The once-swaggering company is losing more money and growing more slowly than ever. What happened?
“From the beginning,” the blog post began, “we’ve always been committed to connecting you with the safest rides on the road.”
It was April 2014, and Uber was announcing a new $1 charge on fares
called the Safe Rides Fee. The start-up described the charge as
necessary to fund “an industry-leading background check process, regular
motor vehicle checks, driver safety education, development of safety
features in the app, and insurance.”
But that was misleading.
Uber’s margin on any given fare was mostly fixed, at around 20 to 25
percent, with the remainder going to the driver. According to employees
who worked on the project, the Safe Rides Fee was devised primarily to
add $1 of pure margin to each trip. Over time, court documents show, it
brought in nearly half a billion dollars for the company, and after the money was collected, it was never earmarked specifically for improving safety.
At
the time, “driver safety education” consisted of little more than a
short video course, and in-app safety features weren’t a priority until
years later. The company was facing rising costs on insurance and
background checks for drivers, but an eventual class-action lawsuit
alleged that its marketing — which claimed “industry leading” checks and
“the safest” rides — was untrue. Uber settled for some $30 million, a fraction of what the fee earned the company in revenue.
“We
boosted our margins saying our rides were safer,” one former employee
told me last year, as I was reporting a book about Uber. “It was
obscene.” (Uber and its founder, Travis Kalanick, declined to comment
for this article.)
That level of
chutzpah is difficult to imagine from the chastened Uber of 2019. Two
years since Mr. Kalanick’s ouster, and three months since a humdrum public offering, the company is in many ways a shadow of the juggernaut whose global presence once felt just shy of inevitable.
As
a private start-up, Uber represented pure possibility — at its peak, a
$69 billion wrecking ball threatening entities as vast as the taxi
industry, mass transit networks and automotive giants, all at the same
time. Mr. Kalanick built the company in his brutal and triumphant image,
knocking through concrete at company headquarters to install luminous
glass-and-black stone staircases — an aesthetic he described as “Blade
Runner meets Paris.” It was a start-up that not only booked Beyoncé to
play a staff party — it paid her with $6 million in restricted stock
that quickly surged in value.
The
public Uber displays little of this braggadocio, and competitors and
critics are moving in. Labor activists are pushing back against the lack
of worker protections for drivers, and legislation could push up the driver minimum wage
in cities like New York. The hype around Uber’s autonomous cars has
died down, and until they arrive — if they ever do — the company will
have a hard time reducing the costs it incurs paying drivers.
In August, Uber posted its largest-ever quarterly loss,
about $5.2 billion, as its revenue growth hit a record low. In cities
around the world, Uber faces well-financed competitors offering a
substantially similar product. And its food delivery business — a bright
spot that executives point to for growth prospects — is in danger of
becoming another cash-suck. Uber and most of its basically
indistinguishable competitors (it names 10 of them in a recent filing)
are subsidizing customers’ meals in a bid for market share, with
profitability a secondary concern.
Investors are internalizing these challenges. Interest in shorting Uber
stock
has only grown since the I.P.O., according to share borrowing data from
IHS Markit, with pessimists betting some $2 billion that the price of
shares will continue to fall.
Dara
Khosrowshahi, who replaced Mr. Kalanick as chief executive two years
ago this week, is under pressure to cut costs wherever possible — laying
off hundreds of marketing employees and even replacing the helium-filled balloons
workers traditionally get on their hiring anniversary with stickers.
Deflation is in the air. At a recent companywide meeting, one employee
asked if the engineering division would be next to face reductions, a
bad sign for a tech company in which morale rests on the ability to
recruit the world’s top coding talent. (Uber has instituted a hiring
freeze for some specific teams in the United States.)
In
combing through documents, interviewing opponents and talking to more
than 200 current and former employees while researching my book, what
came up again and again was this sense of a public-private divide — that
Mr. Kalanick had built a start-up that thrived on venture investment,
blitzkrieg expansion tactics and an ethically questionable aggressive
streak, but that the playbook made little sense for a publicly traded
entity.
Mr. Kalanick required an
almost hypnotic level of obedience from his staff in order to build the
company he wanted. For that, he needed workers who were more than
employees — he needed true believers.
The cult of the founder
The
most vaunted title in Silicon Valley is, has been, and ever will be
“founder.” It’s less of a title than a statement. “I made this,” the
founder proclaims. “I invented it out of nothing. I conjured it into
being.”
If this sounds messianic, that’s because it is. Founder culture — or more accurately, founder worship
— emerged as bedrock faith in Silicon Valley from several strains of
quasi-religious philosophy. 1960s-era San Francisco embraced a sexual,
chemical, hippie-led revolution inspired by dreams of liberated
consciousness and utopian communities. This anti-establishment
counterculture mixed surprisingly well with emerging ideas about the
efficiency of individual greed and the gospel of creative destruction.
