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Home / Naked Capitalism / Hubert Horan: Can Uber Ever Deliver? Part Twenty-One: Mike Isaac’s Book Ignores Economics and Financial Results and Gets the Uber Story Almost Entirely Wrong

Hubert Horan: Can Uber Ever Deliver? Part Twenty-One: Mike Isaac’s Book Ignores Economics and Financial Results and Gets the Uber Story Almost Entirely Wrong

Summary:
By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants One of the recurring themes of this series has been the poor quality of Uber coverage in the mainstream business and tech press. On September 3rd, Mike Isaac, who has been covering Uber for the New York Times since 2014, published Super Pumped! The Battle For Uber.[1] Isaac’s central argument is that Uber is a fundamentally successful company that was nearly undone by ‘[CEO Travis] Kalanick’s boundary-pushing behavior, unabashed pugnacity, and eventually, the CEO’s own personal decline.” (p. xviii).

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By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants

One of the recurring themes of this series has been the poor quality of Uber coverage in the mainstream business and tech press.

On September 3rd, Mike Isaac, who has been covering Uber for the New York Times since 2014, published Super Pumped! The Battle For Uber.[1]

Isaac’s central argument is that Uber is a fundamentally successful company that was nearly undone by ‘[CEO Travis] Kalanick’s boundary-pushing behavior, unabashed pugnacity, and eventually, the CEO’s own personal decline.” (p. xviii). “Uber was the unicorn to end all unicorns” (p. 6), with the potential to “drag the entire transportation industry out of the analog world and into the digital one” (p. 64). Uber represented the “best and worst of Silicon Valley” (p.xviii). It was “a company worth tens of billions of dollars that succeeded in changing the way we move through the world, yet nearly destroyed itself in a bonfire of bad behavior, ugly decisions, and greed” (p. xx) and provides a cautionary tale “about how blind worship of startup founders can go wildly wrong” and threaten the survival of “a multi-billion dollar empire.” (p. xix). The misogyny and rest of the bonfire of  bad behavior directly reflected Kalanick’s personality, and became rampant because Kalanick prevented the Board from exercising normal discipline and control.

Isaac argues that Uber was brought back from the depths of its 2017 crises when key Board members realized “Uber didn’t have an image problem, it had a Travis problem” (p.235) and began to assert their role as the adults in the room, initiating the “Battle for Uber”. When an outside investigation led by former Attorney General Eric Holder produced damming findings, the Board forced Kalanick’s resignation as CEO. Since his hiring, new CEO Dara Khosrowshahi has worked to “systematically undo nearly everything his predecessor had stood for.” (p. 331)

Every component of Isaac’s argument is wrong.

Uber is not a successful company. It has lost over $20 billion and does not have a plausible path to profitability. It took billions in unsustainable predatory subsidies and narratives manufactured by Uber’s massive PR spending to create the appearance that it had disrupted the taxi industry. Uber actually has higher costs than the incumbents they disrupted and is incapable of producing taxi service at a cost the market would be willing to pay for. It is not the unicorn to end all unicorns. It has never had any sustainable competitive advantages and its valuation has never had any relationship to economic reality.

The misogyny and rest of the bonfire of bad behavior was the direct, inevitable result of a “growth-at-all-costs” strategy that combined the massive spending on subsidies and PR narratives with a ruthless, monomaniacal culture designed to convince the world that Uber’s industry domination was inevitable and any resistance was futile. The strategy also drove the rapid revenue and valuation growth Uber’s investors wanted.

Uber’s 2017 crisis was not triggered by the Board’s sudden desire to reign in governance problems. Instead, it was a rebellion against Kalanick’s refusal to rapidly move toward an IPO that would allow investors to realize cash gains on their investments. Kalanick’s resignation was not triggered by the Board’s sudden awareness of bad management behavior, or by unexpected disclosures in the Holder report, that bad behavior had been going on for years with the full knowledge of the Board. In the two years he has been CEO Khosrowshahi has not made a single significant change to Uber business model or growth strategy that had been in place under Kalanick.

