Microsoft’s new relationship with Southeast Asia’s biggest ride-hailing company Grab was sealed with a cheque.
Grab said on Tuesday that Microsoft would become one of its service providers across a suite of products and, in the same breath, noted that the US tech giant will also invest an undisclosed sum in its platform.
Both Grab and Microsoft are in fierce competition for market share; financial investors should question how this pressure is swaying the long-term quality and profitability of their alliances and minority investments.
Microsoft’s arch rival in the public cloud arena is Amazon’s Amazon Web Services (AWS). While Microsoft is chipping away at its lead, AWS remains bigger than its next four competitors combined, according to IT consultancy Synergy Research Group.
The Redmond-headquartered company is clearly betting on Grab’s growth in terms of its need for future IT services as well as for its investment: a catch them while they are young tactic.
Southeast Asia is on the brink of a digital explosion as the increasing affluence of its middle classes combines with accelerating smart phone penetration. In 2016, a Google-Temasek study predicted that Southeast Asia's internet economy would be worth $200 billion by 2025.
Grab, in the latest jargon out of the tech world, wants to be a platform of mobility services that uses the data it gathers to funnel an ever-wider array of products to its users. Grab’s strategy is to stretch this platform across Southeast Asia. And its investors are backing its ambition as a proxy for regional growth across the region – with diversification across often-volatile economies built in.
To continue to improve how it tailors products and to bring online new services, such as autonomous cars, Grab needs to process the trove of data it is collecting on users more intelligently and in a secure environment. Grab has already collected three petabytes of data after completing more than 2 billion rides; that’s almost 40 years’ worth of HD-TV video or close to 690,000 DVDs.
As part of their strategic partnership, Grab said that it will adopt Microsoft Azure as its preferred cloud platform. The five-year agreement will see both parties collaborate on a range of technology projects, including big data, artificial intelligence and mobility solutions.
Investors, however, shouldn’t expect Microsoft to be the sole beneficiary of Grab’s need for computing power as it was not able to negotiate an exclusive relationship.
Grab already has a cloud provider in Amazon Web Services, it uses Google email and will continue to be free to use other IT service providers.
A Microsoft spokeswoman in Singapore declined to comment on the service contract bidding process and whether or not Microsoft is effectively buying market share.
FUND RAISING DRIVE
Grab itself is looking to outcompete a close rival, Indonesia’s Go-Jek, and a key factor in its ability to acquire customers across the region is capital. Neither ride-hailing app is yet profitable.
What is unclear is if Microsoft’s money was a factor in why Grab chose the US firm as a service provider, rather than the quality of its products.
The new money will obviously be welcomed by Grab’s earlier investors if it comes at a higher valuation. This would validate their own thinking and raise the value of their shareholdings, at least on paper.
Grab has raised over $6 billion to date, according to Crunchbase. Its biggest shareholders are San Francisco-based Uber, Japan’s SoftBank and China’s Didi Chuxing – other large investors include carmakers Toyota and South Korea’s SK Holdings. Grab’s valuation has been accelerating upwards, from $6 billion in March to $11 billion in early August.
Grab is on track to raise another $1 billion for its expansion drive across Southeast Asia, boosting the war chest it has built since April to a total of $3 billion, Grab president Ming Maa told FinanceAsia in an interview in August.
While investments by corporates in startups are not unusual, it is worth bearing in mind that their motives for investing are primarily how this benefits their long-term business goals. Financial returns are frequently of lesser importance.
If and when the six-year-old startup does IPO, public market investors will have to unpick valuations carefully to understand who was paid for what and why.