The Economist

Can the ride-hailing giant stay in the fast lane?

AS A teenager, Travis Kalanick’s first job was to knock on strangers’ doors and sell them knives. Now he is trying to dodge the daggers aimed at him and at Uber, a ride-hailing firm that is the world’s most valuable startup. On March 19th Jeff Jones, the company’s president, stepped down after six months, declaring that “the beliefs and approach to leadership that have guided my career are inconsistent with what I saw and experienced at Uber.” At least six key executives and high-ranking employees have left in the past nine weeks. They include Uber’s head of mapping, a former head of self-driving car technology, and an artificial-intelligence (AI) expert who had been put in charge of the firm’s AI research lab only three months ago.

Aggressive and unrelentingly ambitious, Mr Kalanick built his eight-year-old company into America’s largest privately owned technology firm by treading on the toes of different groups, including traditional taxi drivers, other tech companies and regulators. He pushed into new markets abroad and raised an unprecedented amount of capital, to the tune of around $12.5bn, including debt. The firm has a valuation of close to $70bn (see chart).

Yet a remarkable run of bad news for Mr Kalanick, combined with some setbacks for Uber itself, threatens to halt the firm’s momentum. “I have never seen someone have such a bad couple of months,” commiserates the boss of a large, public tech firm. Politics struck first: in January Mr Kalanick was widely criticised for serving on Donald Trump’s businessadvisory committee and for apparently intervening in a strike by taxi drivers opposed to Mr Trump’s ban on refugees. A campaign, called #DeleteUber, took off, encouraging users to stop using the Uber app.

Then worries about Uber’s culture mounted. A former employee wrote a blog post on how Uber’s human-resources department failed to act on her sexual-harassment complaint. Next, an Uber driver filmed Mr Kalanick arguing with him about fare cuts and uploaded the material, including the boss lamenting that “some people don’t like to take responsibility for their own shit”. The latest embarrassment was the revelation that Uber had secretly designed and used a software feature, called Greyball, to evade city officials attempting sting operations to catch Uber drivers violating local regulations.

Two questions face the company. One is whether Uber will continue prospering under Mr Kalanick’s leadership. Silicon Valley and its denizens may celebrate his type, but his public words and actions have made people close to the firm squirm. Bill Gurley, a venture capitalist and early Uber backer who sits on the board, is helping direct a search for a chief operating officer to keep Mr Kalanick in check and bring experience and discipline to the firm. It is certainly hard to keep on top of the firm’s growth: last year, its headcount doubled.

If Mr Gurley and the rest of the board cannot find an experienced candidate willing to work with Mr Kalanick, calls for him to step down may grow louder. But that is his decision to take. Uber is a prominent example of founders’ power at fast-growing tech firms. On its own, Uber’s board does not have the clout to change the CEO, because of his super-voting shares and those of his co-founder, Garrett Camp: together they control a majority of the voting stock.

The second question concerns Uber’s longer-term business prospects. One of the firm’s early-stage investors says that recent events have been a series of “body blows”, but he worries that there could be a “knockout blow” that would permanently damage Uber’s momentum. So far, he says, it looks as if Uber is merely bruised.

From the start of the year to the first week in March, Uber’s market share in America has fallen from around 80% to 74%, according to 7Park Data, which tracks the industry. Lyft, a smaller ride-hailing firm, seems to have been the chief beneficiary. The dip in market share for Uber could reverse, though the firm is unlikely to grow as effortlessly as in the past. There is, at least, still plenty of room to expand at home. Only around 6% of American mobile-phone users hail a ride through Uber and Lyft once a month or more.

Yet Uber’s enormous valuation also depends on the firm pulling off a harder task: dominating most markets for ride-hailing around the world. Fortunately, there is little evidence that Mr Kalanick’s antics have dented its prospects outside America. But the goal of worldwide dominion remains distant, even though no other private technology firm has ever spent so much money to gain a global foothold. It is competing against a strong competitor, Grab, in South-East Asia and was spending billions to compete against its Chinese rival, Didi, until it struck a deal last year to withdraw from the country in exchange for a 20% stake in that firm.

Investors particularly want to see the ride-hailing giant reach profitability in developed markets. Its sales, of around $5.5bn in 2016, are growing rapidly, but it has to spend a lot in American cities where there are rival local firms such as Lyft and (smaller) ones such as Juno and Via. For every dollar that Lyft spends in subsidising fares, it costs Uber four times the amount to hold onto customers and drivers, because of its far larger size. Foreign expansion adds still more expense, and it is unclear whether the competition at home and abroad, which hurts Uber’s chance of becoming profitable, will ever ease up.

There are other threats to watch out for. Uber’s performance depends on its software working smoothly and not being hit by outages, and this could suffer if more executives on the technical side leave. It may also struggle to hire talented engineers during this rough patch.

Another looming problem is regulation. Later this year the European Court of Justice, the European Union’s highest court, will decide on whether Uber is a transport company or just a digital service; if it is judged to be the former, it will need to comply with stricter licensing, insurance and safety rules, lifting its costs significantly in Europe. Last week an American court upheld a law from Seattle allowing Uber drivers a vote to unionise. Other cities are expected to follow suit. A British court will soon need to rule on whether Uber has to pay value-added tax.

As for Uber’s race to move away from human drivers to autonomous driving, obstacles lie ahead. In February Waymo, a self-driving car unit that is owned by Google’s parent company, sued Uber, claiming that former employees of Google had stolen some of Waymo’s proprietary technology when they set up their own autonomous-driving startup, Otto. Last year Uber bought Otto, which makes self-driving kit for lorries, for around $700m.

Patent disputes are common in the tech industry and can take years to play out, but Waymo is being particularly aggressive. It has asked a judge to ban Uber’s use of its lidar technology, which uses lasers to scan a vehicle’s surroundings and is employed in self-driving cars. Uber may settle for a large sum, but the affair adds uncertainty.

Some people close to Uber ask whether all the difficulties will force Mr Kalanick, who has said he never wants to take the firm public, to consider doing just that. It will now be far harder to raise money in the private markets at Uber’s stratospheric valuation. But it is possible to argue the opposite: Mr Kalanick will need the clouds of controversy to clear before going public.

His company’s problems could occur at many startups, but the fact that they have all struck at once suggests its immaturity and a lack of professional management. Given the sums at stake and the blow to the prestige of many in Silicon Valley if Uber failed, there will be no shortage of pressure on Mr Kalanick to prove that he is the right person to stay at the wheel.