Isaac’s approach to the Uber Story is fatally flawed

Before addressing the many problems with Super Pumped! It is important to emphasize that the facts presented in the book (records of events, quotes) are entirely accurate. There is nothing in the book that even remotely suggests active bias or that Isaac had any kind of agenda.

Super Pumped! obviously includes a lot of material from his published New York Times stories, which have been regularly cited in this series. Isaac broke the “Greyball” story (the software Uber developed to obstruct local law enforcement efforts against it) and major stories about the Board rebellion against Kalanick. This book includes the previously unpublished story about how Uber used the entire proceeds from a “Safe Rides Fee” to improve its bottom line, rather than to finance the consumer safety protections as it had promised.

The book is highly readable, but the audience won’t get an accurate understanding of Uber. It is understandable that Isaac’s day-to-day reporting on Uber would focus narrowly on things like events and quotes. A full length book gave Isaac the opportunity to dig deeper into the story and to analyze broader issues that would have been difficult to address while working against deadlines, but he didn’t. The book illustrates how one can string together factual points that clearly meet the Times’ day-to-day reporting standards and still get the bigger-picture “story” badly wrong. [2]

Isaac’s approach to Uber’s history suffers from three fatal flaws.

Isaac thinks the Uber story can be told without any reference to economic or financial data. Normally one evaluates company performance in terms of things like profitability and investor returns. Isaac doesn’t present any of the P&L results showing growing massive losses over ten years. Nor does he present any data on investment funding, cash flow, efficiency, productivity, pricing, cost competitiveness, or anything else. There are a couple passing mentions of Uber’s valuation, but no explanation of where it came from, or what caused changes. Readers thus have no idea what Uber’s current business situation or future outlook is, and have no way to understand Kalanick’s impact of the company’s performance.

Isaac thinks Uber can be explained solely on the basis of personalities.  Super Pumped! focuses almost exclusively on the personalities of a handful of key Uber insiders (primarily Kalanick and Board member Bill Gurley of Benchmark Capital) and readers get no information about Uber other than descriptions of what that this particular handful of people say and do. Since Isaac excludes all economic and financial data, readers have no clue what business issues might be driving those people’s behavior and have no way to evaluate whether claims they make might be powerful insights or self-serving nonsense.

Isaac convincingly portrays Kalanick as an arrogant asshole, and many readers may have a negative visceral reaction to this portrayal. But managers with no offsetting abilities do not remain in place long, and readers they have no way to develop a balanced understanding of Kalanick’s actual record.  By discussing personal styles outside of the business context, Uber comes across as an adult version of a high school student council or college fraternity, where the social dynamics may be colorful but are inconsequential in the grand scheme of things.

This narrow framing means readers never see counter-arguments and cannot understand how Uber behavior compares to comparable companies. If, as Isaac suggests Kalanick’s power and lack of accountability caused serious damage at Uber, why didn’t similar governance problems cripple Google or Facebook? Wasn’t Kalanick’s “arrogant asshole” style common across the Silicon Valley? Uber is presented as an engine solely powered by Travis Kalanick’s personality and drive, an engine that inexplicably failed in 2017.

Isaac appears totally oblivious to Uber’s massive spending on PR narratives. As this series has documented at length, one of Uber’s top priorities was always the creation of PR narratives [3] that provided simplistic explanations of Uber’s amazing competitive strengths that would make its global domination of the taxi industry inevitable, tried to justify Uber’s huge valuation, and diverted attention from Uber’s terrible economics. [4] Isaac doesn’t seem to understand the size and importance of these efforts, so his readers aren’t shown how they established the widespread perception that Uber was a highly innovative, successful company despite billions in ongoing, growing losses.

More problematically, Isaac uncritically repeats many of these manufactured narrative claims which may mislead readers into thinking they are backed by objective evidence. His own efforts to portray Uber as a successful company (aside from misogyny and other bad behavior) suggests that he couldn’t see through Uber’s spin, and after five years on the Uber beat, never bothered to investigate whether the company’s  claims were honest. Since he doesn’t understand the importance of these narratives, he doesn’t understand why the public actions of the Board and both CEOs have always been tightly aligned with them, and given a choice between seemingly irrational marketplace actions and doing things consistent with the narrative, the narrative always won.

