michael barbaro

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 29.

archived recording 1 Scandal rocks Uber. An urgent investigation as a former employee makes explosive allegations of sexual harassment against women. archived recording 2 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. archived recording 3 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. archived recording 4 Facing a series of scandals, Uber sees another executive hit the door. archived recording 5 — announced the departure of another executive. archived recording 6 New trouble for the C.E.O. of Uber. Travis Kalanick is apologizing for a video showing him berating one of his own drivers. He now admits he needs “leadership help.” archived recording 7 Now to a major shakeup at Uber to tell you about. The C.E.O. and founder of the ride-sharing services out of a job this afternoon, Travis Kalanick. archived recording 8 Travis Kalanick is resigning as C.E.O. archived recording 9 Now the big question, who should replace him? archived recording 10 After being plagued by scandals, Uber is trying to get back on track with a new C.E.O. archived recording 11 Well, Uber’s new C.E.O. is wasting no time. Dara Khosrowshahi says the ride-hailing company could go public in as soon as 18 months. archived recording 12 Well, start your engines. Uber pricing its I.P.O. at $45 a share. archived recording 13 This implies a market valuation of about $82.4 billion. It’s expected to be the largest I.P.O. of 2019 and the biggest since Alibaba’s $25 billion debut in 2014. archived recording 14 Uber burned through a staggering amount of money in the second quarter. The ride-share company said it lost $5.2 billion dollars. archived recording 15 $5.2 billion. archived recording 16 $5.2 billion. archived recording 17 Its biggest quarterly loss ever.

michael barbaro

Mike, the last time we talked, Uber had pushed out its founder and C.E.O., Travis Kalanick, very publicly. They vowed to change this kind of wayward, problematic corporate culture, which you spend a lot of time chronicling. They had a huge I.P.O. 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?

mike isaac

Well, 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.

michael barbaro

So Uber has never once made a profit over the last decade?

mike isaac

That’s right.

michael barbaro

I wonder if you could explain how that’s possible.

mike isaac

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 kick-start 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.

michael barbaro

How exactly is it supposed to pay off?

mike isaac

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.

michael barbaro

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.

mike isaac

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.

michael barbaro

And Mike, how unusual was that model, burn money, build saturation, hope for a profit?

mike isaac

I mean, Facebook’s actually a good example of that. 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.

michael barbaro

Mm-hmm.

mike isaac

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.

archived recording 1 Uber has raised more than $1 billion from institutional backers, which, of course, does include Goldman Sachs and several venture capital firms. archived recording 2 Well, Google invested almost $1 billion in Uber. That’s the biggest they’ve invested in anything ever. archived recording 3 According to The New York Times, Saudi Arabia’s public investment fund has infused $3.5 billion in San Francisco-based Uber.

michael barbaro

And what is Uber doing with all of these billions of dollars that investors are handing over?

mike isaac

So let’s break it down to the granular level. Imagine that a ride costs $10, right?

michael barbaro

Mm-hmm.

mike isaac

Uber might pay $2 or $3 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. Thirty percent of that goes to the driver. So at the end of the day, Uber ends up making, like, $2 or $3 on the ride. But count all their overhead, and maybe they lose $1 or $2 on the ride.

michael barbaro

Hmm.

mike isaac

Now, multiply that by millions of rides per day in each city across the United States. And then move out of the United States, and then there’s millions more in other cities outwards. So in theory, they might be losing millions of dollars in each city every single day.

michael barbaro

Wow.

mike isaac

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 forget about the consequences. We can actually afford to pay them off. So whether that’s in 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 a cost of doing business. And so this is how we need to push through.

michael barbaro

So Uber’s 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 to profit?

mike isaac

Yep, that’s right.

michael barbaro

O.K. 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?

mike isaac

Yeah. I mean, if you think back to 2015, 2016, Uber was on top of the world.

archived recording 1 Uber, O.K., doing a great job, right? We all like Uber. Here’s the thing. archived recording 2 Every decade there’s a company that comes along that sort of changes everything. archived recording 3 It all started as a ride-sharing app. And it’s exploded into a global force, disrupting the entire transportation industry. archived recording 4 The ride-sharing company’s most recent funding round giving Uber evaluation of, get this, $68 billion.

mike isaac

They were open in almost every continent. They were actually crushing their competition. Lyft was on its deathbed, basically, trying to get people to use the service. But it seemed like Uber really was going to win.

michael barbaro

Mm-hmm.

mike isaac

And then 2017 happened.

archived recording In the past year, the company has faced crisis after crisis, including accusations of stealing self-driving technology from Google — [CROWDS CHANTING] — and protests by drivers. archived recording 1 #DeleteUber — people around the world are deleting their Uber app because of Uber’s link with President Trump. But today — archived recording 2 The C.E.O. of Uber is out. It was an investor revolt that led Travis Kalanick to resign, after months of turmoil, just a —

mike isaac

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.

