boss at Alibaba, a guy named Wang Gang and actually earlier that year, it kind of started this side project, an app that they called Momo. Momo was essentially on iOS the sort of Find Friends feature. It was essentially that. So they’re working on this app on the side at Alibaba, see the market opportunity in ridesharing and immediately pivot and renamed the company Didi Dache which translated into English means “honk-honk, call a taxi.” So when they pivot, they decided to leave Alibaba, go full-time. Cheng is the CEO and Wang invested the initial seed capital into the company. And they’re kind of off to the races along with everyone else.
So, I wanted to ask Brad here. I mean, you spent a lot of time, probably more than anybody, interviewing these folks. What are they like? What drove them to start this company?
Brad: I just love Cheng Wei. He was great. I should say his English isn’t so good and my Chinese is nonexistent, so my partner-in-crime on the story was Lulu Chang, one of my Bloomberg colleagues in Beijing. We went to visit Cheng Wei at Didi’s headquarters. I loved him because he presents his story as a series of small personal humiliations. For example, his very important college entrance exams in high school. He leaves one page blank by accident and gets into a lesser school. In college, he gets a job selling life insurance and he doesn’t sell a single policy. Then he signs up to work at a healthcare company only to find out that it’s a chain of foot massage parlors. And he walks into an Alibaba office in Shanghai, gets a job, meets Wang Gang, his mentor, and really they started on their entrepreneurship path because Wang Gang doesn’t get a promotion. They start kind of brainstorming ideas. Momo actually, it wasn’t their idea. It was something that’s kind of a hack that existed on the app store in China and they sort of realized the power of GPS and the potential to do things like a Hailo in China, a taxi hailing app. Yeah, and then they launch this company called Didi, only to find out that dozens upon dozens of other companies had the exact same idea.
Here you’ve got this young kind of whippersnapper in Cheng Wei. Wang Gang, we spoke to on the phone, he very rarely does interviews but sort of flamboyant investor who as just by virtue of small Angel investment in Didi has minted at least a billion dollars. These guys, they had nothing. And 30 is the number of companies that launched. There might have been hundreds that spun up to address this opportunity in Beijing at the beginning of 2012. So the odds were against them but, I think as we’ll talk about, they had some experience in the industry and knew what it took to succeed in China.
Ben: Brad, I think you pointed out in your book that it was roughly the American equivalent of 100k that he put into Didi as his little Angel investment.
Brad: A pretty good investment.
David: Kind of on par with Sequoia’s 600k into Airbnb a few years earlier that you also covered in the book. I’m also struck by both the similarities between Travis Kalanick and Cheng Wei in terms of their histories and their failures in the past. I mean, neither of them when they started these companies were household names. You know, far from it but also like the complete opposite in terms of their outward personality is like it must have been– Did that come through and as you were talking to both of them like this sort of underlying drive that they have that I suspect as in my many ways been motivated by their past failures but just contrasted with these wildly different surfaces?
Brad: I think that this is a cultural thing. It’s funny because I was recently telling some of my colleagues in Asia that we need to stop describing internet CEOs and founders as humble. But I think like they’re all trying to present the humble veneer that there’s just kind of cultural value in doing that. Whereas in the US, somebody like Travis doesn’t hesitate to be presented or present himself as extremely aggressive, right? Of course, Travis did that over the first few years. But behind the façade, they’re very much alike. I think one of the reasons Didi succeeded and beat all these companies is that Cheng Wei had a vision which is that smartphones and technology could make transportation more efficient in China. But along that idealism there was a ruthlessness to go and pursue that goal. Like everywhere else in the world, ride-hailing was quasi-legal in China and yet nevertheless he sent those early employees to cities, to go and launch without permission and in some places they were shut down and he nevertheless kind of persevered. And that’s kind of what it took in this industry – a relentlessness in the approach.
Ben: Thinking about that perseverance and that relentlessness, as you meet with the founders of Didi, the founders of Uber, the founders of Amazon, do you get the sense that when you talk to these people in person, there’s something about them that’s just different than other people, that this relentlessness and this kind of ruthlessness that that sort of thing could be predicted? Like are they the inherent forces of nature that set them apart from other people? Or what is it about them?
Brad: That’s the big question. First of all, I wouldn’t put anyone else in the category of Jeff Bezos because he stands alone and had the vision before anyone, that the internet was going to change the world and bet so heavily on it and then had years of people thinking that Amazon was really just a boring retailer. I don’t know that the Uber’s and the Didi’s of the world have suffered the way that Amazon and its employees suffered for many years. I think in terms of Cheng Wei, probably what marked him and his story is that he – and I’m sure we’ll get to this – like had great people around them and then was able… I mean, the dynamics of the Chinese market are so unique that Didi’s smartest move very early on was to hook into Tencent. When they did that, everything became possible.
David: To pick up the story there, I think what’s striking reading the book and hearing about the early days of the ridesharing competition in China is it makes… you know, the Uber and Lyft fight that we think is so ugly and distasteful here in the States, it makes it look like kids in the sandbox, right? These 30 companies were just brutal to each other and in particular, they all started raising large amounts of money and then being willing to go deeply, deeply gross margin negative by paying drivers a lot more for each ride than the riders were paying the companies. So it kind of becomes that their laying siege to each other’s businesses in a way. You know, this is war. And one of the tools, one of the ways that they start raising money is from the large, the big 3 internet companies in China, and Didi Dache is actually the second one. They raised money from Tencent. But before that, their competitor Kuaidi raises money from Alibaba which of course is Cheng Wei and Wang Gang’s former employer.
So Brad, you talked to all these guys. Like what was going on?
Brad: Right. I think when Kuaidi went and raised money from Alibaba, it was definitely a blow to the Didi guys because that’s their alma mater and Alibaba obviously the e-commerce giant in China. So I think that there was a moment of almost panic that Alibaba had placed its bet. It was on Kuaidi. As a result, Wang Gang, the investor and Cheng Wai’s mentor, his next call was to Tencent. As it happened then, it was probably difficult to see in 2012 but Tencent has this social network/messaging platform called WeChat.
