pipelinepipelineauthorBiz CarsonNoneDo you know what's going on in the venture capital and startup world? Get the Pipeline newsletter every Saturday.021fce003e
×

Get access to Protocol

Will be used in accordance with our Privacy Policy

I’m already a subscriber
Power

Uber buying Grubhub could give it a stranglehold on U.S. food delivery

A deal would consolidate an ultracompetitive market — but regulators could intervene.

An Uber Eats delivery bike

The merger would pit two SoftBank-backed companies against each other in a race to control the food delivery nationwide.

Photo: Matthew Horwood/Getty Images

Uber is reportedly in talks to take over Grubhub, news that sent both companies' stock prices soaring Tuesday. The deal, if it went through, would mark a seismic shift in the food-delivery wars, potentially giving Uber the majority of the U.S. market share, according to analysts. It would also pit two SoftBank-backed companies against each other in a race to control the food delivery nationwide.

The move would consolidate a large chunk of the U.S. delivery market into Uber's pocket, at a time when its main ride-share business is suffering from the pandemic. But the merger wouldn't be without its challenges. Grubhub primarily operates a different business model than Uber's, offering a platform for restaurants that do their own delivery. The merger would also have to fight off regulatory challenges, and potentially even counterbids from competitors.

Consolidation in the space has been expected for some time, as Grubhub has reportedly been shopping around for a buyer since January. But it was a question of who would end up teaming up — and when. If Uber had merged with its other main competitor, DoorDash, it would mean that Uber would've taken out an aggressive spender. But DoorDash, most recently valued at nearly $13 billion, may have been too costly for Uber to take on — indeed, talks last year reportedly fell through. A merger with Grubhub, whose market cap was $4.3 billion before the deal was reported, instead would increase Uber's market share, particularly in lucrative cities like New York, while not necessarily breaking the bank. It would also bring on a new inventory of restaurants that do their own deliveries instead of relying on other couriers, as many of the restaurants on Uber Eats do.

While Grubhub used to control the U.S. food market, SoftBank-backed DoorDash took the lead in 2019. Together, a combined Grubhub and Uber Eats could now control around 55% of the market share, according to analysts at Wedbush. DoorDash would have 35%, followed by Postmates, which has pursued more of a regional dominance strategy in cities like Los Angeles. Both Postmates and DoorDash have confidentially filed to go public, although the window for an IPO may be closed for some time, given the pandemic. Wedbush analysts also said in a note shared with Protocol that this merger might not go ahead without a fight, writing that they "wouldn't rule out a bidding war with DoorDash … as it, too, will look to whether it makes sense to purchase market dominance."

The move could also spark more mergers in the food delivery market, PitchBook analyst Asad Hussain said. "The wave of food delivery consolidation in North America is finally here, and we expect it to continue in the coming months," he said. "We believe companies such as DoorDash and Postmates could be likely merger candidates going forward."

Grubhub did not comment on the takeover reports, but said in a statement that "consolidation could make sense in our industry and, like any responsible company, we are always looking at value-enhancing opportunities." Uber told Protocol that it didn't comment on M&A rumors or speculation, and DoorDash also declined to comment. Postmates wasn't immediately available for comment.

That market dominance also invites the specter of regulation. It's hard to see how reduced competition wouldn't lead to higher prices, which could lead regulators — already examining tech acquisitions for anticompetitive behavior — to intervene. "There's reasonable questions as to whether or not they can get a deal done," D.A. Davidson analyst Tom White told Bloomberg News. "I think Uber's got a bit of a target on their back, if you will, in the eyes of regulators."

It's already attracting notice. U.S. Rep. David Cicilline, the top Democrat on the House Judiciary's antitrust subcommittee, said in a statement that the deal "underscores" the need for a merger moratorium. Though Cicilline previously proposed including a merger moratorium in the upcoming congressional stimulus package, the bill unveiled by Democrats on Tuesday did not include any pause on M&A activity. "Uber is a notoriously predatory company that has long denied its drivers a living wage. Its attempt to acquire Grubhub — which has a history of exploiting local restaurants through deceptive tactics and extortionate fees — marks a new low in pandemic profiteering," Cicilline said. "We cannot allow these corporations to monopolize food delivery, especially amid a crisis that is rendering American families and local restaurants more dependent than ever on these very services."

