In the last seven months, Uber has endured:

The #DeleteUber campaign

The fallout from Susan Fowler Rigetti’s blog post, including the Holder investigation and report

A lawsuit from Waymo alleging the theft of intellectual property

Multiple revelations of past misconduct, including Greyball, which has prompted an investigation from the Department of Justice

The forced resignation of founder and CEO Travis Kalanick, and then, earlier this month, an explosive lawsuit against Kalanick from the company’s biggest investor

And, at the end of all that drama — and this is only a partial list (as of the time of this writing Techmeme has had 280 posts about Uber in 2017) — Dara Khosrowshahi, the very successful, very stable, and very well-compensated CEO of Expedia, jumped at the opportunity to take the helm, beating out GE CEO Jeffrey Immelt and and Hewlett Packard Enterprise CEO Meg Whitman for the honor…it’s an honor, right?

In fact, I think Khosrowshahi is a great choice for CEO, and understanding why goes a long ways towards explaining why the Uber job remains an attractive one, even after the worst seven-month stretch in startup history.

Aggregation

Most news stories are making the obvious point that Khosrowshahi is qualified because he is a CEO for a tech company in the travel industry. What is even more relevant, though, is that Khosrowshahi is the CEO of an aggregator. Expedia and other online travel agents (and their associated stables of sites) have built businesses by focusing on discovery: instead of having to find hotels directly, a customer can go to Expedia and simply search for a location.

This, by extension, draws supply; while hotels may complain about having to pay OTA fees, the truth is the volume driven by the OTAs is well worth the cost — and Khosrowshahi has been willing to remind hotels of that fact. Indeed, Khosrowshahi had to learn just how powerful the effect of aggregation on suppliers can be. In an oral history on Skift about online travel, Khosrowshahi (who was then CFO of Expedia controlling-shareholder IAC/Interactive) recounted how it was that the company passed on Booking.com:

I think the Expedia team had taken a look at Booking.com and Active [Hotels, acquired by Priceline in 2005 and 2004, respectively] and again had passed. And, I think it was because we were attached to the merchant model and we were attached to high margins at the time.

The merchant model Khosrowshahi is referring to is where an OTA buys rooms at a wholesale rate and then sells them to end users; the advantage is a bigger margin on the sale of a room plus a positive cash cycle: the customer pays immediately but the OTA doesn’t pay the hotel until the stay occurs. The disadvantage, though, is that it requires making deals with hotels to buy rooms. Former Priceline CEO Jeffery Boyd, in the same oral history, explained what made Booking.com unique:

What the guys at Booking.com did the best really was that they understood how to basically address the entire market and not just the big chain hotels, the Accors and Marriotts and Hiltons in London, but ultimately leads to find demand for and service hotels in all countries, small towns, small hotels.

Booking.com used the agency model: instead of selling rooms at a markup Booking collected a commission on the rooms booked through its service. This meant significantly lower margins, no money until the stay occurred, and even then collection required some sort of enforcement mechanism.

The payoff, though, was tremendous: Booking.com, unlike Expedia, had minimal transactions costs for customers and suppliers. Hotels could sign up for Booking.com on their own instead of having to negotiate a deal, which meant it was Booking.com that led the industry in growth for many years; the full payoff of owning discovery in a world of drastically reduced distribution and transaction costs comes not from extracting margin from a limited set of suppliers, but rather from expanding the market to the greatest extent possible, creating the conditions for a virtuous cycle of more customers -> more suppliers -> more customers.

To Khosrowshahi’s credit he learned this lesson: Expedia was in big trouble in the years after he took over, and one of the changes Khosrowshahi made was to add the agency model to Expedia’s properties (Expedia now has a hybrid approach). It is a lesson that will serve him well as Uber’s CEO; the fundamental mistake made in so much Uber analysis comes from believing that drivers are the key to the model. For example, there was a very popular piece of analysis some months ago premised on evaluating the cost of driving for Uber relative to driving for a traditional cab company. It was a classic example of getting the facts right and missing the point.

In fact, what makes Uber so valuable — and still so attractive, despite all of the recent troubles — is its position with riders. The more riders Uber has, the more drivers it will attract, even if the economics are worse relative to other services: driving at a worse rate is better than not driving at a better one.

To that end, Uber’s strength — and its sky-high valuation — comes from the company’s ability to acquire customers cheaply thanks to a combination of the service’s usefulness and the effects of aggregation theory: as the company acquires users (and as users increases their usage) Uber attracts more drivers, which makes the service better, which makes it easier to acquire marginal users (not by lowering the price but rather by offering a better service for the same price). The single biggest factor that differentiates multi-billion dollar companies is a scalable advantage in customer acquisition costs; Uber has that.

Indeed, Uber’s position is in this respect stronger than Expedia’s: Expedia is an aggregator of sorts, but a huge portion of its audience in fact starts with a Google search, which means Expedia must pay Google a huge “tax”, in the form of search ads, to acquire users. Moreover, Expedia lives in constant fear that Google is simply going to fill the OTA role directly; that is why Expedia was a complainant in the EU’s antitrust case against Google. An even more pressing concern is Airbnb, which is forging its own customer relationship and own supply, and could (should?) move into hotel booking as well.