David: And which was of course QQ before that on desktop. This was like, you know, sometimes it’s better to be lucky than good, right?
Brad: I think that’s right and I think that the big moment for this industry, so Kuaidi and Didi start to emerge by virtue of the investment of Tencent and Alibaba. Baidu is still sitting on the sidelines. What happens at the end of 2013, beginning of 2014, and again, almost sort of lucky is that over the Chinese New Year, WeChat integrates Didi as a way and there’s a product called Red Envelope or Red Package and it’s basically a way for Chinese WeChat users to give each other small gifts. The idea of giving somebody a gift on Didi the gift of a ride kind of takes off. Both Tencent and Alibaba, the sponsors of these ridesharing companies realized that the next battlefield in this longstanding war between the internet giants in China is going to be mobile payments. And that the taxi companies, the ride-hailing companies are ways to spur payment value with mobile payments. So they start to kind of use these two ridesharing companies as proxies and funnel money right off their balance sheet into these companies as a way to drive payment volume. That is when Didi and Kuaidi started to just take off on steroids and not only growing very rapidly but burning tremendous amounts of money.
David: Yeah. Because the siege is continuing and both Alibaba and Tencent are reporting tons of money in. But other investors are also venture firms and private equity firms also pouring in lots of money. I mean, it gets to be billions of dollars that these companies are burning just trying to subsidize rides to kind of get big fast and beat the other one, right?
Brad: That’s right. Then you've got the people like Yuri Milner and DST who… all the big investors had missed on Uber and believe me, they berate themselves nonstop and that’s an interesting aspect to the story, that these companies very early on did not look like the prototypical internet companies. So Yuri Milner who prides himself on hitting all of the big ones passed on Uber. So, bets big on ridesharing or ride-hailing in China, makes an investment in Didi and then kind of sees this destructive war playing out between these two indigenous Chinese ride-hailing companies and gradually over throughout 2014, starts to broker a piece. Not only because both companies are losing a lot of money and siphoning cash off Alibaba and Tencent’s balance sheet because, you know, I think that they also had sort of the foresight to know that Uber was coming and that the Chinese companies were probably better off together than they were apart.
Ben: It’s interesting thinking about the big three in China. Their investment firms, they’re their own business. And in America or the US, we tend to have, I mean, there’s corporate venture but you don’t have like, “Oh, Facebook invested in them.” So, Google needs to go invest in someone else. Those corporations just buy companies, right? Then they subsume them into their offering. But we don’t really have this first tier of funding is kind of corporate venture like there is in China.
Brad: Well, the funny thing, we can make an interesting juxtaposition with Google and Uber because Google Ventures invested in Uber – it’s their biggest investment ever – and then they start competing with Uber, right? They roll out a ridesharing… well, they start talking about the ridesharing service but they scare Uber into thinking that maybe Uber will be a competitor. And relations between the two companies are strained. Whereas Tencent invests in Didi and doesn’t ever compete with it and as a result… you know, it’s interesting. It’s a different model. I think maybe sort of smart that kind of Tencent knows that that is not in its core competency.
David: What it also feels like to an outsider perspective, it feels like these big three Chinese internet companies are willing to sort of more directly exercise their influence in the market there, if that’s the right way to put it, than the internet companies are in the US. I mean, it’s really hard to imagine Google or Facebook sort of giving preferential treatment to… You know, like if Facebook started giving preferential app installs to one ridesharing app over another or one other form of company over another, I can’t imagine that going well.
Brad: You’re right. That’s a great point. We’ll get to this but not only was Tencent prioritizing Didi on WeChat but when Uber comes into China, it starts blocking Uber from WeChat. So I think that’s a good point. I think that there would be some regulatory or anti-trust scrutiny if Google was to play favorites in the way that Tencent and Alibaba did in China.
David: So Yuri Milner kind of comes in and brokers this piece between Didi and Kuaidi and they know Uber is coming. Didi ends up “winning the battle.” They get 60% of the combined company. Cheng Wei stays on as CEO of the company. I just want to sort of step back for a minute here and talk about this is like two years after these companies were founded. So they go from getting started – inspired by Hailo, not Uber – having this sort of wide playing field and then a bloodbath emerges, the big internet companies get involved, they raise and burn billions of dollars and like 700 days go by. The pace is just blistering.
Brad: One funny thing from the book, yeah, there were moments of like just technical meltdown for these companies and they mythologize these periods within the company that I think they call one “7 days, 7 nights” where they worked so hard to prop up the infrastructure that one of the engineers had to go to the hospital because his contact lenses had become sealed to his eyeballs.
David: Oh my God.
Brad: So that kind of tells you how hard and how fast they were moving at the time.
David: Yeah. I mean, it’s like when Mark Zuckerberg talks about Facebook going on “lockdown.” I’m pretty sure the employees still go home at night but in China, they don’t.
Ben: Well, in crushing the numbers it looks like it literally was about twice as fast. We don’t know exactly when Uber hit a $1 billion valuation but they did their series B on 300 million in December 2011 and their series C in August 2013 on 3.5 billion. So if you look back at their seed of August of 2009, they probably hit a billion dollars about four years after founding, approximately twice as long as their Chinese counterparts. So, it really is an insane pace.
Brad: You just think about the size of the Chinese market and how car ownership is so much less developed in China and so there was just more of a hunger for this kind of service.
