By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants
Brad Stone’s new book “The Upstarts,” is subtitled “How Uber, Airbnb, and the Killer Companies of the New Silicon Valley Are Changing the World,” is the first book-length treatment of these companies. Stone is senior executive editor for technology at Bloomberg News; his previous book was 2013’s “The Everything Store”, a corporate history of Amazon. Stone relies heavily on published news stories and interviews with Uber CEO Travis Kalanick and Airbnb CEO Brian Chesky. The material in the book is split roughly evenly between the two companies, although the comments below will focus on its coverage of Uber.
Does “The Upstarts” provide any new information or thoughtful arguments for people who have been following the Naked Capitalism Uber series, or who are interested in the wide range of issues raised by Uber’s rapid ascendency? Unfortunately not. The major deficiencies in Stone’s argument illustrate why tech industry and mainstream business media coverage has not only failed to investigate seriously the reasons for Uber’s unprecedented growth but also has abandoned any pretense of journalistic independence to become a de facto advocate for Uber’s corporate interests.
Stone openly admits he is not an independent, objective observer, but is out to tell the story Travis Kalanick wants told.
Amazon executives declined to talk to Stone for his previous book, and Stone describes how he proactively sought the cooperation of Uber and Airbnb for this book. Airbnb readily agreed to cooperate, but Kalanick initially refused in early 2015 (“There’s no way in hell I’m cooperating with a book about Uber right now”) and had to be wooed. Stone quotes himself (p.13) as telling Kalanick “If you want people to embrace a radical future in which they give up their cars you have to allow journalists to explain and demystify your story. If you want to change the way cities work, Uber must be understood.” Kalanick remains skeptical, so Stone goes on to describe a narrative featuring backward politicians and regulators protecting “the big taxi guys” while Uber struggles to roll out its innovative new product.
Thus “The Upstarts” cannot be considered journalism; it is Stone’s personal contribution to Uber’s ongoing propaganda program. This is not to say that Stone presents a whitewashed or otherwise warped depiction of events; numerous Uber criticisms and missteps are noted and Stone’s story would have no credibility if he hadn’t. But Stone suggests criticism of Uber is overwhelming driven by vested interests protecting an inefficient status quo and each mention of Uber missteps (e.g. journalist harassment, lying about potential driver earnings) is immediately followed by emphatic claims about Uber’s true virtues.
Stone insists that the multiple reports about Uber harassment of journalist Sarah Lacy and Johanna Bhuiyan under the direction of executive Emil Michaels were all totally fabricated; Michaels only wanted to “create a coalition for responsible journalism.” (p.262). Stone elided the fact that Uber claims that its drivers made over $90,000 a year was willful dishonesty by suddenly focusing on how a Uber recruiter on Chicago’s South Side was creating wonderful opportunities for people short on cash.(p319-21). Willful refusal to obey existing laws is honorable because those obstacles would prevent Uber from “unlock[ing] the true potential of an on-demand transportation service.” (p.299)
As is often seen with writers whose stories are based on access to key insiders, they can help flesh out bits of the historical chronology, and provide some background color on the personalities and styles of those insiders. “The Upstarts” provides a perfectly good (and very readable) overview of the “when” and “who” aspects of the Uber (and Airbnb) stories, but is useless to any reader trying to better understand the “why.”
Much of Stone’s story directly follows Uber’s longstanding propaganda narrative
“The Upstarts” endorses every aspect of Uber’s propaganda narrative, without offering any hard evidence supporting any of the claims.
Uber’s growth was based on powerful technological innovation. “[Uber and Airbnb] have scrawled in the annals of entrepreneurship the most memorable stories of a third phase of internet history—the post-Google, post-Facebook era of innovation that allowed the digital realm to expand into the physical one”(p.7) “The idea was this:..if you opened up the service to anyone with a car and allowed him to pick up passengers using a smartphone app? You could fill empty seats in cars, reduce the chronic congestion on America’s highways, and allow drivers to make money on the side.” (p196). “Because the brilliance of this seamless transaction [via Uber’s App] is so widely accepted in the LCD-lit halls of Silicon Valley that it inspired a surge of similar businesses in the fields of food delivery, package pickup, babysitting services, and so on.(p.7).
