Sep 2, 2016 ยท 18 minutes

Something strange is happening in mid-2016: Uber CEO Travis Kalanick and I seem to be agreeing more than we’re disagreeing.

I say “seem” because he and I haven’t actually spoken since an argument in 2012 about Pando’s reporting being too hard on Uber. (The piece in question was pretty innocuous in retrospect. It was well before even before this piece…)

But let’s just look at what he has said to others:

On China:

Here’s Travis Kalanick in his own blog post explaining why he sold off Uber China:

“...as an entrepreneur, I’ve learned that being successful is about listening to your head as well as following your heart,” he wrote. “Uber and Didi Chuxing are investing billions of dollars in China and both companies have yet to turn a profit there.” “Getting to profitability is the only way to build a sustainable business that can best serve Chinese riders, drivers and cities over the long term.”

Yep! I’ve been saying this for the better part of a year. From just one of the times I’ve argued the losses and strategy were unsustainable despite Uber’s bizarre claims at growing market share and impending market dominance:

...Something is going to have to change. The cost of [Uber’s] subsidies in China is in addition to losing money in the US, spending another $1 billion to grow in India, and countless other expenses in other markets that haven’t “leaked” yet. Uber itself is worried enough it’s been upping its own take from each ride, while driving down what drivers get in many markets, causing yet another nasty PR black eye in the US.

Uber is either going to need to raise a lot more capital in a contracting funding market or find a way to quadruple its footprint in China in one year without also quadrupling the huge cost of subsidies.

After the Saudi round, I again said a breaking point was coming, despite bizarre boasts that Uber was going to be the number one ridesharing company in China in a year’s time:

Whatever benefit Uber is getting in China from the new infusion of cash, it’s sure to be short lived. Didi is itself closing a round that president Jean Liu said last week will be even larger. Apple has already put in $1 billion, and both Alibaba and Tencent are said to have reupped as well.  

But you can drive yourself crazy trying to make long term sense of Uber’s strategy in China.

You can understand how they got here. It’s the largest ridesharing market in the world. They had to try. When they entered, Didi was still two companies that hadn’t yet merged. They had no real idea what they were going up against. And back then, cash was still readily available, so Uber did what it does: It used cash like a weapon. This was the first time that approach didn’t work.

The question isn’t so much the logic that got them here, it’s rapidly becoming what the breaking point will be. It isn’t an easy answer. Uber will not win this market, and it’s hard to see how they build a sustainable business there. And yet, six of its Chinese cities are its largest cities anywhere in the world. China is big enough that even 13% of the market is a lot. It’s an asset. And it’s an asset they’ve paid billions of dollars for.

Clearly the breaking point isn’t spending billions for low double digit market share. It’s doubling down on that. It’s willing to take further dilution and risk US optics of giving the Saudi government a board seat to keep making it rain in China.

So what is the end game for Uber in China? It can’t go public on the Asian stock exchange by the end of this year, as it promised investors one year ago. Not burning $1 billion to $2 billion a year in capital.

Maybe at some point they divest it in a sale, but to whom? I doubt Didi would pay as much as Uber would want, given they dominate the market and struggle with supply more than demand.

So, I admit, Didi gave Uber way more than I would have expected. But in 2016, Kalanick and I agreed that Uber was never going to win China, couldn’t keep bleeding out and merging and taking a honking steak in Didi was by far the best return on investment it could get in China.

On the “existential threat” Uber faces in the self-driving car era:

Here is Kalanick the day Uber rolled out the new “Uber self driving car” as the tech press called it or “modified Volvo” as anyone else would call it.

Kalanick, via Bloomberg:

“The minute it was clear to us that our friends in Mountain View were going to be getting in the ride-sharing space, we needed to make sure there is an alternative [self-driving car],” says Kalanick. “Because if there is not, we’re not going to have any business.” Developing an autonomous vehicle, he adds, “is basically existential for us.” (Google also invests in Uber through Alphabet’s venture capital division, GV.)

Google’s David Drummond has since left Uber’s board, and this week, Google announced it was already competing with Google via Waze.

