The Daily - Why Uber Still Can’t Make a Profit

Episode Date: August 29, 2019

Uber transformed American transportation and changed the United States economy. But a decade after its founding, the once-swaggering company is losing more money and growing more slowly than ever. What happened? Guest: Mike Isaac, a technology reporter for The New York Times and the author of “Super Pumped: The Battle for Uber.” For more information on today’s episode, visit nytimes.com/thedaily. Background coverage: The Uber of 2019 displays little of the braggadocio of its past, and competitors and critics are moving in.

From The New York Times, I'm Michael Barbaro. This is The Daily. Today, the company that transformed American transportation and changed the U.S. economy can't stop losing money. Mike Isaac on what exactly is going on with Uber. It's Thursday, August 29th. Scandal rocks Uber. An urgent investigation as a former employee

makes explosive allegations of sexual harassment against women. A former employee claims she was sexually harassed and Uber management didn't do anything about it. In fact, she says she was ultimately criticized for reporting the problem. But hers wasn't the only complaint. The company's been forced to fire more than 20 people after uncovering 215 other allegations of harassment.

Facing a series of scandals, Uber sees another executive hit the door. Announce the departure of another executive. New trouble for the CEO of Uber. Travis Kalanick is apologizing for a video showing him berating one of his own drivers. He now admits he needs leadership help. Now to a major shakeup at Uber to tell you about the CEO and founder of the ride-sharing service.

He's out of a job this afternoon. Travis Kalanick is resigning as CEO. Now the big question, who should replace him? After being plagued by scandals, Uber is trying to get back on track with a new CEO. Well, Uber's new CEO is wasting no time. Dara Khashoggi says the ride-hailing company could go public in as soon as 18 months. Well, start your engines. Uber pricing its IPO at $45 a share. This implies a market valuation of about $82.4 billion. It's expected to be the largest IPO of 2019

and the biggest since Alibaba's $25 billion debut in 2014. its $25 billion debut in 2014. Uber burned through a staggering amount of money in the second quarter. The rideshare company said it lost $5.2 billion. $5.2 billion. $5.2 billion. Its biggest quarterly loss ever. Mike, the last time we talked,

Uber had pushed out its founder and CEO, Travis Kalanick, very publicly. They vowed to change this kind of wayward, problematic corporate culture, which you spent a lot of time chronicling. They had a huge IPO that valued the company at the scale of a small country. All of that suggested that a corner had been turned for Uber. So how is it possible that just a few days ago, the company lost $5 billion? It's funny. I think the thing that folks don't really realize is that they have never been a profitable company in the 10 years that they've existed. From day one, they've been bleeding money. And that's just sort of the business model that they've been predicated on.

So Uber has never once made a profit over the last decade. That's right. I wonder if you could explain how that's possible. I wonder if you could explain how that's possible. I think from the beginning, Travis Kalanick had this idea that is pretty common in the Valley, which is like, look, we can think about profits at some point,

but it just, how can I get as many bodies in seats as possible? The way he used to explain it is, you have to kickstart the flywheel in each city. So he sends a strike team of employees into each city, floods Craigslist with ads for free rides, floods people into basically the town square handing out coupons to drive or ride with Uber and get as many bodies in the backs of seats as possible. And then take that and replicate it over and over.

Do that long enough for a long enough period of time and take over as many cities as possible. And then eventually you apparently can start making money off of that, provided that there are no actual competitors to your business. How exactly is it supposed to pay off? The thesis put forth by Travis was once you get to the tipping point in any given city that Uber is part of your daily life, then eventually they get to a point where maybe they can hike the rates, maybe they can lower the payment for drivers, but it doesn't matter because people are hooked and people are going to keep using it because it's part of their daily lives. So the plan at the beginning was spend whatever money Uber needed to spend to get people hooked

on Uber, make it an essential part of people's lives. And at some point, the business becomes so big, so many people use it, that a profit will just inevitably come. The maxim he liked to use internally was transportation as reliable as running water. Make it ubiquitous. Make Uber an inevitability in every city, in every country around the world. And then you can stop burning money to make it work. And like, how unusual was that model? Burn money, build saturation, hope for a profit. I mean, Facebook's actually a good example of that.