Stone makes absolutely no attempt to explain the underlying innovations, but wants readers to believe that the ability to order and track taxis on a smartphone was the most powerful innovation in transportation history. Since Stone does not care about cost competitiveness, he cannot explain whether these innovations had any material impact on productive efficiency, cannot explain why they have not made Uber profitable, and cannot explain why no other company in any other industry has been able to achieve major competitive or financial impacts from them. Stone simply ignores the question of whether Uber’s growth might have been driven by predatory multi-billion dollar subsidies for uneconomical prices and service levels.
Uber’s ultra-powerful business model will work anywhere in the world and will eventually displace car ownership. “Even Uber’s most fervent supporters had not grasped the true potential of the business. Uber wasn’t just taking passengers out of yellow cabs, it was growing the overall market for paid transportation.” (p.251) “Kalanick introduced a more inspirational articulation of the company’s mission…to offer transportation as reliable as running water, everywhere and for everyone” (p.261). “Uber was only halfway to its goals..(quoting Kalanick:) “what if I said there’s going to be no traffic in any major city in the US in five years?” (p.330)
Stone notes that Uber was forced to abandon China after suffering staggering losses, but instead of seeing that the business model might not be universally powerful, or emphasizing that it had burned a billion dollars of the investors’ cash, he cited Kalanick’s characterization of the China venture as “romantic” and a chance to “do something interesting and beautiful.” Since Stone completely ignores Uber financial results, he does not consider the possibility that a business model that lost $2 billion in 2015 and $3 billion in 2016 might not ever earn sustainable profits in a lot of places other than China. He also does explain how Uber could ever lower their costs to the point of being cheaper than car ownership if after seven years of operations they are still billions of dollars away from being cheaper than Yellow Cab.
Uber’s survival depended on heroically fighting “the big taxi cartel” and corrupt regulators. “Uber’s expansion also measured the will of local governments to update antiquated transportation laws for a service that many of its own citizens desperately wanted. This was a litmus test for democracy, exposing whether regulators and legislators were more beholden to their own people or to powerful taxi interests and unions.” (p.300) “The meeting thrust Kalanick into the thick of the familiar battle between new technology and the old, outdated ways of doing things” (p.122) As noted, selling this idea was part of Stone’s sales pitch to get Kalanick’s cooperation on the book, and there are unsubstantiated anti-regulatory claims throughout the book.
The idea that a company with $13 billion in funding from Silicon Valley billionaires had to wage a difficult battle with “”powerful taxi interests” who were fragmented and struggling to survive is too absurd to consider seriously. Even though he acknowledges Uber’s growing use of lobbyists, Stone fails to consider whether the question of whether local politicians and regulators might be more beholden to the interests of a rich, powerful company than the interests of their own people, and whether this might raise any questions about the nature of democracy. Stone tells his readers that unlike regulators, Kalanick was a dispassionate seeker of objective truth. “Facts and intellectual arguments, not charm were his weapons, and he wasn’t about to kiss any political rings.” (p.191) However readers were then told that Kalanick’s factual intellectual argument was that regulatory demands that Uber obey existing rules about insurance and safety was just like the decision making in the Soviet Union that led to the rationing of toilet paper.
As with past startups, losses will soon give way to robust profits. “Uber had discovered what startup gurus call the virtuous circle, the links between various parts of its business. Lower prices led to more customers and more frequent usage, which led to a larger supply of cars and busier drivers, which enabled Uber to further cut prices and put more pressure on competitors.” (p.251).
Stone has no evidence backing his assertion about superior driver utilization, or that overall Uber efficiency improved because of this “virtuous circle”, and the claim is directly contradicted by Uber’s actual financial results. If Uber was achieving significant efficiency gains, operating profit margins would improve. Actual margins showed no improvement whatsoever between 2013 and 2015, and only increased in 2016 because Uber unilaterally reduced driver compensation.