David: Yeah. So Uber, as we’ve been mentioning, they’re not blind to this too and actually, it turns out that Uber had had this kind of small sort of clandestine presence in China since 2013. There’s this story that Travis and a few other Uber executives go over to China and Travis sort of famously calls back to headquarters in San Francisco and says like, “Hey. I need you guys to tweet the text so that we can like… like we’re going to go out here. Our executives signed up a few drivers and just like run some tests here in China.” So they started doing that in 2013 but they’re just sort of testing. Then when Didi and Kuaidi are in the midst of their merger, that’s when Travis decides, “Okay.” He’s going to put his foot on the gas and launch for real in China. And Uber does and pretty quickly while Didi and Kuaidi are consumed with the merger, Uber gets to a 30% market share kind of right off the bat. So it’s now sort of they’re a real player in the market. How did that happen so quickly?
Brad: It’s funny. We’ll go back to the story of technology in China is always the story of the big three. One of the things that happened was Uber when they launched, the integration was very poor in China because they were using Google Maps and we all know Google is pretty much blocked in China, so the integration was poor. Also this idea of launching via the black car or limo market in China was always a limiting one because it’s just not that big of a market. So Uber kind of tootles along for a year and a half and then makes the very kind of smart observation that Baidu has sort of missed this wave of mobile payment competition and needs to catch up. So they solicited an investment in Baidu, they start using Baidu maps which is much smarter about the transportation in China than Google and the product just gets much better. At the same time, at the beginning of 2014, Didi and Kuadi are merging and as with all mergers, it’s an awkward one and they kind of slow down. So I think Uber took advantage of sort of this opening and made up some ground. But as we’ll see, it was temporary.
David: Yeah. So they come in swinging into the market with Baidu as a partner, get 30% market share, and Travis goes in over and he meets with Cheng, he meets with the newly merged Didi. And Travis, he sort of walks into the meeting, he thinks Uber is international, Didi’s not at this point. Uber is, Travis is convinced the better product, the better technology, they had Baidu maps which had the best maps in China. He essentially offers to acquire Didi. He frames it as an investment. He wants to invest in Didi but he wants a 40% stake. And this is really, to my mind at least, seems like he’s trying to say like, “Hey, I’m just going to take you guys out on the cheap.” And Cheng and Didi reject this offer.
Brad, you learned a lot about this meeting. What happened there?
Brad: Well, I think Travis kind of met his match. One of the things that happens at this meeting is Cheng Wei stands up and on a whiteboard kind of charts Uber’s growth since 2010, then with another fever line charts Didi’s growth since 2012, and the lines intersect and he projects that Didi will be larger than Uber primarily because the market in China is so much larger. There’s all sorts of funny little maneuverings here at this meeting and one of the Uber executives were wondering whether the food that they had been served at the meeting was deliberately bad as a kind of strategic maneuver. But it was and I think it was actually just a bad lunch.
David: You loyal taste taster. It’s like the Middle Ages here.
Brad: Right. There’s a lot of maneuverings here behind the scenes. But I think that to their credit, the Didi executives and at this point, Jean Luo, an executive from Goldman Sachs, she’s either advising Didi at this time or has joined really as Cheng Wei’s partner. And I think there’s a belief that as with so many other markets in China, the local player will be able to prevail. There’s a lot of sort of kind of fierce pride I think in the Chinese internet market that they can hold their own. And it’s funny because I contrast that with the attitude in Europe where we really don’t see that. So as a result, Travis and his bid to acquire Didi very early on was rejected and they resolved that they’re going to fight it out in the marketplace.
Ben: So a question on that. Google doesn’t operate in China and many other large internet giants have been sort of kicked out of China and not allowed with the great firewall to operate on the internet there. Why was it that Uber was able to get to 30% market penetration and didn’t Didi have on its side the ability to just say “Hey, we’re going to make a couple of calls and you really need to leave our country”?
Brad: I mean, I think that the censorship challenge is a company that’s like Facebook, Twitter, and Google phase are about information and sharing information that the government in China just doesn’t allow. And Uber is a transportation tool, so it was sort of kind of less clear that they were violating those rules. Now, I think there’s an argument to be made. I don’t happen to believe that it was significant but there’s an argument to be made that maybe ultimately the Chinese government did tilt the playing field on behalf of Didi and slow Uber down, or that maybe in the future if Uber was going to stay in the market they would have problems because obviously they do collect sensitive information about where people are and where they’re going. But yeah, Uber was not facing those kinds of censorship challenges and to the extent that all these companies had problems and do have problems, they’re pretty universal in terms of who’s allowed to drive for these services.
David: Cheng and Did kind of essentially say that to Travis after this meeting like, “Okay, you want to fight? We can do that. Welcome to China. We’ve been through this brawl with 30 other companies. We can take you on too.” I know I keep saying this throughout the episode but really just reading about this is so surprising to me because we just don’t see this in tech here in America. Things go like kind of nuclear at this point. So what happens is Didi and Uber both start raising huge amounts of money to fight each other in China. Did first announces –
Ben: And not from the usual suspects either.
David: And not from the usual suspects, yeah. They already have the investment from the internet portals, but Uber raises $3.5 billion from Saudi Arabia’s public investment fund and Didi raises $7 billion of its own. So that’s over $10 billion raised within a couple of months and they just basically start giving this money away to subsidized rides. Didi does something that I suspect even Travis and Uber, as Machiavellian as they are in the US, couldn’t even imagine and see it coming. Didi starts investing in all of Uber’s rivals around the world including Lyft in the US and Ola in India and Grab Taxi in Southeast Asia, and they announced that they’re going to literally, it's like the allies fighting the Nazis here. They have this global alliance to fight Uber that they start building. When people, investors and executives at Uber start seeing this happen, like what was going through their heads?
Brad: I think they were dismissive of the global alliance because it was unclear what it really meant or whether there was much value in sort of integrating each other’s apps or how smooth that would be. I think the more meaningful thing, like Uber is bringing a couple of assumptions to its battle with China that I think are interesting to examine. One, obviously I think at the time Travis is pursuing a global network but this is not really a network effects business or if it is, it’s very local. So it was sort of unclear that Uber’s strength and the rest of the world would even translate into China. The great contrast is with Airbnb where I think they do have more of a global network effect because they’ve got travelers going back and forth across oceans.
