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How Uber Got Lost

This article is adapted from the book “Super Pumped: The Battle for Uber,” by Mike Isaac, a reporter for The New York Times. The book will be published by W.W. Norton & Co. on Sept. 3.

“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 cement 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.

ImageCreditSpencer Platt/Getty Images

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.

ImageCreditMichael Nagle/Bloomberg

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.

ImageCreditScott Heins for The New York Times16 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.

ImageCreditJeenah Moon for The New York Times‘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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