Grubhub, founded in 2004, has been in the food delivery game for a lot longer than anyone else. It built a profitable business with its marketplace model, which aggregates restaurants that offer delivery services into a large platform. For years, the company resisted doing the deliveries itself. But its profitable model came under threat in recent years, thanks to an influx of new VC-backed competition like DoorDash, Postmates, Caviar and Uber Eats. SoftBank, which has invested around $7.6 billion in Uber and an estimated $600 million to $900 million in DoorDash, has been a major driver of the trend.

Those companies, which have their own delivery drivers pick up and drop off food, have sparked a price war in the industry. They forced Grubhub to enter the logistics space, despite executives telling investors that it didn't believe "that a company can generate significant profits on just the logistics component of the business."

Last October, Grubhub executives said "online diners are becoming more promiscuous," saying that "the easy wins in the market are disappearing a little more quickly than we thought." Things were set to ease up a little this year, with firms like Uber and Postmates focused on improving their margins. But the pandemic threw a spanner in the works by reigniting the price war. That means that the significant uplift in orders isn't translating into a meaningful earnings improvement.

Deutsche Bank analyst Kunal Madhukar said Monday that Grubhub is likely discounting "in the mid-to-high-single-digit range across all delivery orders." In the first quarter of 2019, Grubhub made a profit of almost $7 million. This year, the first quarter led to a $33.4 million loss. With Uber knocking on the door, now might be a good time to call it a day.

Update (4:50pm): This post has been updated with comments from U.S. congressman David Cicilline.

Protocol | China

Everything you need to know about the Zhihu IPO

The Beijing-based question-and-answer site just filed for an IPO.

The Zhihu homepage.

David Wertime/Protocol

Investors eager to buy a slice of China's urban elite internet will soon have the chance. Zhihu, a Beijing-based question-and-answer site similar to the U.S.-based Quora, has just filed for an IPO to sell American Depositary Shares on the New York Stock Exchange.

What does Zhihu do?

Zhihu is China's largest online Q&A platform — the name comes from the expression "Do you know?" in classical Chinese. It was founded 10 years ago by Yuan Zhou (周源), a former journalist, and spent two years as an invite-only online platform. It quickly built a reputation as a source for quality answers and has drawn a community of elite professionals, including ZhenFund managing partner Bob Xu and venture capitalist Kai-Fu Lee, also an early investor.

Over time, the Chinese-language Zhihu has become more mainstream, and now says it hosts 315.3 million questions and answers contributed by 43.1 million "creators." (Quora, about one year older than Zhihu, had almost 61 million questions and 108 million answers by the end of 2019). The website has grown into a content platform where people also keep diaries, write fiction and blog as social media influencers.

Zhihu users do not look like China as a whole. Most than half are men, most live in "Tier 1" cities and more than three-quarters are under 30 years old.

Zhihu continues to emphasize the quality of its content. "Zhihu is also recognized as the most trustworthy online content community and widely regarded as offering the highest-quality content in China," its prospectus says.

Zhihu's financials

Zhihu registered for its IPO via the Jumpstart Our Business Startups Act, a.k.a. the JOBS Act, which has reduced disclosure requirements for companies with less than $1.07 billion in annual revenue. Zhihu's revenue doubled from 2019 to 2020, but still only reached $207.2 million, and the company is short of profitability with a 2020 net loss of $79.3 million. The company says it's "still in an early stage of monetization" with "significant runway for growth across multiple new monetization channels."

Trend lines are good. Zhihu has managed to double revenue while keeping expenses largely constant, with selling and marketing aimed at growing Zhihu's user base as the biggest single expense.

