This time, Uber takes a ride

Inflation has driven a stake through the heart of Silicon Valley's 'blitzscaling' business model – putting Uber, the first, and biggest, examplar, directly in the firing line

It’s the modern quest for alchemy. Every so often, a commercial idea is touted that quite hard-headed types persuade themselves is immune to the pull of financial gravity. Remember the dot.com frenzy in 2000 – the weightless economy and all that? Then, in the years before 2008, complex financial derivatives were credited with having abolished risk. Even Alan Greenspan bought that one, being ideologically incapable of believing that banks and trading outfits could act against their own self interest. Today’s new thing is, or maybe make that was, cryptocurrencies, which now transpire to have no inherent value as an asset class or hedge, are violently climate-unfriendly and of real use chiefly for buying drugs and arms, and money-laundering.  

The longest alchemical run of faith so far has been achIeved by the digital platforms – Amazon, Uber, Airbnb and their Silicon Valley ilk. These too seemed revolutionary at the time. Instead of, you know, the boring old way of figuring out a good way to make money and then using the returns to do more of it, what if we do the reverse: grow so big that we can’t fail and then figure out a way to make money? If another company acquires us, we might not even have to do that! I exaggerate slightly, but not much. Backed by enormous amounts of VC capital, ‘blitzscaling’, as LInkedIn founder Reid Hoffmann dubbed the new business model, soon became Silicon Valley’s startup mode du jour

The idea behind blitzscaling is that when turbocharged by network effects, rapid growth can generate such benefits to scale that the winner takes all – at which point it can turn its mind to capturing the rents of its unassailable market position. Of course, getting to that position costs, big time, but that didn’t seem to matter in the 2010s, when the problem wasn’t finding money so much as something to invest it in. So California is now home to a large number of startlingly-valued high growth companies that not only don’t make any money, but maybe never will, as Airbnb coolly informed investors at its nonetheless successful 2020 IPO.

Yet the glory days of profitless growth may be numbered. The reason is simple and without appeal: inflation. Money is no longer free, and some scared investors even want it back. To appreciate the implications, consider Uber, the poster child for the magical new business model. 

Uber was conceived as the embodiment of Silicon Valley fundamentalism, in particular the technological solutionism that holds that all societal and economic problems can be solved by networked digital technologies, if only the sector’s entrepreneurs are freed up to exercise their basic right to unfettered innovation. Founder Travis Kalanick played the part of Ayn Randian entrepreneur to the full, moving fast and breaking so many things that investors finally intervened to oust him in 2017 to limit the potential damage to Uber’s IPO prospects caused by repeated claims of sexual harassment*.

The scale of Uber’s ambitions was, and is, mind-bending. It currently claims to cover 10,000 towns and cities worldwide, has 3.5 million drivers on its books and carries 120 million active users at its peak. It had to be: nothing less than global domination of the taxi sector would give it the market clout to jack up prices and start paying back its costs. These are equally extradordinary. In its 12 years of operations, Uber has lost more money faster than any other new venture in history. Since 2015, when it started publishing figures, net losses have reached an astonishing $20bn, and they are still rising.  

Inflation is never welcome, but today’s upturn comes at a bad time for Uber. Many of the company’s blitzscaling assumptions have turned out to be wrong, or at least exaggerated. Network effects are much weaker than expected in the presence of fierce competition for both riders and drivers everywhere (all major ridesharing companies are unprofitable), and economies of scale in Uber’s asset-light model much less. Uber doesn’t have a technological lead – Oracle’s Larry Ellison reportedly declared that his cat could have devised a better app. Nor have regulators and city authorities had the grace to roll over in the face of Uber’s daring enterprise, instead insisting at least in some jurisdictions that it take responsibility for externalities like emissions and congestion, and treat its drivers more like employees. Finally, unexpectedly slow progress in bringing autonomous vehicles to reality (in the last two years Uber has ditched its own vaunted driverless car and vertical lift-off aircraft units, along with bikes and scooters) makes it unlikely it will be able to eliminate drivers, and thus its biggest expense, any time soon, delaying world domination still further**.

Inflation only intensifies the smell of burning money. For more than a decade customers have enjoyed rides subsidized by investors at well below cost. They may come to regret it: in that time many smaller, ironically more efficient operators have been driven out of business, reflecting a perverse flow of capital from more to less productive use (another thing to make Greenberg scratch his head). In this situation Inflation is a quadruple whammy – making customers poorer, drivers more demanding and debt dearer at the same time as the capital subsidies threaten to dry up. No wonder that in a recent memo to staff CEO Dara Khosrowshahi declared that the days of plenty were over. ‘Some initiatives that require substantial capital will be slowed,’ he said. ‘We have to make our unit economics work before we go big. The least efficient marketing and incentive spend will be slowed. We will treat hiring as a privilege and be deliberate about when and where we add headcount’.

Put more brutally: the blitzscaling business model is dead, with a stake through its heart. As the FT’s Sarah O’Connor tweeted: ‘Had to LOL at [the above quote] from Uber, a company whose entire strategy has been the opposite since it began’. Financial gravity has reasserted itself. Turns out ‘losses’ really are losses, and money really doesn’t grow on trees. Uber is only tangentially a tech company, and even its disruptiveness isn’t new, being based on a failed semi-monopoly play worthy of the last century’s robber barons rather than something original. So one more alchemical experiment bites the dust, leaving customers in some areas – food delivery, for instance, as well as taxis – worse off as it clears. Yet the hope of a free ride springs eternal: another one will be almost certainly be along soon enough.

*17 July 2922 Recent revelations in the leaked ‘Uber files’ show just how far the company was prepared to go in evading responsibility for its drivers, misleading regulators and secretly lobbying governments in order to get its way.

** In 2016 competitor Lyft’s CEO predicted that by 2021 most of its rides would be in driverless cars, and that in many US cities private car ownership would be practically extinct by 2025.

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