The other advantage I think Uber thought it had was capital advantage and what we really started to see in 2015 and 2016 was this unique capital market where there were all sorts of unique sources of capital that were willing to shower all these companies with money. I think it was more the fact that Didi goes in and gets money from Apple or that these sovereign wealth funds start to kind of provide capital that begins to convince all these companies that they are on a sort of unsustainable path. The investment in Lyft, the global alliance, I think the Uber guys, as arrogant and confident as they are, sort of shrug but it’s when a company like Apple or FoxConn gets into fray and starts putting money into Didi that I think Travis and Emil Michael, his deputy, start to wonder can they really win this battle.
David: By the summer of 2016, Didi is starting to pull away and whether that’s because Chinese regulators are subtly tilting the field towards them or because of its capital or just better execution, hard to say, but Didi claims by summer of 2016 that they have 85% market share so they’ve won back another 15% that Uber had taken and they’re operating in 400 cities in China versus Uber which was only 100. Then apparently, it's Uber’s investors that start pressuring Uber to negotiate a truce and Uber reaches out to Didi and says, “Okay, let’s begin peace negotiations.” And pretty quickly from when they reach out, Brad, I think you say it’s 2 or 3 weeks. They come to a deal where Uber sells its China operations to Didi in return for a 17% equity stake, and Didi agrees to invest $1 billion in Uber and get aboard. How did that set of meetings come together and differ from that first meeting when Travis went over?
Brad: Well, first of all we should be clear that this is not a bad deal for Uber, right? It’s a sort of remarkable retreat that nearly 20% of what will be kind of their major international rival, a billion dollars investment to kind of recoup some of the massive losses, I think at this point, this is a very respectful set of negotiations primarily Jean Luo of Didi and Emil Michael from Uber culminating, as I depict in the book, this kind of famous drinking session between Cheng Wei and Travis in Beijing over the summer of 2016 where they’re drinking Baiju and Cheng Wei was sort of hilariously dismissive of Travis’ drinking abilities. But of course, Baiju is not for the faint of heart. I guess I don’t have much illumination on how they came to kind of 17% or 18% ownership stake other than this is what sort of the market was suggesting at this time. And for Didi it's a great deal too because they kind of win not just the Uber China brand and its customers and all those employees but basically an open playing field to be the primary kind of transportation innovator in the world’s largest transportation market.
Ben: We usually save this more for the end, our evaluation criteria. I think we’re going to look at Uber here and say was this – usually we look at the M&A event and say was this a good use of funds, was this impactful and multiplicative in the future to bring this company in. So the lens I think we should look at this through is was it a good move for Uber to engage in all of this activity and then leave with the 17% stake in Didi. If you just look at the raw dollar leverage, I mean, it’s a very short period of time of blowing $2 billion to get almost $6 billion in value of present dollars. And the hope is, is you make that investment and that Didi continues to grow in value in China. And you raise a great point, one of the best markets in the world or the best market in the world, the biggest market in the world should get remarkably bigger than Uber itself.
Brad: So I think it was a good deal for Uber, I only gave two reasons. But I’m curious to hear what you guys think. One, Uber may not have known this but the regulatory environment in China was about to change for all the ridesharing companies. A lot of the big cities have now said it was illegal to drive for these companies if you don’t live in the city. That has constrained the supply of Didi and slowed down its growth. So I think Uber got out at probably the right time. If you’ve got a constrained supply being on a battle for the hearts and minds of drivers is not the position you want to be in if you’re the foreign company.
Ben: For listeners, Brad was telling us this earlier. I had no idea. I think this is super new, super interesting and I hadn’t fully thought through it. Brad, why do you think it’s advantageous and why would you think a city would legislate that? It seems like it’s only good for business.
Brad: Well, I think it’s protectionism. I think that the yellow cab fleets are a major source of revenue for cities and the fees and taxes that they pay and perhaps the medallion fees. So I think that’s one reason that I think they’ve kind of tipped their fingers on the scale as like the taxi companies have done all around the world. I think the second reason is there’s a rational argument around traffic and congestion and obviously all the Chinese cities struggling with it mightily, that might be a little bit of a cover story for just protectionism. And of course, the pendulum may shift. But I think for now, Didi is kind of fighting that regulatory battle and they've reorganized, restructured their company a little bit to put more emphasis on some of their chauffeured offerings and they’re commuting alternatives like buses.
I think the other thing that happened and the reason why this was a smart deal probably for both companies is, it became very clear over the last two years that this market was about to undergo a major pivot into driverless car technology and so it really doesn’t make a lot of sense to go waging a war and spending a battle for a market that is going to be changing very quickly. And now both Didi and Uber are spending a lot of that money that they might have been spending on subsidies, investigating the future, and I think that’s a smart approach.
Ben: Do you know if Didi is also working the self-driving car offering?
Brad: They are. Yeah. They’ve been trying to hire some folks and they've got a team and they’ve got some partners. I think Baidu is also exploring it in China and as is everyone now. Of course, it’s very fashionable to say you’re looking into it. It’s unclear to me now whether Didi has made the progress of, say, Uber which is testing cars now in Pittsburgh and a few other cities.
Ben: One thing I learned from your book, Brad, is how fast or how recent Uber is to this sort of area of self-driving cars because they really weren’t tipped off to it until Travis got in one of the self-driving Google cars when he went to meet with Larry Page or Eric Schmidt.
Brad: That’s right, it was Larry Page. But even then, remember he – my times are messed up but I think that’s 2013 – even then he believes Google will be Uber’s partner in that effort and it was only at the Recode Conference in late 2014 where Sergey Brin is talking about in a little bit of a dismissive way toward Uber and Travis had gotten wind that Sergey was going to have a talk and maybe announce its own sort of Uber competitor that I think Travis starts to realize that Google is not a partner in self-driving cars but a competitor, and that is when he begins to invest very seriously in self-driving cars.
