Tech

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Saudi Arabia isn't all that fond of competition. The kingdom has long reaped rich reward from its OPEC membership. And recently, it decided that pesky U.S. shale oil drillers should be killed off by driving oil prices lower.

Now, Saudi's sovereign wealth fund is investing $3.5 billion in Uber Technologies. The taxi-hailing app's strategy will have resonated with Riyadh's policymakers: annihilate the competition by slashing prices.

Why else would Uber need all that cash?

Following a succession of gargantuan funding rounds, Uber has more than $11 billion in cash and convertible debt. But in theory Uber is an asset-light business. Unlike Tesla, say, it doesn't need factories. Uber drivers bring their own vehicles to the party (even if the company helps finance many of them).

However, having lots of money allows Uber to do lots of marketing and, importantly, to subsidize cheap fares and seize market share. A price war in China is costing Uber more than $1 billion a year, the company has conceded.

Uber's Growing Global Revenue (and Losses)
The ride-hailing leader lost $697 million on $498 million in revenue in the third quarter of 2015.
Sources: The Information; Bloomberg News (person familiar with the matter)

Of course, Saudi's Prince Alwaleed Bin Talal's investment fund has also plowed at least $100 million into Lyft, Uber's ride-sharing rival. So the kingdom can't be accused of not sharing the love. Still, that's chump change compared to the Saudi Public Investment Fund's backing of Uber.

Being a monopoly is the holy grail of Silicon Valley start-ups (tech investor Peter Thiel thinks competition is for losers). Uber's $62.5 billion valuation, propped up by the Saudi investment, only begins to make sense if you think it will ultimately become one.

The trouble is, much like Saudi's oil strategy -- which has arguably done more long-term harm to OPEC than to the prospects of North American shale -- Uber's bid for monopoly status will probably fail in the end.

Of course there are network effects associated with having lots of drivers, meaning customers don't have to wait long for a ride. But in densely populated cities, those problems aren't insurmountable for rivals. Uber's already facing fierce competition from Lyft in the U.S., from MyTaxi in Germany, from Apple-backed Didi Chuxing in China and from Ola in India.

Indeed, Lyft, Didi Chuxing, Ola and GrabTaxi have formed a partnership letting customers book rides from each others' apps. So, like the low oil prices consumers have enjoyed for the past year, Uber may simply end up providing customers with a cheap way to get around, without delivering a knockout blow to competitors.

Saudi Arabia is facilitating that process by providing Uber with a pile of more cash to burn through before having to test public markets. But, as with oil, strangling new rivals is harder than it looks.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net