Zipcar buy is no surefire win

January 3, 2013: 3:09 PM ET

Avis' logic is that its weekday business will be complimented by ZipCar's weekend traffic. That may be flawed thinking.

By Doron Levin, contributor

130102122856-zipcar-avis-gallery-horizontalFORTUNE -- Avis Budget Group Inc.'s decision to spend $500 million, or $12.25 a share, to buy Zipcar Inc. almost certainly isn't because Avis sees a bright future for an urban rent-by-the-hour car service. Avis's chief executive Ron Nelson conceded Wednesday that he's been "dismissive" of car sharing.

Nelson did assert that Zipcar can be "complementary" to Avis (CAR), partly by reaching a younger, urban, more tech-savvy audience that is attracted to Zipcar's model for reserving cars via the Web and mobile devices. Another synergy might be exploited if Avis, whose cars are in high demand from Monday through Friday at airports, can generate incremental demand for the Avis fleet by the hour on weekends, as Zipcar already does for its fleet.

Avis, for the time being, is an industry elephant and Zipcar a flea, notwithstanding the 760,000 "members" who carry its card. What makes the flea interesting to the elephant is the rapidly changing nature of personal transportation and how that might affect a car rental industry dominated by Hertz, Avis and Enterprise. But whatever that outcome might be, it's probably not going to be widespread availability of cars that are rented by the hour.

The venture capitalists who financed Zipcar, and who profited from their investments, hailed the Avis buyout as a triumph for the "sharing economy." The truth is that Zipcar struggled because it couldn't sustain rapid growth, financial results or scale -- suggesting there may be far fewer customers for cars by the hour than its founders guessed.

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Zipcar isn't the first venture to tap into the well-known indifference, if not actual distaste, of some young urban dwellers for owning operating their own cars. Uber, which is more like a car service using drivers who agree to drive customers for a fee -- trips ordered and paid by smartphone app -- is spreading through major U.S. cities and overseas.

Enterprise started an on-demand car rental service a few years ago and has bought two more. Clearly there's an interest among rental-car companies, which are stuck in non-growth, to expand their presence beyond airports.

Based in Cambridge, Massachusetts, Zipcar started in 1999 and went public in 2011. Its market capitalization rose to $1.1 billion in a frenzy of trading before collapsing as losses mounted and the limits to its growth grew apparent. Avis's buyout offer represented a nearly 50% premium on the market value of the shares.

For many drivers and passengers, who would rather be texting (or watching a movie or sleeping) than driving and have little appetite for the hassles and expense of insurance, repairs and parking, the driverless car provide the solution. Most automakers can credibly demonstrate that driverless technology exists, at least experimentally, and may be widely available within a decade.

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Avis is likely to put some real capital and big-company management expertise behind the Zipcar initiative, if only to find out how much demand exists or can be stimulated by hourly rentals. The more interesting opportunity will be to learn what it can about Zipcar's customers and how the company uses information technology.

All of these ventures face imminent tumult as the intersection of personal transportation and software change traveler economics, expectations and usage patterns.

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