Stone explains much of Uber’s growth by “Travis’ Law” which combines the “powerful innovation” and “regulation is the enemy of progress” themes: “Our product is so superior to the status quo that if we give people the opportunity to see it or try it, in any place in the world where government has the responsibility to be at least somewhat responsive to the people, they will demand it and defend its right to exist.” If true, this would strongly support the hypothesis that Uber was “good for society” but Stone has absolutely no interest in helping his readers understand whether it is actually true.
Uber might be good for society if this alleged huge product superiority can be explained on the basis of huge efficiency advantages that allowed Uber to profitably produce superior service at lower cost, but Uber clearly is nowhere near profitability, and Stone completely ignores all questions of productive efficiency or competitive advantage. If marketplace competition has been badly distorted by the ability of Silicon Valley billionaires to subsidize billions in losses in order to drive more efficient producers out of business (as the Naked Capitalism series had documented in detail) than Uber is more likely bad for society, but Stone also ignores questions about subsidies and the pursuit of monopoly.
Stone fails to ask, much less address many of the most important questions that have been raised about Uber
Uber is the most highly valued private company in the world. While it has received more attention in the technology and mainstream business press than any previous startup, its finances and competitive economics are largely kept secret and poorly understood. Unfortunately Stone makes no attempt to even consider (much less present any hard evidence about) a wide range of critical economic questions including:
- Will Uber ever be profitable? Stone completely ignores all published evidence about Uber’s multi-billion dollar losses, even though his Bloomberg colleague Eric Newcomer has been one of the main sources for these reports.
- Does Uber’s $69 billion venture capital valuation reflect the type of growth and profit potential it might have in the future as a public company? Stone spends two sentences (p.296) mentioning that Uber’s valuation had rapidly grown from $14 billion to nearly $70 billion but makes no effort to explain why Uber became the most highly valued private company in history, or to consider whether the unprecedented valuation is in any way related to unprecedented competitive power or profit potential
- Why did Uber raise $13 billion from investors, a staggering larger amount than any previous startup had ever raised? The only “explanation” Stone provides is a Kalanick quote citing the demands of “operating globally” (p.329). Although he has now written books about both companies, Stone never explains why Uber has required 1600 times as much pre-IPO funding as Amazon, which also competes globally.
- What did Uber’s investors think would drive significant returns on that $13 billion investment? Stone reasonably places Uber’s funding in the broader context of the post-Facebook tech startup investment frenzy. However, just as he fails to consider why Uber got so much more funding than other companies caught up in that frenzy, he makes no attempt to evaluate why those investors think Uber will produce massively greater returns than those other companies
- Why has Uber remained private much longer than past startups, and shown almost no interest in an IPO that might return cash to those investors? At several points Stone seems to presume that Uber had near-term plans to go public, but never explains why they have stayed private much longer than any previous tech unicorn
- Are the major investor subsidies that fueled Uber’s growth (by allowing it to offer more service at lower prices) justified by powerful growth economics? Stone completely ignores the fact that traditional taxis need to charge fares covering the actual costs of trips while Uber fares have been massively subsidized by Uber’s billionaire investors. Hypothetically these subsidies might be justifiable if Uber could rapidly “grow into profitability” but he fundamentally ignores the question of how Uber might eventually become profitable, and never examines whether Uber has the growth economics that powered growth and rapid profit improvement at startups (like Amazon); issues such as scale economies are never mentioned.
- Will Uber provide drivers with higher pay and better conditions than traditional taxi operators? Uber’s “independent contractor” drivers are integral to Uber’s overall business model, but Stone makes no effort to consider whether drivers will be better or worse off in an Uber-dominated industry. Stone notes (p.185) that in 2012 when Kalanick was still focused on more-upscale black car services, he didn’t think mass market taxi service would work if Uber took the same 20% it took out of black-car fares. But Stone ignores the fact (also first reported by a Bloomberg colleague) that Uber now takes 30% of all fares, suggesting that drivers are now worse off than they had been before Uber entered the market.