Isaac doesn’t seem to understand Uber’s business model, or its investors’ strategy for earning outsized returns

Another major flaw is that Isaac never provides his readers with a coherent summary of Uber’s business model or strategy, and it is not clear he would have been capable of doing this. Isaac’s book purports to tell the story of what Kalanick did as CEO, and the conflict with the Board that led to his dismissal. But this focus ignores the question of what Kalanick and the Board thought management should be doing to eventually produce sustainable profitable growth and returns on the money invested in the company. It also overlooks whether the conflicts might have had anything to do with performance against those strategic objectives, or changing views about what those objectives and priorities ought to be.

Explaining the business model and strategy would require economic data (where will competitive advantages come from? what will drive growth and productivity improvements?) and industry comparisons (does Uber have lower costs than traditional taxis?).  Isaac’s story clearly underscores Uber’s focus on rapid growth, but every other Silicon Valley funded company had the same priority.

Instead Isaac uncritically repeats bits of Uber’s PR narrative—Uber is based on highly innovative technology that is changing the world, and is following a tech industry strategy directly based on Amazon’s (“More than any other company, Amazon embodied the company [Kalanick] wanted Uber to become” p.11). Again, Isaac doesn’t understand that much of the PR narrative was in fact PR—designed to distract attention from Uber’s terrible economics, and nothing that an outsider should take at face value.

While it will never be realized, Kalanick and Uber’s investors were always fully aligned around a highly innovative strategy for achieving outsized returns. Uber never intended to follow the difficult and risky parts of Amazon’s strategy, such as developing major new product and efficiency breakthroughs that would give it huge, sustainable advantage over incumbent retailers and constantly plowing its strong positive cash flow into expansion opportunities where there were huge synergies with its core business. Uber’s strategy was to skip all of the hard parts of corporate business development and to use billions in predatory subsidies to bulldoze their way to global industry dominance. Which is why Uber required 2300 times more pre-IPO funding than Amazon.

As noted, the monomaniacal “growth-at-all-costs” culture and the PR narratives provided critical support to this subsidy-driven strategy. The first accelerated progress towards the hoped-for industry dominance, and the latter created the false impression that Uber’s “success” was based on the triumph of its superior products and efficiency in competitive markets, and the false impression that since Uber had the same economics as tech companies like Amazon and Facebook, it would quickly become robustly profitable and enjoy many years of huge equity appreciation.

Uber’s investors did hope to replicate the second part of Amazon’s strategy, where its dominance and platform ubiquity would create the anti-competitive market power needed to vastly improve margins in its core business and to profitably expand to many new businesses where it had no natural competitive strengths. This has not happened because Uber has not achieved the level of dominance needed to exercise anti-competitive market power.

The strategic use of enormous predatory subsidies and manufactured PR narratives was totally unprecedented, but it was a coherent, rational strategy. Kalanick and the Board totally understood and agreed on the strategy. Kalanick’s ruthless, monomaniacal style was not a problem, but was exactly what the Board was looking for. As noted, the bad behavior that eventually produced systemic sexual harassment had been present at Uber from day 1, was integral to “growth-at-all-costs” and until Susan Fowler’s blog went viral, the Board never had any problem with it.

Isaac ignores every significant Uber question his readers might have  

Why has Uber lost over $20 billion? Isaac completely ignores this question and there is nothing in the book that helps readers answer it. The book ignores the fact that Uber actually is higher cost and less efficient than the operators it has driven out of business, ignores that Uber has none of the growth economics that allowed other Silicon Valley-funded startups to “grow into profitability” and skips over the fact that taxis and other urban transport services have always been marginal, and that Uber’s business model did not transform industry economics or solve longstanding structural cost and demand problems.

Did Uber ever build a sustainable core business? Obviously not, given its inability after ten years to generate positive cash flow, its lack of cost competitiveness and the absence of any other powerful, sustainable competitive advantages. Instead of providing readers with a clear answer to this question, Isaac simply cites vague  narrative claims (“harnessing the power of the internet”). He mentions “innovations” but never mentions any evidence showing they had a significant impact on cost efficiency or productivity. If Uber’s smartphone app was so powerful why hasn’t any other company in any other industry been able to overwhelm competition and produce tens of billions in corporate value from a smartphone app?