Yep! Here it is in my own words back in July back when Uber was still saying self-driving cars would be it’s immediate salvation:  

In the case of Uber, we see the inflection point [coming in self driving cars]. We know it has better funded competitors at that inflection point. Better funded competitors who have more of the pieces required to thrive in a self driving car world: Those would-be competitors have the hardware already (Google/Tesla), they have the brand (Apple/Tesla), they have huge installed bases as well (Apple/Google). Uber has a great driver management app, integrated with a mashup of maps and payments and other technology that already exists elsewhere. Lyft has a nearly identical app. Uber has an installed base, but Lyft and Uber have both shown that more subsidies can increase your base, so that’s really just a function of cash.

The one thing Uber has that no one else has is the one thing it keeps saying it can’t wait to get rid of: The drivers.

Uber could well surprise cynics like me when this inflection point hits. But it’s going to be much harder than what they’ve done so far, and a handful of companies have ever made a leap like that. But getting public with a $60 billion valuation is going to be a lot harder with those set of risks, versus Didi and Lyft and a crash cash burn today. Early investors will still make plenty. Uber executives and founders will. But the bulk of the cash that’s come into the company could be left with nothing. 

On whether or not Uber has figured out its core business model:

Early this year, when news “leaked” that Uber was “profitable” in the US, I expressed incredulity that even the core business model worked:  

VCs, analysts, and the press keep saying that Uber deserves such a rich valuation (reminder: highest for a private company in Silicon Valley history) because it’s a real business. I’d accepted that as fact as well.

But increasingly, I’m wondering if the economics of ridesharing actually do work in their current form. They don’t seem to.

Watching this open, nasty fight Uber is in with drivers -- cutting them to $.30 a mile and telling them to make it up in volume, blocking them on Twitter, sending an admin to record license plates at protests and then lie about where he works, continuing to send out Tweets reminding riders there is no reason to tip-- there are two options:

  • Uber is an evil, uncaring organization who enjoys fucking over the people who got it to this point.
  • Uber doesn’t have an economic choice.

Here’s something I bet you’d never thought you’d see: A post where I argue that Uber isn’t (merely) an evil, uncaring organization who enjoys fucking over the people who got it to this point. Not because I think Uber has a giant heart, but because I think it has a giant strategic brain.

Let’s look at what we know: Uber continues to cut prices in the United States because lower prices are crucial for Uber to replace car ownership. That after all, is its own rationale for why Uber is worth so much more than the cab industry.

Up until this year, Uber was fighting so hard to court drivers it was paying signing bonuses and hiring workers to pose as Lyft riders to steal Lyft’s drivers onto its platform. Those little guys who twirl signs were on every San Francisco street corner hawking Uber. Ads were everywhere telling you how much you could make as an Uber driver.

Why would Uber suddenly on a dime decide it didn’t need them after all?...

...Uber usually makes decisions for one of two reasons: Its valuation or its P&L. Remember: Travis Kalanick is a guy who said “on bad days I look at our revenue graph”.

Is it possible that this is one of those businesses like we saw in the late 1990s? The ones that absolutely proved to be huge opportunities, but back in 1999 with the limited footprint of the Web and capital associated with building a Web business just didn’t work. The kinds that suddenly looked great a decade or more later.

Does this business, at this scale, with these types of growth assumptions and market cap assumptions only work in an era of self driving cars? Is Uber either wildly overvalued on a story of car replacement and global domination that its economics won’t allow, or simply off by ten years?

Best case scenario, Uber increasingly looks like this generation’s Amazon.com-- a company that will have to ignore everyone and keep raising money to grind it out until the economics suddenly work. That’s not a bad thing to be, but depends on Jeff Bezos like execution to make it out the other side. Uber could do that. It has the cash, the lead, the revenues, the backers, and the Machiavellian do anything attitude to get there. It’s wisely held off going public so none of us know what’s really going on with these economics beyond well choreographed leaks.

But worst case, it may be this generation’s WebVan.

And, again! Here we are mid-year and my pal Travis agrees again! Bloomberg broke the news last week that Uber has told investors it is no longer profitable in the US and is burning at least $1.2 billion this year alone.