- How is Uber similar to (or significantly different from) past Silicon Valley-funded unicorns that became profitable public companies? Any comparisons with past startups would depend on the issues that Stone completely ignores such as cost competitiveness, growth economics, profitability, sources of ROI. Stone makes no effort to explain Uber (or Airbnb) in the context of other companies.
- Is there evidence Uber could earn sustainable profits in competitive markets or does Uber believe that investor returns require the quasi-monopoly industry dominance it has been explicitly pursuing? In his epilogue Stone rejects the claim that Uber (and Airbnb) are “merely replac[ing] one set of dominant companies with another” but makes absolutely no effort to explain why readers should share his optimism. His quote misrepresents the situation. Uber is seeking quasi-monopoly dominance of an industry has been highly competitive for a hundred years. His history of Uber provides ample evidence that Kalanick and his investors have long been focused on complete industry domination, and have ruthlessly attacked any company, regulator or journalist that might possibly stand in the way of Uber dominance. Nonetheless Stone completely ignores the question of how Uber would behave with quasi-monopoly dominance, or whether the loss of meaningful competition could be justified on the basis of substantially better service at substantially lower prices.
- Are driverless cars critical to Uber’s future success? On what basis could one Uber to become a major, profitable player in a future driverless car industry? Stone usefully explains that Uber had never considered driverless cars until Google (an Uber investor) demonstrated their own development projects, and never thought to make serious investments in driverless cars until the Google-Uber relationship soured. But Stone does nothing to help readers understand whether driverless cars are now a secondary/incremental opportunity for Uber or (as Kalanick has said) an “existential challenge,” or to understand any of the issues that will affect how a driverless-car industry might develop.
Stone does pose one of the most important questions about Uber, but fails to answer it, and fails to provide any of the evidence that might allow his readers to draw their own conclusions
The central question considered in the Naked Capitalism series on Uber is whether the shift from the pre-Uber urban car service industry to one dominated by Uber would improve overall economic welfare—would overall industry efficiency be significantly greater, would consumers in cities across the world have significantly greater service at significantly lower costs, would the risks from reduced competition clearly be offset by other gains.
Stone poses his own version of this central question about the impact on overall economic welfare. “Did the benefits of their [Uber and Airbnb’s] dominance outweigh the well-publicized drawbacks? What was their true impact on cities? Were they good for society or bad?” (p.243).
Stone clearly wants his readers to believe that Uber has been good for society, but he is unwilling to explicitly say so, unwilling to clearly lay out how he thinks the tradeoff between benefits and drawbacks should be calculated, and unwilling to explain why he thinks the evidence justifies a positive conclusion.
It is impossible to answer Stone’s “is Uber good for society or bad?” question without hard evidence about all this issues that Stone steadfastly ignores–productive efficiencies, the economics behind Uber’s business model and expected investor returns, the sources and magnitude of competitive advantages over the operators Uber has been driving out of business, the sources and magnitudes of any scale or network economies, and evidence as to how Uber might at some point in the future be able to earn sustainable profits in competitive markets.
The issues directly relevant to answering the “is Uber good for society or bad?” are readily quantifiable—how much more service can Uber profitably provide than traditional operators, how much lower are the prices that Uber can sustainably offer, how much did Uber’s innovations reduce the cost of providing taxi service? Readers cannot draw their own conclusions from Stone’s evidence because he ignores all the major economic issues (Uber prices and services currently depend on massive subsidies—what price and service levels could Uber offer on a sustainably profitable basis?), and the pro-Uber benefits he emphasizes are vague (people really like the convenience of Uber’s ordering app) and/or totally unsubstantiated (Uber has reduced urban congestion).
Stone’s objective in “The Upstarts” is to sell his readers on his own version of Uber’s PR narrative, a propaganda story that is not supported by any hard, verifiable economic evidence.
In Parts Six and Seven of this series, I presented a preliminary overview of longstanding Uber efforts to publicize a PR/propaganda narrative, and how it had enlisted a wide variety of outside journalists and tech industry observers to help them promulgate that story.