Technologists began building services to uproot entrenched power
structures and create new ways for society to function. Over the
decades, the ethos informed the creation of ventures like Apple,
Netscape, PayPal — and Uber.
By 2009,
when the company was founded, Silicon Valley saw a willingness to bend —
and even break — the rules not as an unfortunate trait, but as a sign
of a promising entrepreneur with a bright future. And people who knew
Mr. Kalanick tended to remark on one thing: In every game he played,
every race he entered, in anything where he was asked to compete against
others, he sought nothing less than utter domination.
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Early
on, the start-up was called UberCab — a high-end black-car service for
“ballers.” But quickly, by 2011, Mr. Kalanick recognized a
moonshot-sized opportunity for a global transportation company. As he
saw things, realizing this vision would require playing a game that was
already dirty. The standards for fair play in the transportation
industry had been crossed years ago by what he viewed as a mass of
corrupt politicians, all in the pocket of Big Taxi — a “cartel,” as he
frequently called his giant, yellow-and-black adversary. They were bent
on blocking any challengers to the multibillion-dollar market. That
meant Mr. Kalanick had to recruit dedicated followers who were willing
to do whatever it took to win.
This
worldview created conditions for which Uber is still paying a price
today. To run local branches around the world, Mr. Kalanick hired
lieutenants who thought like him: ruthless and confident the money would
never run out. He spun stories of Uber’s eventual ubiquity, providing
“transportation as reliable as running water.” (Never mind, employees
whispered, that water infrastructure isn’t always reliable in much of
the world.) It wasn’t unheard-of for a new hire to enter Uber’s
headquarters having never managed any significant enterprise, and be
sent out to take over a new city.
Mr.
Kalanick trusted his employees with significant power. Each city’s
general manager became a quasi-chief executive, given the autonomy to
make major financial decisions. Empowering workers, Mr. Kalanick
believed, was better than trying to micromanage every city. In many
ways, the approach was smart: A Miami native would be better prepared to
meld Uber to their own city than a transplant from San Francisco. But
the drawbacks were costly. City bosses rarely had to check in with
headquarters, and they began greenlighting seven-figure promotional
campaigns based on little more than hunches and data from their personal
spreadsheets.
Other
problems ranged from cultural — the New York office had a toxic bro
culture that elicited harassment allegations and resignations — to
legal. In Indonesia, Uber set up special “greenlight hubs” where drivers
could quickly get inspections and other services, but the police
threatened to shut them down over traffic concerns. Instead of moving
the hubs, the local Uber managers decided to pay off the cops, with
bribes of around 500,000 rupiah (about $30). They tended to take the
money from petty cash, or forge receipts and submit them for
reimbursement. The activity was the kind of corner cutting — and a possible violation of the Foreign Corrupt Practices Act
— that allowed Uber to grow at unimaginable velocity, but with
breathtaking risk. The Department of Justice is investigating the
matter, as well as other activity in Malaysia, China and India,
according to financial filings.
‘I don’t want the F.T.C. calling me’
Ethics
were not a hallmark of Uber’s first decade. Once, in a meeting with
staff, Mr. Kalanick was presented with a delicious new secret weapon by a
handful of engineers on “workation.” (A workation was an unofficial
Uber tradition: Instead of taking time off to relax, employees would
volunteer to spend a period working on any kind of project they wanted.)
According to two people familiar with the matter, a group of employees
pitched a prototype Uber feature that would repurpose certain parts of a
driver’s smartphone — specifically, the accelerometer and gyroscope —
to detect notifications that came from the app of Lyft, Uber’s biggest
competitor. If Uber knew that a driver worked for its rival, Uber could
market itself differently to the driver to entice them away.
In
the meeting, the engineers described the project to managers, lawyers
and Mr. Kalanick himself. The executives were excited but nervous. This
could be a powerful new weapon in the war against Lyft. But detecting
sounds in a driver’s car without permission was clearly invasive. After
the presentation ended, Mr. Kalanick sat in silence. No one spoke.
“O.K.,” he said,
breaking the tension and nodding his approval. “I think this should be a
thing.” He stood up and looked the engineers in the eye: “I don’t want
the F.T.C. calling me about this, either.” Mr. Kalanick thanked everyone
for coming, turned toward the door and dismissed the meeting.
The
feature, which would have outraged privacy hawks were it to become
public, was never implemented. Other executives at the company later
acknowledged the impracticality of building it, given simpler methods of
tracking Uber’s competitors.
Other
poorly conceived ideas were put into practice, only to be cut loose
after failing spectacularly. Take Uber’s ill-fated Xchange leasing
program. At one point in Uber’s history, someone had the idea that there
might be thousands of potential drivers who didn’t have enough
collateral or credit history to secure a car loan. But Uber could
overlook that and lease the cars anyway, requiring only that the lessee
work off their obligation immediately by driving for Uber. The company
began leasing to high-risk individuals with poor or nonexistent credit
ratings.
