Disruptive Travel Technologies Are Worth More Than Companies That Provide You With Travel

Something I’m pondering this Sunday morning is Uber’s new round of financing and $18 billion valuation.

Fifteen years ago the most valuable thing Delta owned was shares in Priceline — the company liquidating unsold airline inventory was worth more than the carrier that actually had that inventory.

It was 2001 before Delta had sold more than a billion dollars worth of tickets online — and only half that amount was through its own website. (Southwest Airlines was actually one of the first 5 websites to cross a billion dollars in sales in a year.)

In a blast from the past, two years ago Priceline had a market capitalization greater than all US airlines combined. That’s no longer the case, with Delta, American, United, and Southwest alone combining for about 50% more market value than Priceline today. But that means Priceline is worth nearly twice as much as any single U.S. airline.

In this context it’s worth pondering that with Uber’s new $1.2 billion round of financing they have a valuation over $18 billion which is greater than Avis and Hertz, which each have cars. Indeed, Uber’s valuation is now about the same (give or take a few hundred million) as Avis and Hertz combined. (Of course Hertz likey was in worse shape than previously reported.)

I’ve been a big fan of Uber, first penning here Why Taxis Suck and What You Can Do About It. I think the business model of taking underutlized resources (downtime of cars, cabs) and connecting up those with consumers looking to pay for them is a brilliant one. It makes the economy more efficient, delivers value without substantial additional capital.

This idea can be extended, of course, to other industries. And embedded in an $18 billion valuation is that Uber will be able to expand beyond connecting passengers to cars.

Priceline is worth a ton, but was supposed to be able to revolutionize other industries too. The Priceline liquidation model, taking excess capacity and finding consumers through an opaque bidding model that wouldn’t cannibalize existing sales, was supposed to extend to everything from gas for your car to home mortgages. The vision didn’t extend as far as it was supposed to.

I love Uber but I’m skeptical that they’ll revolutionize several industries. Many investors much smarter than I am clearly disagree.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. The Uber valuation (as well as most other startup valuations) is ridiculous. The problem is the people valuing these companies are 20-somethings who were in elementary school during the last dot-com bust.

    Although I am a fan of changing the regulations to encourage competition, Uber is currently running a service that is illegal in most jurisdictions. Running an unregulated service competing against regulated companies is absurdly unfair.

    I could be worth 10 billion dollars too if I could sell unregulated insurance and compete against big companies with their capital and reserve requirements.

    There needs to be a level playing field for Uber and all the other companies and individual drivers — until then, Uber is as speculative as running a heroin dispensary.

  2. gary, i assume you meant “cannibalize” rather than capitalize in your second to last paragraph?

    these massive valuations are ridiculous and i strongly suspect that they will all come crashing back to earth in the not too distant future.

  3. One thing to note about Priceline is that their valuation increased with the acquisition of Booking.com and Kayak.com – it’s not because of the success in their bid-for-travel model, it’s success with Booking.com and the multiple language platforms that Booking.com has. Without booking.com, Priceline wouldn’t be what it is today.

  4. These investment houses are nothing more than flocks. Step 1, buy for ridiculous price. Step 2, convince everyone else that your investment was sound.

  5. Does Uber have any defensible competitive advantage over Lyft, sidecar, or as yet to exist competition? Is there any reason to think they are even the best at that type of business model?

  6. @Scott, first mover advantage and brand recognition. The brand is big. They are the “kleenex” or “coke” of their industry, i.e. synonymous with it. And, they built that brand by starting at the high end (black cars) abd then backing down to taxis and UberX. So it retained the image of a premium brand. Whereas the competitors just make it seem like some guy off the street, more of a community or sharing thing rather than professional. Likely not worth its valuation but Uber has built a good brand. And functionally, as a user, not sure what they could improve upon.

  7. I understand the brand recognition and so on, but they definitely don’t have a brand like coke. Plus the entire taxi industry in the United States probably wouldn’t support the valuation. I’ll believe they have something worthwhile when Warren Buffet jumps in.

  8. @Gary — I’ve worked in banks for a huge chunk of my life, but on the IT side. I was even IT Director of a multi-billion dollar bank in New York. All this taught me is that financial types who do these valuations are extremely narrow-sighted at best and plain street-stupid at worst (or let’s just say young graduates who do the “analysis”). On the other side of the equation we have IT people who really are the smart ones — and I’m not saying so because I was on the IT side; I’m not a programmer. And entrepreneurs who are both book- and street-smart by definition.