You know, they burned a lot of money with no advertising for a very long time. The other one that is a pretty classic case is Amazon. From the beginning of that business, Jeff Bezos actually trained Wall Street to allow Amazon to lose money because they were often losing money every quarter or maybe break even at best. And his whole thing was, look, we need to spend money to make money. We need to get as many people using our site as possible. And that habituates them into making us part of their everyday lives. And clearly that theory was right. So investors have been used to this type of business model for a long time,

and they were happy to pour money into Uber from the very beginning. And they did in a really huge way to the tune of billions. Uber has raised more than $1 billion from institutional backers, which of course does include Goldman Sachs and several venture capital firms. Google invested almost a billion in Uber. That's the biggest they've invested in anything ever. According to the New York Times, Saudi Arabia's public investment fund has infused $3.5 billion in San Francisco-based Uber. And what is Uber doing with all of these billions of dollars that investors are handing over? So let's break it down to like the granular

level. Imagine that a ride costs ten dollars, right? Uber might pay two or three dollars out of that ride just to make it cheaper for a rider. So you or I might pay like seven bucks to get somewhere where in reality it costs $10. 30% of that goes to the driver. So at the end of the day, Uber ends up making like two or $3 on the ride, but count all their overhead and maybe they lose a dollar or two on the ride. Now multiply that by millions of rides per day in each city across, you know, the United States and then move out to the United States. And then there's millions more in other cities outwards. So, you know, in theory, they might be losing millions of dollars in each city every single day. Wow. So not only are they actually paying for riders and drivers to take rides, but part of their strategy

was barrel into a new city and, you know, forget about the consequences. We can actually like afford to pay them off. So whether that's in, you know, Southeast Asia, where they were literally, allegedly bribing police officers to operate in certain areas, or in China, where they were burning billions of dollars, some of those going to fake rides. Tons of scammers. There are actually organized crime rings set up entirely to scam Uber out of millions, if not billions of dollars. And Travis's idea was, it doesn't matter. This is the cost of doing business. And so this is how we need to push through. So Uber is not just subsidizing each ride. They are having to pay in all these other ways around the world just to keep on growing and growing into new markets beyond the U.S.

And the idea, right, is that this will still someday pay off and turn into profit. Yep, that's right. Okay, so they're getting a foothold into all these markets in cities across the world. Did it seem like it was all going according to plan, that people were starting to become hooked on Uber in the way that its founders had expected? Yeah, I mean, if you think back to 2015, 2016,

Uber was on top of the world. Uber, okay, doing a great job, right? We all like Uber. Here's the thing. Every decade, there's a company that comes along that sort of changes everything. It all started as a ride-sharing app, and it's exploded into a global force, disrupting the entire transportation industry. The ride-sharing company's most recent funding round,

giving Uber a valuation of, get this, $68 billion. They were open in almost every continent. They were actually crushing their competition. Lyft was on its deathbed, basically, you know, trying to get people to use the service. But it seemed like Uber really was going to win. And then 2017 happened. In the past year, the company has faced crisis after crisis, including accusations of stealing self-driving technology from Google and protests by drivers.

Hashtag delete Uber. People around the world are deleting their Uber app because of Uber's link with President Trump. But today, the CEO of Uber is out. It was an investor revolt that led Travis Kalanick to resign after months of turmoil. Just a lot. A lot of this stuff cemented the idea in people's heads that Uber is this gross, bro-tastic company, and I shouldn't use the product. And I think the thing that people didn't really quite realize is that that actually really affected their business. Folks started actually using Lyft as a way to say, I don't use Uber. It brought it back from the brink and sort of like revived this competitor.

It's this war that ultimately never ends for them and keeps kicking the idea of profitability further and further down the line just because they're always competing and there's always someone new popping up ready to make you spend more money. So what does Uber have to do to adjust to this new problematic environment? So Uber's answer is to spread into a bunch more money-losing businesses. Folks need food, and I bring it to them. I've been called a liaison of linguine, a convoy of cakes. Most people just look out their window and say,

hey, it's Uber Eats, dude. They started moving into Uber Eats, their food delivery service. They're the latest addition to the bike-share craze with a twist. Jump is an electric bike that gives you a boost to cover more ground with every pedal. They bought this company called Jump, which creates e-bikes and scooters in a bunch of different cities, and decided to start replicating that all over the place. Everyone knows about Uber and the way it's transformed the taxi business, but have you ever heard of Uber Freight? Think of it as Uber for truck drivers. They basically took the thesis that we need to spend money to make money in one category and put that into all these different lines of business to expand on the idea that we're not just a ride-hailing company.