The company is trying to diversify its revenue streams. In 2019, 86.1% came from advertising. 2020 saw advertising account for 62.4% while "content-commerce" — meaning native advertising — took in 10%. The rest was mostly paid memberships.

What's next for Zhihu

After years of evincing a relaxed attitude toward monetization, Zhihu is putting itself in the hot seat to do just that. Zhihu is betting that monetizing Chinese web users will get easier over time. The prospectus describes "significant growth potential" in China's "online content community market" and says average revenue per user in China is expected to more than triple from about $55 in 2019 to about $199 in 2025, with revenue in the overall market reaching a projected $200 billion in 2025.

The company looks like it will basically try everything to monetize, and see what sticks. It plans to "ramp up our online education service" and to "continue to explore other innovative monetization channels, such as content e-commerce and IP-based monetization."

The prospectus also mentions AI frequently, touting Zhihu's AI content moderation tool wali as well as a "question routing system" and "feed recommendation and search systems." However, the depth and quality of content remains far more important to Zhihu's success. Users have joked on Zhihu about the poor quality of its wali filter.

What could go wrong?

Zhihu could fail to turn a profit. Like most content platforms, Zhihu has found it hard to monetize its traffic and the vast amount of free content at its core. The platform was built on the premise that anyone can acquire professional knowledge easily, which means users are not inclined to pay.

Since 2016, Zhihu has tried many monetization models: paid physical/virtual events, online courses taught by its top creators, premium memberships and paid consulting services. None have been a hit. Zhihu Live, the paid virtual event product, attracted a lot of public attention in 2016 and 2017, but since then its popularity has waned. According to the prospectus, Zhihu currently has 2.4 million paying members, or only 3.4% of its monthly active users.

Zhihu also faces intense competition. Defined narrowly, it has no rivals, with would-be contenders like Baidu Zhidao and Wukong, owned by ByteDance, falling by the wayside. But Zhihu has positioned itself as something more: a community for diverse content. In this regard, it's competing with big public-facing social media platforms such as the Twitter-like Weibo and Bilibili. While Zhihu's 68.5 million monthly active user base is growing fast, Weibo has over 500 million and Bilibili over 200 million. Zhihu differentiates itself with the quality and depth of its content, but maintaining that creates inevitable tension with the business imperative to expand.

Like every content platform in China, Zhihu is subject to rigid state censorship and faces harsh penalties for failing to police speech itself. Politically-sensitive questions are nowhere to be found on the platform, while other topics including transgender rights have been censored in the past. Even so, in March 2018, Zhihu was taken off every mobile app store for seven days at the request of Beijing's municipal Cyberspace Administration. Authorities did not specify why, but the suspension probably related to subtle criticisms of Xi Jinping on the platform; Zhihu promised to "make adjustments."

Zhihu's prospectus is largely mum on the censorship question, perhaps because the company feels it's gotten good enough at doing it. Zhihu says it has a "comprehensive community governance system" that combines "AI-powered content assessment algorithms" with the ability of users to report each other as well as "proprietary know-how." These resemble the same tools most big Chinese social media platforms use to censor content and keep in Beijing's good graces.

Who gets rich?

Here's what we know:

  • Founder, CEO and Chairman Yuan Zhou currently owns 8.2% of Zhihu, with another 8% worth of options, which he can exercise within 60 days of the IPO, held in a separate holding company controlled by a trust of which he is the beneficiary. Following exercise, Zhou will have the vast majority of aggregate voting power.
  • Innovation Works, beneficially owned by Peter Liu and Kai-Fu Lee, owns 13.1% of Zhihu. According to corporate database Qichacha, Innovation Works invested about $153,000 in an angel round in January 2011, then made follow-on investments in the C and D rounds.
  • Tencent owns 12.3%.
  • Qiming Entities owns 11.3%. According to corporate database Qichacha, Qiming invested $1 million in Zhihu's series A, then made follow-on investments in the B, C and D rounds.

Kuaishou, Baidu and Sogou also own stakes, as does SAIF IV Mobile Apps Limited.