    Financial types fixate on headlines and fail to see the big picture. They look for buzz words — like the fact that everywhere you look now you see the word Uber (including in bad news stories where they’re being banned!) — and take that, and that alone, to mean that this is the next big thing. And they have more money than they know what to do with (investors’ money, of course).

    This is how you get these bubbles. This is how you get useless companies who haven’t generated a cent of income (I’m not talking about a specific one here) valued at billions of dollars.

    Don’t believe everything you read, Wall Street. Or, rather, read the entire article, not just the headline! I love Uber, but if it’s worth that much then I’m a pink elephant and we live on Mars. Same goes for Facebook, Twitter, and the lot.

  9. Haven’t used Uber yet, but they’ve managed to create shockwaves (and generate enormous publicity) internationally as well, in places like Paris and London (not unlike Airbnb). I like their approach of actually charging a premium for quality and convenience rather than trying to only compete on price. Worth paying more instead of waiting in the rain to catch a taxi in central Paris on a Saturday night. Unlike the pure dotcoms providing virtual experiences they actually connect a physical service through an online interface. The ones cashing in will be the venture capitalists who took a risk when no one else believed it would work.

  10. Gary,

    You called out investors about Uber and it’s really fake valuation (remember Facebook). What Uber really is, is the spike of oil at $147.11 before the collapse. The $1.2 Billion round of “easy” money came from institutional investors this time like Fidelity. These are the big cahonaas, not the scam crooks like Andreesson/Horiwitz, or Sequoia Capital.

    Let’s look at what Uber really is:

    1) A computer program. Nothing else. Today, rather than call it a program, it’s called an “app”, a change of wording in the mind like New Coke called Coke, and the original Coke now called “Coke Classic”. My fav concerning the new Millennial word flip is instant counterfeiting now called sharing.
    2) There’s no central base of regulation, except for the fact that Uber is a Christmas tree lighting system. When one light goes out, they all do. In other words, the rapists, child molestors, and terrorists that are in the Uber squad just get 1 star ratings rather than a call to law enforcement. But once the taxis and rental-car services band together and demand financing from Goldman Sachs, the US Media will be all over Uber like Strontium radioactivity—-especially when the markets collapse again and Uber has no riders.
    3) My favorite. Uber makes no money. That’s why it requires gigantic rounds of financing, all of it to be lost. The income from corporate capital is not taxed. If Uber did make money, they’d have to pay a 35% corporation tax, ObamaCare, income taxes, state taxes, vehicle registration taxes, excise taxes, social security taxes, airport rental-car taxes and fees, and the best one of all, Workman’s compensation insurance. Uber does not pay for the maintenance of vehicles—-instead it is “part time” lemonade stand with Yelp assistance.

    You’re a COO. You already know an App is a program, and a company that makes “natta” needs capital more and more and more. Kiss that $1.2 Billion goodbye because the result is American Airlines cutting First Class meals under 1K nautical miles. Uber drivers can go off cliffs for all I care, I’ll rent. Thanks.

  11. @ED
    I agree that this valuation is absolutely overpriced, but it isn’t like a company making no money now is just a money pit forever. Look at Facebook, for years they required large rounds of financing just to pay the bills, now they have billions in profit per year, it takes time for some business models to develop and scale.

  12. @Kris – you forget that facebook had huge amounts of traffic. Same with Google. Take the traffic and monetize it. Can Uber even break into that sort of traffic/’unique visits’? And it brings to mind the Priceline discussion and that its growth came via acquisition. If Uber can somehow grow and then monetize the traffic they have a shot else they burn through this round of funding. And private market valuations are rigged anyway and are really only meaningful for tax purposes. The valuation is high, look for another then an IPO. Those in at the current valuation will hope for a higher priced IPO, otherwise they’ll lose on taxes. High valuations lead to IPO hype, watch for the IPO roadshows in the future and see them tout the hype as even greater than it is.

    I may be flawed in some of this but it’s all just hype. Build the market up, thinking this is the next big chance to make money, take said money via IPO and then keep the Groupon/Twitter underperformers limping along until someone buys them out at bargain basement prices.

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