We are a transportation platform. ride-hailing company. We are a transportation platform. And we want Uber to be every part of your life from, you know, commuting to work to getting McDonald's delivered to your house at the end of the day. And the idea within this platform is still to subsidize each of these experiences. Yeah, I mean, again, getting back into that cycle of we need to grow as fast as possible. And that means giving freebies away to customers as well as like getting drivers to deliver as many pieces of food as possible. And I just read a report the other day that they probably aren't going to expect profitability from Uber Eats for a very long time, probably years out. We'll be right back. Mike, so let's talk about why this business model hasn't worked for Uber. Because, as you said earlier, this theoretically can work. It has

worked for Amazon, for Facebook. So what is so uniquely non-functional about it for Uber? The first 10 years of Amazon's business, they spent building out warehouses. They spent sort of building new infrastructure and things that can't be easily replicated by a bunch of their competitors. The first 10 years of Uber's business were just spent growing and creating this network. But as it turns out, you can catch a ride from anyone and not really care much about who you're getting it from. So whereas Amazon, you know, I'm locked in. I have my Prime subscription. You know, I'm not going to go to Walmart.com or Jet or whatever because Amazon's hooked into my life. But Uber, I could give or take depending on what service I feel

most comfortable riding with. So add to that the idea that Uber's brand has been toxic and sort of tainted with people in their minds. And the idea that they could easily go to a competitor like Lyft or Didi in China and Brazil or Ola in India. And at the end of the day, what has Uber really built in terms of its defense against its other competitors? So, Mike, you're saying it's comparatively quite easy to compete with Uber in a way that it's not with a company like Amazon. And yet I wonder, why did it take Uber this long to recognize this problem? The idea that it is so easy to compete based on the technology here seems like something that the founders and the investors would have absorbed pretty early on. I mean, it seems obvious in retrospect, right? Right. It's hard to think back to 2010, 2011, but Uber really was the only game in town back then. Like, all these competitors didn't really exist. They were able to raise billions of dollars.

competitors didn't really exist. They were able to raise billions of dollars. Travis would sort of block investors from investing in competing companies. And it seemed like they were remaking the whole economy, right? I mean, I remember when the idea of a gig worker was just totally novel and new and they were the ones offering it to folks. And this was going to upend how people were working. And now think of how many businesses are the Uber for X. If you don't want to go work for Uber, you can go work for DoorDash or TaskRabbit or whatever. It's really not fundamentally that difficult of a business when you can easily replicate it as a competitor. And I think the idea that this business is not that defensible really came on

quickly, especially when Uber was having just a nightmare 2017. And now they've had to really shift a lot of the assumptions that they had early on that Uber was going to be the only company to go to. And so that's been a tough shift for them. They've really had to change very quickly in a very short amount of time. I have to imagine at this point, as Uber is posting billions of dollars in losses in a single quarter, that those original investors in the company who bet on this dominant strategy that has not yet come to fruition are very unhappy. No, I think they're actually pretty happy. Why? Everyone who got in early on Uber made a killing.

You know, there was one guy who parked $5,000 in the company early on, and that turned into a $20 million investment for him. And he did absolutely nothing. Wow. Anyone who got their money in on the ground floor is very happy with how things turned out. I mean, how exactly is that possible if the company has never made any money? Anyone who bought shares in Uber early on, all they had to do was basically spot the idea and sit on their investment for years. So by the time you get to an initial public offering, which is when people like you and me can actually buy shares

of this company, those early investors can sell their shares at an insane profit. The company's worth billions of dollars. All of the gains that they realized have occurred in the 10 years that they were a private company. Whereas you and I are buying shares on day one and just hoping that that company value continues to go up in the future. And on day one of Uber's IPO, the value has only continued to plummet. And anyone who bought shares on the first day have only lost money, essentially. So I think Uber has been a wonderful business for venture capitalists because it made them a ton of money early on. I wonder if Uber is a wonderful business for normal people who want it to be profitable one day.

