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Millennials May Have to Get Used to More Expensive Stuff

Traditional companies are realizing the futility of competing with venture-funded startups. That’s a bad sign for consumers.

Millennials May Have to Get Used to More Expensive Stuff
A customer uses an Apple Inc. iPhone 11 Pro smartphone at an Apple store during a product launch event in Hong Kong, China. (Photographer: Kyle Lam/Bloomberg)

(Bloomberg Opinion) -- There’s a school of thought that says the dominant business model for tech startups isn’t B2B (business-to-business) or D2C (direct-to-consumer). It’s really V2C: venture-capital-to-consumer.

In other words, piles of venture capital are being directed into the pockets of consumers — often tech-savvy millennials — in the form of discounted services provided by startups prioritizing growth over profit. The fact that your ride-hailing app, co-working space or food-delivery service is so cheap isn’t necessarily because anyone has found a wondrous new business model that reduces costs. It’s because the firms are heavily subsidized by investors.

When the venture cash dries up, however, that model often becomes untenable. Nowhere is that truer than in the transportation industry, as automotive giants Daimler AG and BMW AG are now recognizing.

The German carmakers announced on Wednesday that they plan to withdraw their car-sharing service, Share Now, from North America and three European cities. Tough competition — not least from VC-backed firms with less short-term pressure to be profitable — and low adoption rates stymied the group’s ambitions.

Almost five years ago, the automotive industry was stricken with a panic as three emerging technologies threatened to challenge established car companies: self-driving technology, electric vehicles and “shared mobility” (ride-hailing, car-sharing and so on).

As venture capital flooded into each, automakers responded by spreading their own bets, acquiring or investing in scores of relevant startups. Steadily, Daimler built up compelling counterpoints to Uber Technologies Inc. in Europe, for instance, including the Free Now app in Berlin and Kapten in Paris. Both challengers were included in the joint venture Daimler entered into with BMW in February.

Millennials May Have to Get Used to More Expensive Stuff

Since then, however, a lot has changed. Both companies have appointed new chief executive officers — Oliver Zipse at BMW and Ola Kaellenius at Daimler — and both seem to have decided that, of the triple threat posed by new tech, only one merits immediate attention: electrification. Autonomous vehicles are unlikely to dominate public roads any time soon, and shared mobility is proving to be a tough business; analysts expect Uber to lose $5.9 billion in 2019, adding to a grand total of $12 billion in net losses over the previous five years.

Kapten and Free Now aren’t being pared back or shuttered just yet. But increased spending on electrification will likely mean belt-tightening elsewhere, as the Share Now decision suggests. Daimler’s capital expenditure on property, plants and equipment at its car business has jumped more than threefold from 2009, to 5.7 billion euros last year. Research and development spending more than doubled to 7 billion euros. Far better to focus on solving the technical challenges of electric cars, the thinking goes, than to simply direct more capital into consumers’ wallets.

That calculation is likely a prudent one for automakers. But for consumers, it means that the heady days of subsidized everything may well be nearing an end.

--With assistance from Chris Bryant.

To contact the editor responsible for this story: Timothy Lavin at tlavin1@bloomberg.net

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

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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