On Friday, Gupta told investors that Uber's losses mounted in the second quarter. Even in the U.S., where Uber had turned a profit during its first quarter, the company was once again losing money.

In the first quarter of this year, Uber lost about $520 million before interest, taxes, depreciation and amortization, according to people familiar with the matter. In the second quarter the losses significantly exceeded $750 million, including a roughly $100 million shortfall in the U.S., those people said. That means Uber's losses in the first half of 2016 totaled at least $1.27 billion.

Subsidies for Uber's drivers are responsible for the majority of the company's losses globally, Gupta told investors, according to people familiar with the matter…

...Uber's losses and revenue have generally grown in lockstep as the company's global ambitions have expanded. Uber has lost money quarter after quarter. In 2015, Uber lost at least $2 billion before interest, taxes, depreciation and amortization. Uber, which is seven years old, has lost at least $4 billion in the history of the company.

It's hard to find much of a precedent for Uber's losses. Webvan and Kozmo.com—two now-defunct phantoms of the original dot-com boom—lost just over $1 billion combined in their short lifetimes. Amazon.com Inc. is famous for losing money while increasing its market value, but its biggest loss ever totaled $1.4 billion in 2000. Uber exceeded that number in 2015 and is on pace to do it again this year. 

Some journalists-- right now cue-- are now expressing the same concerns we did six months ago, wondering aloud if Uber has proven its business model. To the point, where almost all are also invoking Webvan.

On embarking on possible criminal tactics to silence critics:

And just for fun, let’s throw in this one. In the face of Kalanick and Emil Michael’s insistence to me via email and on Twitter that neither they nor Uber would ever actually hire shady oppo researchers to investigate the families of critics as they threatened to do to me, I wrote and said repeatedly on TV that I didn’t for a moment believe the protestations.

And then, earlier this year, the court found this:

A week or so ago, a judge ordered the release of documents that show beyond all reasonable doubt that Uber hired a CIA-linked private investigation firm to investigate the personal and professional life of Portland attorney Andrew Schmidt and his client, Spencer Meyer. Meyer had recently filed a lawsuit against Uber and Kalanick.

The emails, some of which are embedded below courtesy of the Bangor Daily News, show Uber executives contracting the investigations firm, Ergo, to dig into the background of Meyer and Schmidt.

The plan begins with Ergo contacting colleagues and friends of Schmidt, and lying about the purpose of their emails and calls, in order to trick them into revealing damaging information which could form the basis of further investigation. Kalanick had previously denied that Uber was aware of any kind of secret investigation against Meyer and Schmidt.

Worse, the emails also show attempts by Uber and Ergo to encrypt the emails to avoid problems "from a discovery perspective." That is, to ensure that they couldn't ever be uncovered by a court or law enforcement.

So I guess, Kalanick agrees with me there too: They absolutely would do this kind of thing!

Even after busted boasting about it and then saying they wouldn’t!

And now, there are signs a fifth instance of this strange mid-year pattern may be occurring.

I’ve speculated several times before on social media that it would be fascinating to see an Uber “do-over.” What would it look like if the company had focused more of its resources on dominating ridesharing and broader logistics of everything in the US, instead of spending billions chasing markets that it isn’t winning in?

Well, there are some signs that Uber appears to be trying to do just that. Now that it’s cut its losses in China-- and with it trimmed the minimum $1.2 billion burn rate so far this year-- it seems to be turning attention again towards beating Lyft in the US and expanding fledgling products like UberEats.

This month, Uber has debuted a trial subscription in six US cities that would allow customers to buy packs of 20 or 40 rides at reduced, flat prices with no surge pricing. Will it hurt revenues? Yep. Will it hurt driver’s pay if it’s enacted widely? Yep.

But it’ll be the first time Uber has sought to use its cash position to lock customers into only using it’s service. And that’s important because right now Uber and Lyft are commodity products: Similar looking app that’s based on a lot of the same APIs, same price points, same product, and same drivers in most cases. And Google is already offering a cheaper carpool option in San Francisco. Google: A company who is worth half a trillion dollars and can afford not to take any cut of the business.