Ben: Got you.
David: Let’s move on to acquisition category and then come back to grading. But before I do, I just want to say we’re recording this episode here in the middle of February in 2017, you know, because the deal has happened but the story is kind of far from over. Just last month Didi announced that they were going to invest $100 million in a company called 99 which is the primary Uber competitor in Brazil. So they sort of, you know, all is quiet on the eastern front of the battle in China but I think the war is not yet over. An armistice may be signed but I predict that we will see more Uber and Didi going head to head throughout the world in years to come.
Ben: Yeah. The interesting analogy is it was the battle for China is settled but at the end of the day, these are both global companies and if not now, then that’s an aspiration in the future.
Brad: They’re global companies in a market where it’s really not clear that being global gives you that much of an advantage.
Ben: Yeah. To your point about network effects, it seems like with Airbnb it’s highly advantageous to have people everywhere on a single network since they travel a lot or you could imagine like eBay or Amazon where it’s even stronger of a network effect because literally it’s all shipping. It doesn’t matter where you are. But with Uber, shy of having to download a new app when you go to a new place, it really doesn’t seem that strong. It seems like these pockets of network effects that better describe the service.
Brad: Yeah. And there’s a belief at Uber that kind of technology will make a difference and they can move kind of learnings around the world. But it’s just not clear to me. Like the continued strength of Lyft in a lot of US cities I think is indicative of like maybe as long as you pick somebody up within 3 minutes, maybe nothing else matters. Ola in India, knowing that market, knowing the cash habits of those people, knowing just how to press the buttons of city governments or what to do in streets that are just utterly congested, I mean that’s an advantage. Not to say that Uber doesn’t have that because they have local offices and very smart general managers but I think there’s a reason that Uber hasn’t run the table yet.
Ben: Right. To your point, it's not that they aren’t great at those things. It’s that they don’t have a structural advantage by gaining the position that they’re in to necessarily make that N+1 market any easier than the N market.
Brad: Right. I think that they thought that capital will be the ultimate advantage but all these other companies have been able to fund themselves just fine.
David: So much good stuff for tech themes. Let’s do category real quick. Ben, what’s your take?
Ben: So for new listeners to the show, we normally assign a category of people, technology, product, business line, asset, or other. Asset, we added a few episodes back when we we’re talking about purchasing a data asset. And in this episode I’m going to go with “other” and possibly create another one too. This was a takeout. I mean, Uber was not buying something here that they couldn’t otherwise get by making a talent acquisition or buying an interesting new technology company. This was literally you are a massive competitor and it’s massively disadvantageous for our business for us both to be fighting here.
Brad: It’s like geopolitical, right? It was a peace tree, it was Yalta. We will seat this country to you and be punitive allies. And of course, they took seats on each other’s board and yet, it's an uneasy piece.
David: Yeah. The category I was going to go with was sort of like marketplace consolidation, sort of like we talked about with Kathleen Philipps in the Zillow-Trulia episode. But the twist I was going to add is it’s incomplete, right? It’s marketplace consolidation in one part of the world but the fight continues elsewhere as we’ve been talking about.
Ben: Yup. We should make bets on how long we think they’ll be on each other’s board.
Brad: Yeah. Who knows? For all we know, they’re not even or that was a little illusory to begin with. I mean, those were not voting seats as far as I understood it and that’s heck of a long way to travel for a board meeting. So that may have been optics.
David: Yeah. So what would have happened otherwise? I mean, Brad, I’m curious for you like if they kept fighting, how long could this have gone on?
Brad: I think it could have gone on for a long time but it would have been destructive to Uber in other parts of its business. It was fighting a multi-front war. Instead of fighting in China, they’ve kind of reinvested in their India operation, so that wouldn’t have happened and I think they would have moved less aggressively into driverless cars and trucks. So they recently acquired Otto, a driverless truck company and so perhaps we would continue to see this war in China but less activity in other parts of Uber’s business. So I don’t know that they were constrained with capital. They’ve raised 12 to 13 billion plus. They could have kept fighting but in the end, for what? For points of market share.
Ben: Another thing to factor in here is if they hadn’t gone and spent a couple of billion dollars in China and kind of waging that war, could they have focused on an earlier IPO? I mean, it's been 8 years now that Uber has been around and they’ve gotten this capital. They went and aggressively raised capital from all sorts of different places to wage this war. I don’t know that they’re usually exclusive but should they have IPO’d by now? What would have been the advantages of that?
Brad: Well, I mean they haven’t been constrained in raising money, right? So if anything, that would be embracing a whole set of challenges and obligations for its transparency. Clearly, predictably with all the troubles that Uber has had recently in the press, the company is sort of not ready for it.
Brad: So, I don’t know. I think it’s probably valuable that they haven’t gone public so they can kind of get their house in order.
David: Yeah. But the flipside though is like, you know, I think at least in terms of public perception and honestly as a user of the product too. Like one story just sort of to me as a total outsider, Ben totally characterizes Uber to me as – I was in San Francisco, this was probably a year or two ago. I was going to meet a friend who’s an Uber employee at dinner and I ordered an Uber to take me there. The driver just started driving in the other direction like clearly didn’t want to pick me up. So I waited a couple of minutes, I ended up canceling the ride then had to get another one. It was rush hour. I was like 30 minutes late to dinner. I showed up, I apologized to my friend who works at Uber. He said, “Oh yeah, it happens all the time.” I was like, “What? You work at Uber.”
And I just wonder, you know, without like – and I don’t say that to castigate Uber but like they've been fighting on so many fronts for so long. If they’d had the space and time to focus a little more internally, I wonder if some of these problems that we hear so much about there wouldn’t have popped up or would be taken care of by now.