Does Uber have any path to profitability? None is apparent, and nobody inside or outside of Uber has been able to articulate a half-way plausible theory of how Uber could achieve sustainable profitability. Isaac completely ignores this question and there is nothing in the book that helps readers answer it. Price increases cannot cover more than a trivial portion of the current profit gap. The market is simply unwilling to support prices that would cover Uber’s actual costs. Price increases and service cutbacks would also throttle Uber’s already rapidly declining growth rates, which would help kill any remaining perceptions that Uber is a high-growth company.

Uber’s only major source of margin improvement has come from cutting driver compensation, to (and below) minimum wage levels, so there is no potential for further driver cuts. All of the new businesses Uber has expanded into (food delivery, scooters) appear to have even worse profit margins than car service, and their sole purpose appears to be to boost revenue growth rates, and mislead naïve investors that Uber has Amazon-like potential for profitable long-term growth and can become the “Amazon of Transportation.” Normally startups do not undertake major expansion without a core business producing strong positive cash flow, and major synergies between the businesses; Uber has neither. Cutting back those businesses, or spending on speculative future businesses (self-driving and flying cars, trucking) would not get Uber anywhere near breakeven, but would also help kill the “high-growth” narrative that Uber believes is critical to its equity value.

What actually drove Uber’s meteoric growth? Isaac suggests this is totally explained by Kalanick’s personality and his monomaniacal focus on “growth at all costs.”  But since he did not understand the investors’ strategy, Isaac never mentions the tens of billions in predatory investor subsidies that allowed Uber to provide much more service at much lower prices than could be economically justified. [5] Traditional taxis could not compete with Silicon Valley billionaires willing to funds years of multi-billion dollar losses.

Did Uber benefit drivers? Isaac tells readers that “Everyone in the company knew…driving for Uber was miserable” (p.190) but since he hasn’t looked at financial data can’t tell them why, and can’t explain the responses of Uber management. Since Uber entered the market driver take home pay has fallen over 40%, and in many cities is now below minimum wage levels. To recruit drivers, Uber willfully lied about pay, and can terminate drivers (who are locked into expensive vehicle obligations) or change their compensation at will. Almost all of Uber’s margin improvements in recent years came from these unilateral driver pay cuts. Instead of telling readers about driver pay and conditions, Isaac describes Uber executives who think morale problems can be solved with better communication programs. When Kalanick undermines these programs with further pay cuts, Isaac attributes this to Kalanick’s nasty personality, ignoring the P&L problem he is actually struggling with.

Did Uber create sustainable benefits for cities and taxi users? Isaac completely bypasses these issues and there is nothing in the book that helps readers answer them. The simple answer is obviously not, since Uber has not and cannot provide its existing service on a sustainably profitable basis. The more complete answer is also no, since there is no evidence that a quasi-monopoly Uber, controlled by Silicon Valley investors totally free of any legal or regulatory oversight would produce more car service at lower prices than the (admittedly not very good) taxi companies they had driven out of business. Cities could not possibly come out ahead unless Uber could sustainably produce service at much lower cost, and had huge incentive to pass on many of those savings to consumers. Isaac fails to consider this question, and instead repeats a series of egregious falsehoods from Uber’s narrative about all traditional taxi service problems being caused by corrupt regulators desperate to block innovation and job creation in order to protect The Evil Taxi Medallion Cartel. [6]