And, UberEats is quietly expanding as well out of adjacent markets. Indeed, yesterday, the company announced that co-founder and Uber board member Ryan Graves was now in charge of everything not ridesharing-- about 1% of the company.

From Fortune:

The shift for Graves, 33, is the second time in Uber’s six-year history that he has given up key responsibilities. In 2010, he relinquished the CEO position to Kalanick, a co-founder who initially chose not to work full time with the company. Graves went on to oversee Uber’s launch process around the world. He told Fortune that he views the opportunity to hire Jones as the right move for the company. Graves will continue to serve as Uber’s top executive for human resources as well as UberEverything, a collection of nascent businesses that includes UberEats, a prepared-food delivery service. 

So you can look at that two ways: Either “UberEverything” is important enough that a co-founder is now focusing on it, or unimportant enough that a guy whose jobs keep outgrowing him is focused on it. Either way, having a board member focused on that division certainly can’t signal that Uber is giving up on growing that business.

The next things to watch closely are Uber’s actions in other international markets. It’s been banned in much of Europe but remains strong in a handful of markets like London. It’s reportedly getting beat by in market share by Ola in India-- where it’s also said to be burning $1 billion a year. But Ola is nowhere near as dominant in India as Didi was in China. The market is also not nearly as primed for rapid growth. And then there’s SouthEast Asia where Didi is still propping up Grab despite the Uber bear-hug.

Uber is clearly trying to move into a new phase of its business where its shots are focused and its burn rate is somewhat pulled into a comparatively rational range. There’s speculation the company is doing this ahead of an IPO. I’m not convinced. I think it’s just as likely the company is doing this so it doesn’t have to go public.

I hate to say it, because I think the US market desperately needs a strong competitor to Uber. But the clearest shot on better margins is taking this window to just destroy Lyft and making its cars and drivers more efficient-- the promise of UberEverything.

Sure, keep a toe in India and SouthEast Asia and Europe and the rest to have a future growth story. The massive Yahoo/Alibaba like stake in Didi gives them that too. But the smartest move is to use the capital in the bank to become a monopoly in the US and then change all the economics on everyone.

There’s another reason to focus on this now: Because in a self-driving car era, Uber doesn’t have the most cash. And even in an essay where he gave Uber odds of beating Google, Ben Thompson admitted it all becomes even more about cost in a self driving car era.

To my mind, Uber only has two advantages over a Google, Apple or Tesla: Existing users and drivers. The latter won’t help them, so they need to do everything they can to lock in the former before the market changes. Sure, Thompson and others would argue the routing data is a huge advantage. But Lyft-- which has been doing carpooling longer-- has a lot of that data too and could be grabbed up by any of those companies to help bridge that knowledge gap.

The only other advantage even Uber fans say the company has is “stones.” The fact that the battle is existential for Uber, where it’s not with Google, Thompson says gives Uber an edge.

Won’t that make them try harder? Yes, very likely. And the biggest X factor is just how badly Google wants to win this market. But despite the fantasies of bros in Silicon Valley, “stones” can only get you so far. It can tip the scales, maybe. But this isn’t a balanced fight where “stones” alone can make the difference.

Uber had major “stones” going into China and how’d that work out? The Chinese have even opened up antitrust investigation into the plum face-saving deal that Uber got in giving up on the market.

I know we want to believe the founder with “stones” will win. But if that were true, startups would have a higher success rate and venture capitalists wouldn’t brush off previous failures as bad timing or unfair competitive dynamics.

Uber is entering a battle that even Thompson admits gives Google two major technology advantages, not to mention Google’s cash advantage and the fact that it’s already a successful public company and won’t go through the distraction of that transition.

Uber has one shot: Own the market while it’s still transitioning. And all they need to do that is beat Lyft over the head with a bag of cash for the next year or so. Again, I’d hate this to happen. But I can’t imagine it’s not the company’s plan.

Don’t believe me? My words sound eerily similar to another Travis Kalanick quote from the vault:

Sometimes Uber CEO Travis Kalanick gazes down on the street from his office window in San Francisco and wonders, "Why aren't all of those cars Ubers?"

"The world would be a better place"

Better for his margins at least.