michael barbaro

Mm-hmm.

mike isaac

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 revived this competitor.

michael barbaro

Hmm.

mike isaac

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.

michael barbaro

So what does Uber have to do to adjust to this new problematic environment?

mike isaac

So Uber’s answer is to spread into a bunch more money-losing businesses.

archived recording Folks need food, and I bring it to them. I’ve been called a liaison of linguine, the convoy of cakes. Ooh! Most people just look out their window and say, hey, it’s Uber Eats dude.

mike isaac

They started moving into Uber Eats, their food delivery service.

archived recording They’re the latest addition to the bike-share craze, with a twist. Jump is an electric bike. It gives you a boost to cover more ground with every pedal.

mike isaac

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.

archived recording Everyone knows about Uber and the way it’s transformed the taxi business. But if you ever heard of Uber Freight? Think of it as Uber for truck drivers.

mike isaac

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. And we want Uber to be every part of your life, from commuting to work to getting McDonald’s delivered to your house at the end of the day.

michael barbaro

And the idea within this platform is still to subsidize each of these experiences.

mike isaac

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.

[music]

michael barbaro

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?

mike isaac

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.

michael barbaro

Mm-hmm.

mike isaac

The first 10 years of Uber is 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.

michael barbaro

Hmm.

mike isaac

So whereas Amazon, I’m locked in. I have my Prime subscription. I’m not going to go to Walmart.com or Jet or whatever, because Amazon’s hooked into my life.

michael barbaro

Mm-hmm.

mike isaac

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?

michael barbaro

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.

mike isaac

It seems obvious in retrospect, right?

michael barbaro

Right.

mike isaac

It’s hard to think back to 2010, 2011. But Uber really was the only game in town back then. All these 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 do 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.

michael barbaro

Mm-hmm

mike isaac

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.

michael barbaro

Right.

mike isaac

So that’s been a tough shift for them. They’ve really had to change very quickly in a very short amount of time.

[music]

michael barbaro

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.

mike isaac

[LAUGHS] No, I think they’re actually pretty happy.

michael barbaro

Why?

mike isaac

Everyone who got in early on Uber made a killing. 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.

michael barbaro

Wow.

mike isaac

Anyone who got their money in on the ground floor is very happy with how things turned out.

michael barbaro

How exactly is that possible, if the company has never made any money?

mike isaac

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.

michael barbaro

Mm-hmm.

mike isaac

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.

michael barbaro

Mm-hmm.

mike isaac

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 I.P.O., 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.

michael barbaro

Mm-hmm.

mike isaac

But that really is how companies work out here. If you’re an early V.C., you kind of don’t care the fate of these companies and whether they turn into viable businesses, because you made your money early, and then you can get out.

michael barbaro

So for the super-wealthy early investors, it isn’t necessarily a problem that Uber has never made money. Those investors did make a huge amount of money from the I.P.O. 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?

mike isaac

Yes, that’s common out here. And I think that’s just going to continue occurring, because that’s how the model works.

michael barbaro

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.

mike isaac

Well, 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, $200,000 a year.

michael barbaro

$200,000 on employee balloons?

mike isaac

[LAUGHS] 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 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 elsewhere 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.

michael barbaro

O.K. 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?

mike isaac

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 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.

michael barbaro

Hmm.

mike isaac

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 in 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.

[music]

michael barbaro

So in the end, Mike, 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.

mike isaac

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.

michael barbaro

Mm-hmm.

mike isaac

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.

michael barbaro

Mike, thank you very much.

mike isaac

Hey, thanks for having me.

michael barbaro

We’ll be right back. Here’s what else you need to know today.

archived recording [CROWDS CHANTING]

michael barbaro

On Wednesday, in an unusual move, Britain’s new prime minister, Boris Johnson, announced a plan to shut down to Parliament for several weeks in what appeared to be an extraordinary attempt to silence opponents of his plans to leave the European Union.

archived recording [CROWDS CHANTING]

michael barbaro

The decision drew outrage from members of Parliament, who compared the maneuver to a coup.

archived recording It’s absolutely outrageous. And if M.P.s don’t come together next week to stop Boris Johnson in his tracks, then I think today will go down in history as the day U.K. democracy died.

michael barbaro

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. And —

archived recording (kirsten gillibrand) Hey, everyone, I wanted you to hear it from me first. But after more than eight incredible months, I’m ending my presidential campaign.

michael barbaro

— Senator Kirsten Gillibrand of New York, who campaigned for president as a champion of women and families, is dropping out of the 2020 race.

archived recording (kirsten gillibrand) 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.

michael barbaro