Brad: Perhaps. It’s a company whose founder and CEO had to kind of manifest destiny to be the global transportation innovator and kind of moved in one mode, aggression. I think like all these guys are disciples of Bezos, right? They’re kind of following that blueprint of boldness. But I think it’s true. I mean, like Uber is not infallible. To some extent it's still very much dependent on the limits of GPS. I was just in DC and was taking Ubers and Lyfts all around the city. Every single time, there is a phone call between me and the driver, “Where are you? What street are you on?” there’s lots of aspects of the transaction that Uber just can’t control because it doesn’t control GPS and is operating on smartphone platforms that it doesn’t own. So, there’s lots of room for improvement for sure.
David: I feel like we’ve been touching on it as we often do throughout the show but let’s jump into tech themes. Ben, what do you have?
Ben: A big one that I really want to talk about is company culture and its impact on business trajectory. I think that Uber is one that has been a win-at-all-cost company. Brad, you mentioned in your book that Airbnb defined its mission and values very early and Uber didn’t really. Their mission and values were just keep going and win. I think you have a more eloquent way of phrasing it. But it’s really something where they’re massively living a scorched earth behind them. They’ve won so far through credible boldness and strong-headedness and they’re leaving – like everybody has a different reason to be pissed off at Uber.
Brad: It seems very true predictively and reasonably.
Ben: Yeah. I mean, drivers are feeling like they’re getting the short end of the stick. Uber claims that they’re the customer but they’re changing the take rate so the drivers get less. With riders, they’re feeling like they’re getting the short end of the stick on surge pricing too. And this will probably be last week by the time we release this episode and there’ll be new sense then. But just the horrible news coming out of the Uber engineering organization yesterday with the misogynistic, sexist behavior that Uber has moved incredibly fast, everything in the name of winning. And there’s a lot of problems there. I think that I’m not totally sure this is a tech theme that apples to every other company but we’re certainly seeing in other companies too where as everyone is either a disciple of Bezos or let’s just call it a disciple of boldness, we’re really seeing a lot of this churn in the wake and I think as a lot of these mega unicorns get ready to start going public, that’s going to be a major issue for them.
Brad: Yeah, no doubt. I do think it was interesting that Uber kind of came late to developing its values and when it did, when Travis did present them to the company in 2015, they very much mirror Amazon. In fact, some of them are quite similar. And I think it’s a company that to some extent that it’s still searching for its identity. First of all, I don’t jump to conclusions about the… I’ll say I don’t jump to broad conclusions about the engineer who blogged about her time at Uber. I think it's deplorable what she went through. But it's hard to reach broad conclusions about a company culture from an anecdote. And we will see if others kind of follow their wake and how well Uber does in investigating and addressing her claims.
But I mean, I think it’s true that this is a company that as they all are in a rapidly growing internet world, that was marked by a lot of chaos early on. I talked to lots of Uber employees and Airbnb employees in my book whose experiences kind of mirrored the folks at Amazon early on, just chaos, the busiest year or two years of their life kind of traumatized when they get in when they leave. But I certainly don’t want to make excuses for Uber on what that sexual harassment, those allegations, but I think we’re going to have to watch. And I think calmer heads hopefully will prevail before we kind of reach broad conclusions. Let me put it this way. I think it’s unfair to the many accomplished women who work at Uber and have leadership positions to just dismiss it as a “frat boy culture.”
David: Totally. We’re in the beginning of a new cycle on this and there’s lots of… you know, that’s why in tech as well as in politics, that’s why the role of an independent, inquisitive press is so important and the story remains to be told. But I think there is no question that and I suspect even people who work in Uber and if listeners, if you do work at Uber, reach out to us and we’d love to hear your perspectives. But I think it’s uncontroversial to say, like you said Brad, there are a lot of challenges and chaos there that needs to be solved, that at least seems clear.
Brad: I think it’s sort of a hopeful sign that Travis last year hired an executive from Target named Jeff Jones to be his right hand. I think his title is president. And one of Jeff’s goals for 2017 was to address the rider community. We all know from being in this industry that two-sided marketplaces are hard and from the very earliest days of eBay, you had sellers complaining or buyers complaining. It’s just hard to balance the two. I mean, Airbnb’s approach is clear, like they are kind of a host-driven community. They started as hosts and they cater to their hosts. Uber is really a rider-driven community. The founders started out wanting classy rides around San Francisco. So you kind of have to pick where you start and so Uber now is sort of focusing on the driver community and has a lot of work to do I think to quell some of the dissatisfaction particularly among full-time drivers and when we get into these cars and talk to our drivers, we know that dissatisfaction is there. And partly, David as you said, because of the sort of relentless lowering of the fares to try to position Uber as an alternative to car ownership.
Ben: You touched another thing that’s been a tech theme for us before and couldn’t ring true here is founder DNA. When you describe the culture and values and character of a company, not even through like the internal workings but in the way that the product experience feels when you use it, it’s almost indistinguishable from the founder’s personality. And very rarely does a company, even when it goes through multiple CEOs significantly deviate from that that founder DNA. I think we talked about it in the next episode, David. We talked about it definitely in the Amazon episode. And it’s just companies take the shoes of their founders and stay that way kind of forever.
David: Yeah. Go ahead, Brad.
Brad: Well, I was going to say Garrett Camp is really the inventor of Uber and he’s on the board and has a large presence in the company. Every company I like to say has the sort of combined idealism and ruthlessness, and the idealism of Uber almost comes from Lyft. It’s funny because Logan and John from Lyft are talking about are talking about replacing car ownership and solving traffic on the highways of LA far before Travis ever was at Uber. I think that he drew a lot of their idealism and kind of borrowed it and I think it’s authentic and it’s now a mission at Uber as well. But if that does make a difference and we’ll see the genuineness, and the idealism is more genuine at Lyft than it is at Uber.