Nothing in the Uber narrative was based on any objective evidence of actual industry economics, and every aspect of the narrative is contradicted by the industry economic evidence presented in Parts One through Four of this series, e.g. the lack of profitability, the lack of powerful competitive efficiency advantages; the spectacular failure of Uber China and Uber’s limited penetration of other international markets; the dependence on massive predatory investor subsidies and so forth. Thus the focus of this series has shifted from “What does the economic evidence tell us about the impact of Uber?” to Uber’s narrative and the question of “Why has the public discussion of Uber almost completely ignored economic evidence.”
I have deliberately used “propaganda” (instead of terms such as “marketing”) to describe Uber’s communication strategy, because one of Uber’s key objectives is to frame public discussion around emotive tribal/ideological issues in a way that creates an us-against-then, good guys-versus-bad guys dynamic that blocks any attempts to investigate or debate issues based on objective economic evidence. Stone’s belief that he can “explain” the growth of Uber without using any objective economic evidence needs to be understood in that context.
As discussed in Part Seven, one key element of Uber’s effort to block objective economic analysis of its business model and competitive growth is its aggressive effort to suck tech industry analysts and journalists into this good guys-versus-bad guys dynamic so they will want to become active allies in Uber’s fight against competitors and regulators. Uber has framed its market entry as a heroic battle between innovative technologists fighting to provide consumer a vastly superior product against a backward industry and the corrupt regulators protecting them from competition.
This framing engages the tribal loyalty of many in the technology industries who see themselves as avatars of progress and economic growth. Stone and the analysts cited in Part Seven (to use an expression Stone uses multiple times) clearly seem to have drunk this industry Kool-Aid, and was eagerly enlisted in Uber’s fight. Unlike those analysts, who are willing to consider outside viewpoints and often produce critical analysis, Stone is a committed Uber partisan.
Stone uses extensive interviews with Uber (and Airbnb) executives to flesh out the company point of view, but his 335 pages do not include a single interview with anyone who has any understanding of urban transport economics or anyone who has critically examined any aspect of Uber’s behavior. The Airbnb sections reflect the same tech enthusiast myopia and arrogance—it is not just that you don’t need to evaluate any economic evidence to conclude that Uber and Airbnb are the good guys, you don’t even need to think about the history or cost structure or competitive dynamics of the industry they will inevitably disrupt.
Stone’s book also suffers from the structural problems of “access journalism.” Journalists who focus on cultivating big-name inside sources (such as Kalanick and Chesney) will not get that access (and the cover stories and book contracts it makes possible) unless those sources have complete confidence that they will present the story that the sources want told.
By not focusing on business model economics, Stone incorrectly implies that much of Uber’s strategy was hastily improvised in reaction to unexpected threats
In its early years Stone depicts Uber as strongly focused on developing a niche premium product that was not directly competitive with traditional cabs, and was ideally tailored for large, wealthy cities like San Francisco, New York and the capital cities of Europe. All of Uber’s pricing (roughly double taxi fares plus surge markups on days like New Years’ Eve), product standards (Lincoln town cars) branding (“Everyone’s Private Driver”) and regulatory approach (we should be governed by limo rules, not taxi rules) supported a business model focused on establishing a higher-quality taxi/larger-quantity limo service.
In less than two years Uber had clearly transitioned to a company that wanted to serve all urban car service customers everywhere, and totally displace all incumbent operators, and achieve global industry dominance. Stone, who has focused heavily on Kalanick’s personality and style, and not attempted to explain the economics of Uber’s business model, suggests these major changes in strategic direction were unexpected and haphazard, driven by Kalanick’s sudden reaction to moves by regulators and competitors like Hailo, Zimride and Lyft.
Stone also suggests that little of the early investment in Uber had much to do with the (constantly shifting) understanding of market opportunities, and was mostly an intuitive sense that someone with Kalanick’s personality would remain obsessively focused on investor returns through whatever market challenges unexpectedly occurred.