It worked — sort of. Growth
surged as people who were never before eligible for loans suddenly had
access to vehicles. Thousands of new drivers came onto the platform, and
the managers in charge were given hefty rewards. But it was the
ride-hailing equivalent of a subprime mortgage. And just like 2008, the
negative consequences came soon after.
Uber
noticed that accidents and traffic infractions spiked after the company
began the Xchange leasing program. They later figured out that many of
the new drivers were the ones responsible. The managers had created a
moral hazard, driving up insurance costs and potentially triggering a
public relations and legal nightmare.
Despite all the driver growth, Uber found it was losing more than $9,000
on each Xchange leasing deal, far above the initial estimated losses of
$500 per car. Adding to the misery, many drivers found their credit
even more damaged — all for a gig-economy job that returned less and
less as the company garnished drivers’ wages.
Such
episodes help illustrate why many drivers, an essential constituency,
have little love for Uber today. And that’s before the company begins
trying to replace them with autonomous cars.
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16 murders
For any start-up in Silicon Valley, there is no stronger imperative than growth.
It
is the maxim by which every entrepreneur lives. From the moment a
founder signs their first term sheet from investors, they’ve made a
pledge to make the start-up grow, grow, grow. If your start-up isn’t
growing, your start-up is dying.
But there’s growth, there’s growth at all costs, and then there’s Uber’s version
of growth at all costs. By 2015, some company insiders believed Mr.
Kalanick had an obsession with global expansion that crossed a line. He
had tapped Ed Baker, a former Facebook executive, to increase South
American ridership. In Brazil, Mr. Baker encouraged city managers in São
Paulo and Rio de Janeiro to amass as many riders and drivers as
possible. To limit “friction,” Uber allowed riders to sign up without
requiring them to provide identity beyond an email — easily faked — or a
phone number. Most Brazilians used cash far more frequently than credit
cards, which meant that after a long shift, a driver could be expected
to be carrying a lot of money.
Thieves
and angry taxi cartels struck. A person could access Uber with a bogus
email, then play a version of “Uber roulette”: They’d hail a car, then
cause mayhem. Vehicles were stolen and burned; drivers were assaulted,
robbed and occasionally murdered. The company stuck with the
low-friction sign-up system, even as violence increased.
In 2016, Osvaldo Luis Modolo Filho, a 52-year-old driver in Brazil, was murdered by a teenage couple
who ordered a ride using a fake name. After stabbing Mr. Filho
repeatedly with a pair of blue-handled kitchen knives, the couple took
off in his black S.U.V., leaving him to die in the middle of the street.
Mr.
Kalanick and other Uber executives were not totally indifferent to the
dangers drivers faced in emerging markets. But they had major blind
spots because of their fixation on growth, their belief in technological
solutions, and a casual application of financial incentives that often
inflamed existing cultural problems. Mr. Kalanick was convinced that
software made Uber cars inherently safer than traditional taxis, namely
because rides were recorded and trackable by GPS. He held out faith that
Uber could improve driver safety with code.
The
fixes didn’t come soon enough. Mr. Kalanick’s product team eventually
improved identity verification and security in the app for Brazilian
customers, after intense pressure from product and marketing leaders.
But not before at least 16 drivers in Brazil were murdered.
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‘Now is our time to prove ourselves’
Take away Uber’s unbridled bellicosity, and what do you have left?
A cash-burning enterprise with which investors are losing patience. A chief executive on a humility offensive, with the slogan “We do the right thing — period.” Stabs at new lines of business, like e-bikes
and freight, with far-off promises that they will turn the company into
a profitable “transportation platform.” Meanwhile, the core business is
increasingly commoditized, as customers realize that many imitators are
perfectly capable of getting them from A to B.
Mr.
Kalanick deserves credit for creating a world-changing company, one
that scaled vertiginously from a modest black car service in San
Francisco to a global brand in hundreds of cities. Those who invested
first saw staggering returns. One frequent customer, Oren Michels, cut
Mr. Kalanick a check for $5,000 early on. By the end of 2017, the stake
had multiplied in value some 3,300 times, worth more than $15 million.
The
issue, as a number of financial commentators have pointed out, is that
the gains have been captured almost entirely by pre-I.P.O. investors in
the private market. Anyone who bought shares of Uber on the day of its
stock market debut is in the red. Mr. Khosrowshahi, the C.E.O., has
indicated that the company could lose money through 2021.
On
the night of the I.P.O., at a party on the floor of the New York Stock
Exchange, Mr. Khosrowshahi toasted his employees. They were holding Big
Macs — a nod to the Uber Eats platform — and glasses of Champagne, and
many of them were painfully aware that they personally owned a great
deal of the declining stock. Mr. Khosrowshahi attempted to inspire the
troops.
“Now is our time to prove
ourselves,” he said. “Five years from now, tech companies that come
I.P.O. after us will stand on this very trading floor and see what we’ve
accomplished.”
Using an expletive, he added, “They’ll say ‘Holy crap. I want to be Uber.’”
They might. The question is: which Uber?
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