Ben: And I certainly don’t mean that founder DNA is a negative side. I think for kind of better or for worse, you’re stuck with it. It’s your personality.
David: The tech theme that I wanted to talk about is I think in many ways just a slightly different perspective on the culture question and the founder DNA. From an investor view as opposed to a kind of internal company view, and that’s what this story of both Uber and Didi really highlights for me is the difference between building a moat and scorching the earth. And these are companies, all of them in ridesharing really, I mean, I think Lyft has gotten dragged into it too and probably all the other companies around the world, like they've taken this scorched earth approach and they’ve gotten huge probably, and I don’t know but I would suspect that just in terms of net revenue to the company, Uber is probably larger than Airbnb at this point and Didi perhaps as well. They’ve gotten big quickly but you have to ask how sustainable is what they’re doing. I think it points along the way, it’s clear through this story that Uber and others thought perhaps capital raising was going to be a sustainable advantage and a moat that they could build; thought that driver density was going to be sustainable. Well, it turns out it’s really easy for drivers to multi-home and they do all the time.
I think about that versus as you juxtaposed in the book, Brad, kind of Airbnb and while what they’re doing and what the market they’re attacking looks very similar, I do think they've taken a much smarter approach to building a moat and that’s around focusing on the community things like a host could multi-home but by making reviews and trust and interaction between the community, the kind of focal point of the network, once you have 50 positive reviews on Airbnb, you’re not going to spend much time on, “Oh boy!” because you’re going to get so many more bookings. And that’s I think something that the ridesharing companies haven’t. And I don’t know if it's possible to create something like that or if the dynamics of the market are just such that it’s not something where you can build a moat like that. But an investor makes me think about those dynamics.
Ben: Yeah. David, it's really interesting to think about how could Uber, Lyft, Didi, how could ridesharing in general be better at building their flywheels for defensibility. I love that point that the network effects are not as strong as an Airbnb or other businesses, at least in a global sense what could they do to bolster that.
Brad: I think that there’s a belief particularly among some Uber investors that maybe there is a moat, we just don’t see it right now that when the capital environment changes and these companies have to get profitable, we’re going to separate the men from the boys, so to speak. So we don’t yet know because none of these companies have had to get real or rationalize their balance statements. Lyft clearly still loses a lot of money and they discount, they’re still in expansion mode. They don’t have the scale that Uber has.
So in some respects it almost might be too early to make a kind of judgement on the value of these businesses and there’s an ambiguity around driverless cars, there’s still some regulatory questions. I mean, I would say that there’s still a lot of regulatory ambiguity around Airbnb. It’s a separate topic but almost like cities are waking up now to the potential and the disruptive power of Airbnb and are beginning to wonder if they want residential community as to have a little hotel sprinkled throughout and all the problems and economic opportunities that brings. So, that’s Airbnb’s challenge. I mean, Uber I think has to hope that we move into a different capital environment and all these companies like Lyft, but also like Juno, this New York startup that’s giving its drivers equity that all that stuff starts to look very unsustainable in an environment where companies have to go public and they have to show profit. Right now, Juno is winning this battle for hearts and minds in New York of drivers because drivers can feel a part of it. We have no idea whether any of that is sustainable. So we’re still at 2017, we’re still kind of high on the drug that is internet stock and this amazing opportunity.
I agree, David. It seems to me like the moat is a lot shallower in the ridesharing market but I think that there is a belief and it may be a sort of errant one that time will anoint Uber as the king, and we’ll see.
Ben: Brad, thank you for bringing your seasoned journalistic take to this and you’re right –
Brad: My crazy metaphors.
Ben: Well, you want to render the conclusion?
David: Yeah. Well, I mean, I think we discussed earlier my grade on this is probably… I think I’m going to give it a B+ for both sides because it was clearly the right thing to do and in that it was just going to be unsustainable going forward. But also sort of I don’t get into A territory. I guess a little bit punitively like I’m scratching my head a little bit as like if I were a board member of one of these companies, how would I let the situation get to this point. But Brad, you make the great point that hey, this was a good investment for Uber despite all that distraction. But I just keep coming back to thinking about what are they building here at these companies and what is going to be sustainable and 10 years from now, if you really don’t know 10 years into the company or close to 10 years into the company in Uber’s case, if you don’t know what the moat is you’re building, that would make me really scared. So, a B+ for me.
Ben: It’s interesting to think about, I phrased in the raw dollar perspective earlier that they got 2x to 3x on the dollars that they poured into China, in terms of the highly illiquid stock that they have in Didi. That’s sort of like the private equity approach. It’s like if Uber wanted to be a conglomerate, then like hurray, they put in some dollars and got three times those dollars out. I don’t know that it actually gives them… if the machine that they’re building is Uber technology’s proper, then what do they really get out of investing in Didi? Does it actually help the Uber business to have a large value in Didi. So I think with Uber, to me it was their best option and it was the best cord to pull at this point, and a highly profitable one. But David, I sort of agree that like I don’t know that it was that strategically interesting other than kind of competitive truce. Then from the Didi side, you got to wonder is there any way they could have gotten away with this without giving up 17% to 20% of their company. That’s a little rough too. So you know, I think I’m going to go A- for Uber because there might have been a lot more interesting things they could have done with that capital over those years, and I’m going to go with B- for Didi. Brad, what do you think?