Was Uber’s lawbreaking justified? Isaac documents a lot of this lawbreaking, including the willful refusal to obey laws governing entry, pricing, licensing, insurance and safety, deliberate obstruction of local police enforcement of these laws, competitor sabotage and so forth. But Isaac never answers this question which would require economic evidence showing that the laws materially reduced industry efficiency and that the lawbreaking produced sustainable consumer benefits. Instead of telling readers that none of this evidence exists, Isaac confuses them by quoting vague and totally unsubstantiated claims from Uber’s PR narrative. Uber’s “principled confrontation” with legal authority was fine because “it came from a place of principle” (p.13) Similarly, Isaac tells readers that Uber’s refusal to obey laws requiring driver background checks was a matter of “principle.” But those “principles” were nothing more than the ideological assertion that the since all local governments are inherently corrupt, companies owned by Silicon Valley billionaires should not have to obey any laws they don’t like. Isaac reports Uber’s claim that it was fighting for the principle of “a pure free market, untouched by the corrupt hand of big government and Big Taxi” (p.114) but doesn’t point out Uber’s complete disregard of this principle, spending massive sums to lobby those corrupt governments to artificially rig those markets in its favor, ensuring it was freed from rules that Yellow Cab would still be required to obey.

Was Uber’s misogynist “bro” culture an incidental, fixable problem?  Isaac is clearly disgusted by sexual harassment and misogynistic behavior. But he can’t properly explain the importance of these issues because he hasn’t tried to understand Uber’s core business model issues. He recognizes that Kalanick established a monomaniacal “growth at all costs” culture, but doesn’t recognize the problems this creates in a company that doesn’t have competitive economics. Managers who can produce “growth at all costs” in this environment can hit on female staff whenever they want. Sexual harassment at Uber was never the problem of a “few bad apples” and was not going to be solved by increased sensitivity training. It was the absolutely inevitable result of investors demanding “growth at all costs” in a company with totally uncompetitive economics.

Why did Uber fail miserably in China? In the U.S., Uber—a company with limitless cash and the freedom to use it to fund billions in predatory subsidies—easily overwhelmed tiny, fragmented, undercapitalized incumbents. That formula does not work in a market like China, where the competition had even greater funding than Uber, and an even greater determination to achieve market dominance. [7]  Isaac blames this debacle on Kalanick’s irrational egotistical desire to achieve a China victory that had eluded every other large US company and valorizes Bill Gurley for getting the Board to reverse Kalanick’s terrible error.

Since Isaac doesn’t understand the importance of Uber’s manufactured narratives, he fails to see that they had locked Uber into the failed China expansion. Uber’s narratives claimed Uber’s growth was due to incredibly powerful technological advantages that could overwhelm incumbents anywhere in the world, and that Uber’s huge valuation was justified by the many years of profitable expansion it could pursue.

Expansion to China and other international markets had the Board’s full support, and failing to do so would have been an explicit admission that the claims about powerful competitive advantages and limitless growth opportunities were complete nonsense. Perhaps Kalanick and the Board had blinded themselves to obvious risks after consuming too much of the narrative Kool-Aid, but given a choice between acting in accordance with the narrative or setting cash on fire, Uber management has consistently defended their narrative.

Why is Uber investing in autonomous cars? As with China, Isaac explains this in terms of Kalanick’s irrational egotism. Enraged when he discovered in 2014 that Google (an Uber investor) had secretly mounted a major AV investment program, Kalanick began an Uber program to outdo (the incredibly better financed) Google effort. Kalanick also argued that AVs would allow Uber eliminate the cost of drivers.

As with China, this move is better understood in terms of Kalanick understanding the need to defend the narratives supporting its long-term growth and valuation claims at any cost. Uber’s valuation would have been seriously threatened if (realistically or unrealistically) the perception that AVs would eventually wipe out human-driven taxi business became widespread. Announcing a Uber AV program also supported the valuation narrative by creating the appearance that Uber was already making investments needed (realistically or unrealistically) to sustain growth over many decades.

Five years later, claims that Level 5 AVs will soon be commercially operated on public roads are no longer taken seriously. It is also clear that if commercial AVs ever became feasible, they would make Uber’s economics worse. Commercial AVs would be more expensive than cars with drivers for many years, and would require staggering levels of risky capital investment that Uber currently avoids. Khosrowshahi has continued this seemingly irrational spending on AVs because of the same need to protect narrative claims that Kalanick faced. Even though Uber’s losses are much more visible, and the prospects of AVs much more remote, Khosrowshahi knows he needs to have a “long-term growth” narrative to prop up the stock price. .