But that really is how companies work out here. You know, if you're an early VC, you kind of don't care, you know, the fate of these companies and whether they turn into viable businesses because you made your money early and then you can get out. ever made money, those investors did make a huge amount of money from the IPO. And I wonder if you think that that fact, that reality of how things work out there in Silicon Valley has contributed to the kind of growth that Uber experienced, which was this kind of heedless subsidized investment into profitability that never materialized. Yes, that's common out here. And I think that's just going to continue occurring because that's how the model works. So Mike, what happens now? Uber can't continue hemorrhaging billions of dollars forever. And at this point, a decade is starting to feel kind of like forever. Well, you know, they're doing a lot of different little short

term things right now to try and save money, doing some layoffs in their marketing department, cutting back on the birthday balloons that they give to employees each anniversary, which is going to save them like 200 grand a year. $200,000 on employee balloons. Yeah, that's a big expense for them. But I think the bigger questions of how long are we going to stay in this business? Are scooters, you know, something we can actually make money from? When do we stop competing on food delivery and spending insane amounts of money to compete in India or Brazil or wherever else we're losing money? I think probably they have maybe one or two years of

time before the stock really starts taking a hit. And plus, the bank account doesn't last forever. They only have X amount of dollars of cash on hand. So I imagine within the next two years, they have to really decide what is core to being Uber. What is core to our business and what can we continue doing without losing money that people will actually use and make us a viable business in the long term. Okay, so let's say Uber doesn't figure out how to make a profit before it runs out of money. And perhaps the company stops operating. What will Uber's effect have been on all of our lives? I think the sort of ironic point here is that Uber pioneered a category like ride sharing and delivery and on-demand services. And that's, you know, you have to give them a lot of credit for

that, but that can exist in a world without Uber. I think on-demand services are always going to be here, whether Uber figures out its business model or not. I think another thing is in the past 10 years of drivers flooding into cities and the way Uber has changed how people get around, it really has fundamentally changed how cities operate now. They've created entire new pickup zones and airports for people to get Ubers. Public transportation funding isn't what it was because ridership might be down in certain cities and people that can't afford to take Ubers may not be having the greatest experience on a bus or a subway now just because of how that's affected it. I think Uber will have this lasting impact on cities and how we get around, whether it continues to exist or not.

And I don't know if that's always a positive thing, but I think it's going to affect us for a pretty long time to come in ways we haven't even really thought about. So in the end, like, Uber accomplishes something pretty extraordinary. It creates a new industry. It changes how millions of Americans travel, how cities, as you just said, think about transportation. It challenges and undermines this iconic American industry of taxi cabs.

In many ways, it creates the gig economy. It does all of that, but it just never builds a profitable business. And that may mean it doesn't operate as that business. I mean, whether you think that's a tragedy or a comedy or whatever, I think that's just pretty emblematic of how businesses work out here. In Silicon Valley, there have been more startups that have been more transformative on how the world operates in the past 10 years than I can really even think to remember. And a lot of them continue to burn cash and don't make money on the public markets and maybe don't plan to and

continue selling that idea to people that this business doesn't have to make money right away. And I don't see that changing anytime soon. Turns out, whether your company actually makes money or not, it can still end up affecting billions of people around the world. Mike, thank you very much. Hey, thanks for having me. We'll be right back. Here's what else you need to know today.

Stop the coup! Stop the coup! Stop the coup! On Wednesday, in an unusual mood, Britain's new Prime Minister, Boris Johnson, announced a plan to shut down Parliament for several weeks in what appeared to be an extraordinary attempt to silence opponents of his plans to leave the European Union. Stop the coup! Stop the coup! Stop the coup! The decision drew outrage from members of Parliament who compared the manoeuvre to a coup. It's absolutely outrageous. And if MPs don't come together next week

to stop Boris Johnson in his tracks, then I think today we'll go down in history as the day UK democracy died. Officially, the decision to shut down Parliament must be made by the Queen. And hours after Johnson proposed the idea, the Queen, as is customary, quickly approved the plan. Anne. Hey, everyone.

I wanted you to hear it from me first, that after more than eight incredible months, I'm ending my presidential campaign. Senator Kirsten Gillibrand of New York, who campaigned for president as a champion of women and families, is dropping out of the 2020 race. I know this isn't the result we wanted. We wanted to win this race. But it's important to know when it's not your time and to know how you can best serve your community and country. Gillibrand failed to qualify for the third presidential debate scheduled for next month, a development that she described as fatal to her candidacy.

That's it for The Daily. I'm Michael Mabara. See you tomorrow.