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How Avis will ruin Zipcar

News that Avis has signed a deal to buy Zipcar is bad news for consumers — as it always is when companies that dominate an industry with an “old” business model buy upstart competitors with a threatening “new” business model.

The owners of Zipcar, including former AOL chief Steve Case, are happy because it allows them to cash out with a 50 percent premium. The alternative, of course, is to hang on and compete against Avis and Hertz as they try to respond to the upstart challenge by building their own “car sharing” businesses to compete against Zipcar and the other upstarts.

Avis, of course, thinks it's worth $491 million to enter this market by buying the
largest upstart rather than having to build such a business itself, which if the history of these things is any indication, will end in failure.

The executives and their well-trained equity analysts will tout the cost savings and marketing advantage and Avis’s ability to make better use of its cars on weekends. This is mostly hogwash.

The real issue in these deals is culture. Zipcar has a way of doing things that is particularly appealing to the young, hip urbanites who walk, bike and use public transportation most of the time and don't own a car. They like the types of cool cars (Mini Coopers, Toyota Priuses) that Zipcar provides, the convenience of picking them up in their neighborhood and the very idea of “sharing” cars with people like themselves. Everything about the company — from its marketing to its customer interface to its rules — supports that brand identity.

The only way for Avis to realize its over-promised cost savings will be to force Zipcar to consolidate the two operations and become more like Avis in everything it does. Eventually, all the old Zipcar executives will be fired or will migrate somewhere else. Auto purchasing will be centralized, as will the pickup points. The Zipcar Web site and computer system will be merged into the Avis Web site and computer system. Avis will want to do package deals with airlines and hotel chains and drag Zipcar customers into its loyalty program. They’ll even try to upsell Zipcar customers every time they reserve a car: Wouldn’t you like something bigger for only $2 more? Wouldn’t you like extra insurance?

Oh, sure, Avis executives will say how they respect Zipcar — its culture and its
way of doing business — and promise to preserve it. But a year down the road when it comes to some decision in which they will have to forgo some cost savings or some revenue increase in order to maintain those differences, the decision will be to do it the “Avis” way. And that will be it: Zipcar as we know it will be history.

There are also antitrust implications here. The government has stood back and allowed a dramatic consolidation in the car rental business over the last decade, with Hertz and Avis and National allowed to buy up smaller competitors. One source of potential competition for this oligopoly might have been the car sharing services like Zipcar, which could have targeted travelers who needed a car only for a portion of their trip, picking the cars up near their hotels rather than at the airports. Now, that source of potential competition—the kind of “new model” competition that leads to game-changing innovation—will be eliminated.

The Avis-Zipcar merger will be a good test for Bill Baer, the new head of the Justice Department’s antitrust division, who may have to approve the deal. (Full disclosure: Baer is a friend.) Baer was quietly confirmed by the Senate last week after waiting nearly a year since his nomination. In this case, he will get the usual advice from department lawyers about how hard it is to win a case blocking a merger based on potential competition, since it requires a judge to speculate about competition that might have developed in the future. But antitrust law, by its nature, is speculative. And this is just the sort of competition-crushing and innovation-crushing merger that the law was meant to prevent.