Finance

Expedia’s experience with Google as intermediary has its advantages: OTAs like Expedia and Priceline are, by necessity, the absolute best at testing and measuring the return on investment of outbound marketing, particular search advertising. That specific skill may not be particularly useful to Uber, but what the company certainly needs is a far more disciplined and exact approach to its accounting.

A few months ago, when Uber lost its head of finance Gautam Gupta, The Information reported that:

Financial-performance data tools that Uber executives use for internal purposes have a long way to go, according to two people who have been briefed about the issue. For instance, Uber until recently didn’t have a way to accurately calculate the amount in bonuses that Uber paid to drivers in, say, the past week.

As I noted in a Daily Update at the time, this is staggering: Uber cannot measure the “single most important factor in [its] profitability” on something approaching a real-time basis. Moreover, as I wrote then:

The implication of this lack of tracking is that Uber may not have a clear picture as to what its unit costs are; as I noted in a Daily Update last year about Uber’s unit economics, driver bonuses based on meeting a quota of rides in a specific time period are absolutely variable costs that should be allocated to a unit cost calculation. But, if Uber doesn’t even know what those costs are in anything approaching real time, how can it really know what its unit costs are?

No wonder Benchmark, the investor that is suing Kalanick, listed the lack of a CFO as a reason for its lawsuit. And in that light, Khosrowshahi’s finance background is an asset, not a liability. Nothing is more important for Uber than getting its books straight, because I suspect the company’s tactics might change as well. From that Daily Update:

It is worrisome that these bonuses are the key to profitability; I have long argued that Uber wins not by monopolizing drivers (i.e. supply) but by monopolizing riders (i.e. demand). And, optimizing for demand would suggest giving drivers a bigger cut of each ride such that marginal drivers (i.e. those that aren’t in a position to earn those volume bonuses) are encouraged to come on to the network and improve liquidity. Of course, higher driver payouts quite obviously impact unit economics; if bonuses, at least in Uber’s accounting, do not, then its easy to see how a suboptimal decision that favors bonuses over higher payouts could result. Accounting matters!

In other words, I think that Uber’s use of the bonus model with drivers has the whiffs of Expedia using a merchant model: it makes sense in the short term (in this case, monopolizing the time of professional drivers such that they can’t drive for the competition) but it ignores the long term value of having less friction for suppliers to come on board (that is, the part time drivers that overwhelmingly favor Lyft). Khosrowshahi’s painful lesson with Booking.com may be an advantage here as well.

Turnarounds

I noted that Expedia was in trouble at the beginning of Khosrowshahi’s tenure; in fact, the company’s situation deteriorated over Khosrowshahi’s first few years, culminating in a $2.52 billion loss for 2008. To be fair the biggest part of that loss was the write-down of intangible assets layered on top of the Great Recession, but the truth was that Expedia had been slumping for a long time.

In response Khosrowshahi did something that may have seemed quite risky: instead of trying to apply a quick fix to the business, he led a complete rebuild of the underlying platform that powered Expedia and its various house brands. This new platform not only enabled the shift to the agency model noted above, but dramatically improved the company’s ability to test and iterate its offering. Moreover, because the platform was designed to work with multiple brands, it set Expedia up for its recent acquisition binge, including Orbitz and HomeAway; critics say the company has bought growth, I say that owning more customer touchpoints, provided you can execute against them, is exactly what an aggregator should be doing.

The deeper takeaway, though, is that Khosrowshahi has demonstrated the patience and resolve to fix problems at their root. In the case of Uber, the business may be in better shape than Expedia’s was (pending the fixing of finance, of course), but as this year has made clear the culture needs a fundamental reworking, not simply a fresh coat of paint. Khosrowshahi seems like an ideal candidate to take on the problem at a fundamental level, and has already shown at Expedia that he is willing to walk the walk on issues of sexism in particular.

It is easy to mock Uber and the ridiculous CEO selection process that resulted in Khosrowshahi getting the job. Even the final selection process itself was a joke: in the span of 24 hours the presumed favorite shifted from Immelt to Whitman to the surprise selection of Khosrowshahi, with Uber reporters literally changing their stories by the minute as board members leaked like sieves in an attempt to rally public opinion to their sides. Without question Uber has been horrifically served by its board of directors — all of them.

And yet, the company has landed on a candidate that I am quite enthused about, and that, I think, is a reminder of just why Uber is so compelling. So many tech startups blather on about changing the world; Uber actually is, for the better. To that end, I would argue that one of Kalanick’s greatest failings was in his inability to sell Uber: the company offers a compelling service for riders, an economically attractive one for drivers (who drive by choice), and makes the cities within which it operates better. That the company has managed to become a pariah is the most powerful testament there is to Kalanick’s failure as CEO.

To that end I hope Kalanick and the other members of the board truly give Khosrowshahi the space he needs to rework Uber’s culture, finances, strategy, and image. The fact of the matter is that Uber’s missteps have already cost it much of its global ambitions; Kalanick in particular needs to give the space for Khosrowshahi to aggregate the opportunity that remains.

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