Something is out of whack on the expense side.

Waymo, the self-driving car unit of Google’s parent company, filed a lawsuit on Thursday in federal court against Uber and its recently acquired startup Otto, accusing Uber and Otto’s founder Anthony Levandowski, who’d been a project leader at Google’s self-driving-cars project since 2009, of stealing a huge pile of trade secrets.

The New York Times:

In a federal court filing in San Francisco, Waymo said Anthony Levandowski, who runs Uber’s autonomous car division, downloaded 14,000 files from Google a month before leaving to start his own self-driving car company, Otto. Uber acquired Otto in August for $680 million, about seven months after Mr. Levandowski left Google. “Otto and Uber have taken Waymo’s intellectual property so that they could avoid incurring the risk, time, and expense of independently developing their own technology,” the company said in the filing. “Ultimately, this calculated theft reportedly netted Otto employees over half a billion dollars and allowed Uber to revive a stalled program, all at Waymo’s expense.”

This lawsuit sheds new light on a problem Uber has, a problem that transcends all other problems, of which Uber has plenty: In 2015, Uber lost $2.2 billion; in 2016, the losses are said to have jumped to $3 billion.

Net revenue – the amount left over after it pays its drivers – was expected to exceed $5.5 billion for 2016. In the third quarter alone, it lost $800 million on $1.7 billion in net revenue.

But it’s even worse; these figures are based on sources cited by Bloomberg in late December:

Those are rough figures that may underestimate how much money Uber is losing and don’t include interest, taxes or stock-based compensation.

But it doesn’t seem to matter to investors who’ve been eager to throw vast sums of money at it. Uber has received a total of $12.9 billion in funding, according to the Wall Street Journal. The last round of funding valued the company at $68 billion, which is 37% higher than Ford’s market capitalization of $49.6 billion, though Ford generated $152 billion in revenues, a net income (GAAP) of $4.6 billion in 2016, and an “adjusted” (non-GAAP) income of $10.4 billion.

At Uber, the problem is a quirk in the equation: The more revenues grow, the more money it loses. Something is out of whack on the expense side. Or the business model doesn’t work.









“It’s hard to fathom Uber operating so far from profitability at a time when it feels like an established mainstream brand on the global stage,” TechCrunch mused when the losses were leaked. It pointed at the problem that has now become even hotter with Waymo’s suit against Uber:

Human drivers remain a serious cost center for Uber, even as the company has shifted its compensation practices over the years to lower the cost of every trip it makes. Besides having to pay drivers, Uber has to fight competitors to keep them working within the Uber marketplace, which takes incentives, bonuses, advertising and a solid driver-side mobile app. Of course, Uber has also spent money defending itself in multiple lawsuits filed by drivers around employment classification and more.

Uber is spending enormous resources on self-driving-car technologies. This has unfolded in two ways: doing its own research and acquiring other companies, including Otto, the defendant in the Waymo lawsuit.

“There’s an urgency to our mission about being part of the future,” Uber CEO Travis Kalanick said about the acquisition of Otto at the time. “This is not a side project. This is existential for us.”

So if Uber could just get rid of its drivers and all the affiliated expenses and headaches? Self-driving cars would accomplish that. Uber made very aggressive moves in that direction, in its usual manner: throwing vast sums of money at it and ignoring the rules and laws that are in its way. The New York Times:

Late last year, Uber, in defiance of California state regulators, went ahead with a self-driving car experiment on the streets of San Francisco under the leadership of Anthony Levandowski [the former Google guy at the heart of the lawsuit]…. The experiment quickly ran into problems. In one case, an autonomous Volvo zoomed through a red light on a busy street in front of the city’s Museum of Modern Art.

Which was caught on camera. Luckily, no one was hurt or killed. Uber claimed it was human error. The New York Times:

But even though Uber said it had suspended an employee riding in the Volvo, the self-driving car was, in fact, driving itself when it barreled through the red light, according to two Uber employees, who spoke on the condition of anonymity because they signed nondisclosure agreements with the company, and internal Uber documents viewed by The New York Times. All told, the mapping programs used by Uber’s cars failed to recognize six traffic lights in the San Francisco area. “In this case, the car went through a red light,” the documents said. The description of the traffic violation reflects Uber’s aggressiveness in its efforts around self-driving cars….

But why is Uber so desperately eager to get self-driving-car technologies off the ground? It’s not an automaker; it’s not going to build and sell these cars.

It all comes down to drivers. They’re costly. They get paid for time and mileage. And as TechCrunch pointed out, there are the affiliated expenses of maintaining and increasing this army of drivers and keeping them from working at other rideshare companies. This includes the costs of recruiting, advertising, incentives, and bonuses. There are the management resources drivers consume, and the costs of “defending itself in multiple lawsuits filed by drivers around employment classification and more.”

These are variable costs; they increase as revenues increase. They crush the benefits of economies of scale. They might in the end reduce the business model to a no-profit or low-profit enterprise in a fiercely competitive world. For Uber and its investors alike, the way forward would be the hope of ultimately getting rid of the drivers – and all the affiliated expenses. Hence, the utter desperation with which it pursues its foothold in autonomous-vehicle technologies.

With this much money being thrown at autonomous-vehicle technologies by Silicon Valley companies and automakers alike, the industry appears certain they’re happening. But we’re not prepared. Read… Self-Driving Vehicle Revolution to Wipe Out 4 Million Jobs









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