Innovation Works' Kai-Fu Lee and Peter Liu, and Qiming Ventures, both of which invested early and often, look like the biggest winners besides founder Zhou.

What people are saying

"Zhihu, if it ever wants to be a truly massive platform, will need to go out of the hardcore knowledge-sharing space, and become more mainstream, more entertaining, and yes, even less intellectual. But to capture that market, who better to partner with than Kuaishou, who built its business on exactly those characteristics?" —Ying-Ying Lu, co-host of Tech Buzz China.

"After separating video content into its own feed, Zhihu is now in competition with Bilibili and [ByteDance-owned] Xigua Video. Education-themed videos used to be one of the important growth drivers for the latter two apps. Now [Zhihu], the app that specialized in educational content, has joined the game." —Lan Xi (pen name), independent tech writer.

David Wertime

David Wertime is Protocol's executive director. David is a widely cited China expert with twenty years' experience who has served as a Peace Corps Volunteer in China, founded and sold a media company, and worked in senior positions within multiple newsrooms. He also hosts POLITICO's China Watcher newsletter. After four years working on international deals for top law firms in New York and Hong Kong, David co-founded Tea Leaf Nation, a website that tracked Chinese social media, later selling it to the Washington Post Company. David then served as Senior Editor for China at Foreign Policy magazine, where he launched the first Chinese-language articles in the publication's history. Thereafter, he was Entrepreneur in Residence at the Lenfest Institute for Journalism, which owns the Philadelphia Inquirer. In 2019, David joined Protocol's parent company and in 2020, launched POLITICO's widely-read China Watcher. David is a Senior Fellow at the Foreign Policy Research Institute, a Research Associate at the University of Pennsylvania's Center for the Study of Contemporary China, a Member of the National Committee on U.S.-China Relations, and a Truman National Security fellow. He lives in San Francisco with his wife Diane and his puppy, Luna.

Sponsored Content

The future of computing at the edge: an interview with Intel’s Tom Lantzsch

An interview with Tom Lantzsch, SVP and GM, Internet of Things Group at Intel

An interview with Tom Lantzsch

Senior Vice President and General Manager of the Internet of Things Group (IoT) at Intel Corporation

Edge computing had been on the rise in the last 18 months – and accelerated amid the need for new applications to solve challenges created by the Covid-19 pandemic. Tom Lantzsch, Senior Vice President and General Manager of the Internet of Things Group (IoT) at Intel Corp., thinks there are more innovations to come – and wants technology leaders to think equally about data and the algorithms as critical differentiators.

In his role at Intel, Lantzsch leads the worldwide group of solutions architects across IoT market segments, including retail, banking, hospitality, education, industrial, transportation, smart cities and healthcare. And he's seen first-hand how artificial intelligence run at the edge can have a big impact on customers' success.

Protocol sat down with Lantzsch to talk about the challenges faced by companies seeking to move from the cloud to the edge; some of the surprising ways that Intel has found to help customers and the next big breakthrough in this space.

What are the biggest trends you are seeing with edge computing and IoT?

A few years ago, there was a notion that the edge was going to be a simplistic model, where we were going to have everything connected up into the cloud and all the compute was going to happen in the cloud. At Intel, we had a bit of a contrarian view. We thought much of the interesting compute was going to happen closer to where data was created. And we believed, at that time, that camera technology was going to be the driving force – that just the sheer amount of content that was created would be overwhelming to ship to the cloud – so we'd have to do compute at the edge. A few years later – that hypothesis is in action and we're seeing edge compute happen in a big way.

Keep Reading Show less
Saul Hudson
Saul Hudson has a deep knowledge of creating brand voice identity, especially in understanding and targeting messages in cutting-edge technologies. He enjoys commissioning, editing, writing, and business development, in helping companies to build passionate audiences and accelerate their growth. Hudson has reported from more than 30 countries, from war zones to boardrooms to presidential palaces. He has led multinational, multi-lingual teams and managed operations for hundreds of journalists. Hudson is a Managing Partner at Angle42, a strategic communications consultancy.
Politics

As tech companies flee California, some commit to staying

Between chats with Gov. Newsom and homegrown campaigns, not everyone is leaving California.