Stone is clearly correct that investors appreciated Kalanick’s monomaniacal style, and that some investment may have been motivated by a sense of what was currently hot in venture capital circles. But Stone’s hypothesis that Uber lacked an underlying strategic vision and was winging it in reaction to sudden, unexpected threats is contradicted by a lot of the evidence he ignores (and even some of the evidence he presents).
A company narrowly focused on providing limo service in a handful of big cities would not have gotten major attention from major Silicon Valley venture capital investors. That community can display herd mentality and is often guilty of the tech myopia/arrogance discussed earlier where the presumed power of “disruptive innovation” preempts the need to understand the economics of the industry you are trying to disrupt. But historical evidence strongly suggests they are extremely focused on possible sources of outsized returns, and would not have invested these staggering sums into a company unless its strategic vision was sharply focused on potential sources of outsized returns.
Stone’s argument that the investors were simply wagering on Kalanick’s style implies that business models and strategic visions are relatively unimportant and Kalanick would have been just as successful had he run Zimcar, Cabulous, Taxi Magic or any of the other failed ventures that preceded Uber.
A much more likely hypothesis is that Kalanick and his investors always had a global dominance strategy in mind; the initial focus on the upscale niche was always a preliminary step that would avoid serious competitive and regulatory pushback before a stable market position could be secured. Stone even notes that Kalanick’s initial reluctance to commit to Uber full time was because he thought the limo model “was a good idea, just not necessarily a big one” (p.7) quotes Kalanick as early as 2010 as saying “I’ll stop at nothing to see Uber go to every major city in the US and the world” (p.123) and notes that by early 2011 he had “expelled from his inner circle anyone he thought might stand in the way of Uber’s manifest destiny to conquer the world.”(p.153) The transition to a global, mass-market strategy may have been accelerated by those unexpected competitive moves, but was always part of the plan.
Uber’s early investors would have been strongly attracted by the profit potential of eventual quasi-monopoly market dominance, and the idea that Uber’s smartphone linked software platform might serve as the basis of that market dominance. Sherwin Pishevar, formerly a managing director at Menlo Ventures, became an original investor in Uber because he believed the company’s platform could provide the basis for sustainable rent-extraction and the company’s model could scale globally. “Uber is building a digital mesh–a grid that goes over the cities…Once you have that grid running, in everyone’s pockets, there is a lot of potential for what you can build as a platform. Uber is in the empire-building phase.”
By focusing on personalities instead of competitive economics, Stone misses the fact that Kalanick and his investors have always had a clear and strongly coherent focus on the outsized returns that would be possible if they achieved quasi-monopoly dominance of the global car service industry. Kalanick could not have made the rapid responses to new threats that Stone described unless the longer-term global mass-market strategy already had the full support of his major investors, and no company can grow this rapidly without strong strategic alignment between owners and senior management.
By focusing on personalities instead of competitive economics, Stone misses much of the evidence showing that Uber’s growth has not and will not be good for society. Kalanick’s ruthlessness is not a mixed blessing that produced a series of damaging mistakes while the company was still an immature adolescent. Every one of those “missteps” (competitor sabotage, lying about driver salaries, journalist harassment, willfully disobeying laws, etc.) was fully aligned with Uber’s overall efforts to defeat anything that might be an obstacle to its pursuit of global dominance. No Uber executive was ever disciplined and no Uber investor ever publically criticized any of these actions. They were all fully aligned with Uber’s overall efforts to reframe public discussion around a heroic battle against the enemies of innovation and progress in order to block public discussion of Uber’s extremely weak competitive economics. “The Upstarts” lays out a great deal of the history showing that quasi-monopoly industry dominance was always Uber’s central strategic objective, and Stone fails to provide any credible evidence as why that outcome will not be bad for society.
 Stone, Brad, The Upstarts: How Uber, Airbnb, and the Killer Companies of the New Silicon Valley Are Changing the World, Little, Brown 2017
 Stone, Brad, The Everything Store, Back Bay Books, 2013
 “Uber doesn’t just set passengers up with drivers. It’s a company starting to dream of becoming a logistical nervous system for cities.” Lagorio-Chafkin, Christine, Resistance Is Futile, Inc. Magazine, Jul 2013.