Uber is more fragile than other major tech companies

People think of Uber as a big success story. But it’s not. At least not yet.

Uber dominates the fast-growing ride-sharing market in the United States and much of the world. But three events last month demonstrate how tenuous that dominance still is.

There’s the lawsuit by Waymo, Google’s self-driving car unit, against Uber for allegedly stealing a key piece of self-driving car technology. There’s the bombshell blog post by former Uber engineer Susan Fowler portraying a toxic, sexist culture at the ride-hailing giant. And there was a leaked video showing Uber CEO Travis Kalanick lecturing Uber driver Fawzi Kamel about “responsibility” during an argument over falling Uber earnings.

Kalanick has promised to thoroughly investigate Fowler’s charges, and he apologized profusely for his treatment of Kamel. But apologies and investigations won’t be enough.

Uber has a lot of problems, and it has gotten into the bad habit of trying to paper over those problems with money. It attracts customers by offering them below-cost taxi rides. It built up its base of drivers by offering them a variety of promotions and bonuses. It attracts employees by offering them hugely valuable stock options — and then makes it impossible to cash out early. It has tried to catch up on self-driving cars by spending lavishly on the technology. And it has financed all of this by raising billions of dollars from venture capitalists who hope that all that spending will eventually produce big profits.

But this puts Uber in a precarious situation, because the company’s viability depends on a continued sense of momentum. If investors start to doubt that the company will eventually become profitable, they’ll close their checkbooks, and Uber won’t be able to use money to paper over its problems.

And that’s why periods like the past few weeks are so dangerous for the ride-hailing giant: They cause people to reset their expectations for Uber’s future. If people start expecting Uber to fail, it won’t be long before those expectations come true.

Uber might be the least beloved company in Silicon Valley

The most successful technology companies tend to have idealistic workplace cultures that emphasize goals larger than merely making a profit.

Apple is famously obsessive about producing the best possible user experience — with a “fanatical attention to detail” that extends to things like the door handles in its new headquarters. Mark Zuckerberg writes earnest 6,000-word manifestos exploring how Facebook can become a more positive force in the world. Google has an informal motto of “don’t be evil” and a culture that’s obsessed with solving the hardest technical challenges. Amazon can be a bruising place to work, but it’s also relentlessly focused on improving the customer experience.

These companies don’t always live up to their lofty ambitions, of course, but the existence of these values has helped cement a sense of loyalty among both customers and employees.

Uber is different. Obviously, the company had many fans during its early years when it was seen as a plucky underdog fighting powerful taxi cartels. But years of scandal have tarnished Uber’s image, and today it’s hard to identify any larger values Uber stands for beyond its own continued growth.

Meanwhile, Fowler reports that Uber’s internal culture is one of “complete, unrelenting chaos,” with managers constantly trying to undermine one another in order to curry favor with their supervisors and earn promotions. Fowler, of course, is not a neutral observer, but her account of Uber’s culture dovetails with the perspective of Uber employees who talked to the New York Times.

So why do people keep using and working for Uber? Money has a lot to do with it. Uber has used venture capital money to offer lower fares that attract more customers. Those subsidies also help Uber attract drivers despite often erratic corporate policies and a lack of job security.

On the employee side, the lure of lucrative stock options has a lot to do with Uber’s recruiting success. Many early Uber employees have stock options that are — on paper — worth millions of dollars. But Uber is privately held, which means there’s no public market for stock options. Stock can only be transferred with Kalanick’s approval, and Kalanick has made it practically impossible for early employees to cash out.

Uber has taken a harsher line than Google and Facebook, both of which accommodated early employees who wanted to cash out after a few years on the job. Facebook and Google were confident they could continue to attract top-tier employees even if they let early employees move on to other projects. In contrast, Uber seems to believe that many of its employees will only continue to work there if they’re prevented from cashing in the options they’ve already earned.

The company has equally bad relationships with its drivers, as Kalanick’s bitter argument with Fawzi Kamel demonstrates. Many drivers continue driving for Uber only because they have no choice, and because Uber continues to subsidize their pay in many areas. If Uber runs into financial trouble and has to stop losing money on every ride, it could quickly start losing drivers.

In short, a lot of people don’t particularly like Uber, but they’re just willing to put up with being customers, drivers, and employees because they have a financial incentive to do so.

Time is not on Uber’s side

The big problem here is that Uber isn’t profitable. Most successful technology companies have a core product — Google’s search engine, Apple’s iPhone, Facebook’s social network — that generates massive profits that are available to be reinvested in ambitious new products. In contrast, Uber’s core product is hugely unprofitable, having generated losses of $2.2 billion in the first nine months of 2016 alone.

Uber has convinced investors to continue covering these losses on the theory that they’ll eventually turn into big profits. The idea is presumably that ride-hailing will become a hugely profitable, winner-take-all market. So it’s worth spending big now to capture this lucrative market a few years down the line.

The danger is that Uber’s business model could be completely upended by self-driving cars long before Uber recoups its early losses. So coming up with viable self-driving car technology is essential for the company’s long-term strategy.

But by the time Uber started taking this issue seriously, it was years behind Google’s Waymo unit. Uber raided Carnegie Mellon’s prestigious robotics program in 2015, convincing a bunch of academic experts to help Uber. Then in August 2016, Uber acquired Otto, a self-driving car company started by Waymo veterans just months earlier, for $680 million.

The problem, according to Waymo, is that Otto didn’t develop its own technology from scratch: One of its founders stole technical plans from key Waymo technologies on the way out the door.

We don’t know if these allegations are true — or if Uber knew that Otto had done any of this. But whether the allegations are true or not, this is another example of Uber using cash as a way to paper over a larger problem. Uber has been less successful than other technology giants in developing a culture where the most talented engineers are excited to work, so it was forced to spend lavishly to recruit engineers who developed their technical expertise while working at Waymo.

As a result, the emerging competition between Uber and Waymo is very one-sided. Not only does Waymo have a technical head start, but the massive profits of Google’s search engine profits mean Google can afford to subsidize Waymo for as long as it takes to develop a viable business. Uber, for its part, is trying to play catch-up even as its core business continues to bleed cash.

Before too long, Uber’s cash will run out. And if Uber hasn’t built a viable self-driving car business by then, the results won’t be pretty.