Don't write off Silicon Valley as a tech hub just yet.

Photo: Elena Pueyo/Getty Images

The departures of companies like Tesla, Oracle and HPE has a lot of people questioning the future of Silicon Valley and California as a tech hub. And while there isn't a great abandonment of the state — yet — it's certainly a subject on tech CEOs' minds as they ponder a post-pandemic future.

  • Gov. Gavin Newsom recently spoke to both Airbnb's Brian Chesky and DoorDash's Tony Xu around their recent IPOs, and part of the conversation was about their futures in the state. "Airbnb is staying in California and I'm staying in California. This is a special place," Chesky said in a tweet, adding he had talked to Newsom about it. (Newsom's team didn't respond to request for comment.)
  • DoorDash's Xu also spoke to Newsom and told Business Insider that he planned to stay put in California despite a recent exodus. "I think it's a reflection that we're all virtual today so your kind of geographic location is less important, but you know, that the policy decisions do matter," Xu said. "And, what we have to do is we have to work together, especially during a pandemic, we have to work together to help businesses grow so that the economy recovers.

Other tech executives, like Twilio's Jeff Lawson, have launched their own campaigns to get tech execs to commit to the Bay Area. (His comments were not inspired by a Newsom phone call.)

Keep Reading Show less
Biz Carson

Biz Carson ( @bizcarson) is a San Francisco-based reporter at Protocol, covering Silicon Valley with a focus on startups and venture capital. Previously, she reported for Forbes and was co-editor of Forbes Next Billion-Dollar Startups list. Before that, she worked for Business Insider, Gigaom, and Wired and started her career as a newspaper designer for Gannett.

Transforming 2021

Blockchain, QR codes and your phone: the race to build vaccine passports

Digital verification systems could give people the freedom to work and travel. Here's how they could actually happen.

One day, you might not need to carry that physical passport around, either.

Photo: CommonPass

There will come a time, hopefully in the near future, when you'll feel comfortable getting on a plane again. You might even stop at the lounge at the airport, head to the regional office when you land and maybe even see a concert that evening. This seemingly distant reality will depend upon vaccine rollouts continuing on schedule, an open-sourced digital verification system and, amazingly, the blockchain.

Several countries around the world have begun to prepare for what comes after vaccinations. Swaths of the population will be vaccinated before others, but that hasn't stopped industries decimated by the pandemic from pioneering ways to get some people back to work and play. One of the most promising efforts is the idea of a "vaccine passport," which would allow individuals to show proof that they've been vaccinated against COVID-19 in a way that could be verified by businesses to allow them to travel, work or relax in public without a great fear of spreading the virus.

Keep Reading Show less
Mike Murphy

Mike Murphy ( @mcwm) is the director of special projects at Protocol, focusing on the industries being rapidly upended by technology and the companies disrupting incumbents. Previously, Mike was the technology editor at Quartz, where he frequently wrote on robotics, artificial intelligence, and consumer electronics.

People

DoorDash sparks investor feeding frenzy as stock closes up 85% in debut

After pricing its shares at $102 apiece, it ended up closing at $189.

As part of the IPO process, DoorDash had tried to exert a little bit more control over the pricing by running a hybrid auction process.

Photo: DoorDash

Investors clearly showed an appetite for DoorDash shares as the food delivery company started trading on the NYSE on Wednesday.

Keep Reading Show less
Biz Carson

Biz Carson ( @bizcarson) is a San Francisco-based reporter at Protocol, covering Silicon Valley with a focus on startups and venture capital. Previously, she reported for Forbes and was co-editor of Forbes Next Billion-Dollar Startups list. Before that, she worked for Business Insider, Gigaom, and Wired and started her career as a newspaper designer for Gannett.

Latest Stories