What caused the 2017 Uber Board rebellion? Isaac describes this as the inevitable reaction to Kalanick’s hubris, egotism, arrogance and demand for absolute control finally pushing the Board to a breaking point. Kalanick and the Board had worked together productively for years but Kalanick’s personality dramatically changed, and all hell broke loose.

Once again, Isaac disregards simple corporate economics. The investors, had spent years telling everyone that their investment in Uber was one of the most spectacularly profitable moves in Silicon Valley history, but after 8 years had not seen a penny of actual return. The private valuation of Uber had reached $68 billion because of Silicon Valley’s myopic focus on rapid revenue growth (while ignoring profitability) and Kalanick’s great skill [8] in attracting new investors at continually higher prices. This created irresolvable tension between investors who wanted an IPO as soon as possible and Kalanick, who was smart enough to realize that an IPO would begin to expose Uber’s terrible underlying economics.

The run of terrible 2017 publicity that Uber experienced was not the cause of the Board rebellion, but merely the excuse to force the company on a direct path to an IPO. The Board had totally supported Kalanick’s “growth at all cost” approach, and prior to 2017 had never uttered a word of complaint about the bad behavior (lawbreaking, competitor sabotage, journalist harassment, etc.) it produced. Khosrowshahi was hired because he promised an IPO, and the Board provided him with massive financial incentives to complete the IPO at the valuation they were seeking within 18 months.

__________

[1] WW Norton (2019)

[2] It is also important to emphasize that Isaac’s book is far superior to many of mainstream media reports this series has taken pains to criticize. The worst Uber reporting fails basic tests of intellectual integrity—pieces purporting to be independent journalism or academic analysis that uncritically present Uber’s PR narrative claims written by authors have obvious financial or ideological incentives to present a biased, one-sided pro-Uber position. See, Can Uber Ever Deliver? Part Six: Latest Data Confirms Bleak P&L Performance While Stephen Levitt Makes Indefensible Consumer Welfare Claims, Naked Capitalism(2 Jan 2017), Can Uber Ever Deliver? Part Eight: Brad Stone’s Uber Book “The Upstarts”– PR/Propaganda Masquerading as Journalism, Naked Capitalism(16 Feb 2017) and Can Uber Ever Deliver? Part Fourteen: The New Yorker Lays Out the Template for Pro-Uber Propaganda, Naked Capitalism(15 Mar 2017)

[3] Readers who are not familiar with this series’ extensive analysis of Uber’s PR/propaganda narrative programs should see Section IV of my Transportation Law Journal article; Will the Growth of Uber Increase Economic Welfare? 44 Transp. L.J., 33-105 (2017)  available for download at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2933177or pp.115-117 and pp.122-128 of my more recent “Uber’s Path of Destruction” American Affairs, vol 3, no 2, Summer 2019, pp.108-133. https://americanaffairsjournal.org/2019/05/ubers-path-of-destruction/

[4] Among the many examples: there are radical differences between the economics of ridesharing and traditional taxis; the awesome power of Uber’s technology could overwhelm competitors anywhere in the world; Uber will soon be able to produce “transportation as reliable as running water” and eventually displace car ownership; Uber is not actually a transportation company—it is strictly a software company selling to independent “driver-entrepreneurs”; Uber will have vehicles capable of Level 5 autonomy on the road by 2018; Uber will soon become the “Amazon of Transportation.”

[5] Isaac does mention subsidies for incentive programs used to initially attract drivers (a small part of overall subsidies), but failed to explain the connection between reduced driver incentives and much higher driver turnover.

[6] Uber’s nonsensical claims about the Evil Taxi Medallion Cartel and their corrupt regulatory defenders are addressed in the Transportation Law Journal article at pp. 61-63 and 71-86.

[7] Isaac correctly notes that the Chinese government would have never allowed a foreign company like Uber to achieve dominance, but this political support was unnecessary given Didi Chuxing’s superior funding and clear commitment to market dominance.

[8] Isaac notes Kalanick’s money raising skill, (p.188) and also notes growing division on the Board between early investors and what I would call the “dumb money” (post 2015 investments), but still treats IPO issues as much less important than Kalanick personality issues.

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