Brad: Well, I don’t know. I don’t want to get into the business of grading. But the only point I would add is that both of these companies and their investors and their founding teams took enormous amounts of dilution to wage this battle. I wonder if you’re let’s say a Cheng Wei right now with Didi and you had a certain percentage of your company and then you merge with Kuaidi and then you merge with Uber-China, and you’re sitting there probably with your low single digit ownership percentage, and still extraordinary stake, but like what did you gain for all that dilution. I guess the question is was there a way to win on the marketplace and what we’ve been saying is that perhaps it was – I mean, Didi always had the high ground in China because it had the integration with Tencent, so the question is was there a way to just kind of leverage that position and circumnavigate all these awkward mergers. I don’t know. Maybe there wasn’t because it’s just too easy for other competitors that come in with alliances with the big three. I don’t know. I think we have to give Cheng Wei in particular credit for moving very quickly from being an anonymous middle manager at Alibaba to really joining the ranks of the upstarts, and that’s why I included him on the book and why I was very impressed with his journey.
David: Ben, you want to really quickly mention our Follow-up and Hot Takes?
Ben: Yeah. So we just have one to mention, listeners. The Snapchat IPO will price on the evening of March 1st, go out on the 2nd for the first day trading. David and I are going to be recording an episode on the 3rd in the morning and then hopefully producing that and getting it out over the weekend on the 4th. So we’ll let you know when that’s here and stay tuned for far too early to tell speculation and lots of fun analysis on Snapchat. Because we haven’t really covered the S1 yet and no matter what happens on the first day of trading, there is some gold to talk about in there.
David: Absolutely. Carve Out?
Ben: Yeah. I’ll do mine real quick. I think our Carve Outs collectively between us David have been Wait But Why like five times so far in this show. But I was recently on a flight back from London and had just like way too much time and read a whole bunch of Wait But Why. This one from 2014 that I really loved is Why You Should Stop Caring What Other People Think: Taming the Mammoth. He brings up this really great idea that you shouldn’t care what other people think but it’s deeper than just like this thing that we always talk about. We frequently talk about how we’re people pleasers or we over weigh our perception of what other people are talking about or thinking of us. Really, they’re just not thinking that much about us. They’re consumed in their own lives, their head is probably in their smartphone. But then links it to this evolutionary track that I never really thought about before that it was evolutionarily advantageous for other people, like for you to be a member of the tribe and have other people like you and want to look out for you and feel a sameness so that they would protect you on events. So you can sort of trace that, that every splashy article that we read is “Don’t care what other people think about you and here’s some new research to show that you really need to be your own person and under weigh that influence in your life…” And as it turns out, that’s really grained into us or it’s possibly the result of natural selection of that being a highly advantageous thing in effect. But we’re really fighting biology there. So it's a really cool way to tie those two things together.
David: Yeah. You know who probably doesn’t have that trait is Travis, or maybe he cultivates it through zen practice. Mine real quick is a podcast. Conversations with Tyler by Tyler Cowen who we’ve talked about this show before, co-author of the Marginal Revolution blog. Really good. His first one is with Peter Thiel and while I certainly don’t agree with all of Peter’s statements, it’s a fascinating conversation. He has another great one with Kareem Abdul-Jabbar, well worth listening to. Brad, do you want to close it out with your recommendation for our listeners to listen to or perhaps read in the coming years?
Brad: Sure. Aside from touting my own book, which naturally needs to be on everyone’s –
David: You’re welcome to recommend your own book. We recommend it.
Brad: Well, thank you. So I will not do that. But I will say, and this is an easy one to recommend, but the book Sapiens by you all know Harari –
David: Oh, so good.
Brad: He’s got a new book out that I’m just starting but enjoying very much. Homo Deus – I think is how you pronounce it – A Brief History of Tomorrow, which is him kind of looking at the future and automation and the future of humanity. I just find his writing to be mesmerizing. I listened to the first book on Audible. I’m reading this one but I might actually get the Audible. He’s just brilliant and he puts everything in perspective. We can be so consumed with the daily ebb and flow of the tech industry. So to be able to step back and look at humanity in an epical timeframe is why I just love his work. He’s got a new one coming out that everybody should read.
Ben: Love it. Well, that’s it for us. Let’s close it down. I just want to say if you want to join the Slack, we’re there. Join us, 400 strong and we’ve love to bring you to the conversation. Share the show if you like it on Twitter, Facebook. Rate us on iTunes, wherever you feel that would be something you want to be. Go read The Upstarts, it’s fantastic. And thanks so much to Brad for joining us and thanks to our sponsor for this episode, Silicon Valley Bank, and we will see you for the next one.
We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten.
Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!
Purchase Price: $4.2 billion, 2009
Estimated Current Contribution to Market Cap: $20.5 billion
Absolute Dollar Return: $16.3 billion
Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…
Total Purchase Price: $70 million (estimated), 2004
Estimated Current Contribution to Market Cap: $16.9 billion
Absolute Dollar Return: $16.8 billion
Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!
Total Purchase Price: $188 million (by ABC), 1984
Estimated Current Contribution to Market Cap: $31.2 billion
Absolute Dollar Return: $31.0 billion
ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”
Total Purchase Price: $1.5 billion, 2002
Value Realized at Spinoff: $47.1 billion
Absolute Dollar Return: $45.6 billion
Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.
Total Purchase Price: $135 million, 2005
Estimated Current Contribution to Market Cap: $49.9 billion
Absolute Dollar Return: $49.8 billion
Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.
Total Purchase Price: $429 million, 1997
Estimated Current Contribution to Market Cap: $63.0 billion
Absolute Dollar Return: $62.6 billion
How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.
Total Purchase Price: $50 million, 2005
Estimated Current Contribution to Market Cap: $72 billion
Absolute Dollar Return: $72 billion
Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.
Total Purchase Price: $1.65 billion, 2006
Estimated Current Contribution to Market Cap: $86.2 billion
Absolute Dollar Return: $84.5 billion
We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”. With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.
That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.
Total Purchase Price: $3.1 billion, 2007
Estimated Current Contribution to Market Cap: $126.4 billion
Absolute Dollar Return: $123.3 billion
A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...
Purchase Price: $1 billion, 2012
Estimated Current Contribution to Market Cap: $153 billion
Absolute Dollar Return: $152 billion
When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.
Methodology and Notes:
Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
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