21 June 2017

Travis Kalanick, Uber and the cutting edge of capitalism


There are two theories about the rise and fall of Travis Kalanick. The first is that he was a great man, but not a good one. The second is that he was neither great, nor good, just lucky – that Uber was such a good idea, so perfectly of its time, that it didn’t much matter who was actually running it.

To understand the significance of Kalanick’s departure as Uber’s CEO, it’s worth running through both his extraordinary accomplishments, and the charge sheet against him.

Kalanick did not found Uber, or invent the idea. But he took the app from proof of concept to a global leviathan – a multi-billion-dollar behemoth that operates in more than 60 countries and more than 500 cities, that has both massively expanded the market for on-demand transportation and significantly lowered its cost.

True, Uber was kicked out of China – but it emerged with a large chunk of the country’s dominant firm. And as the age of the self-driving car arrives, Uber is one of the leading candidates to assume control of the transportation industry full stop.

Uber, in other words, is genuinely brilliant. It’s unlocked slack in the economy, turning people with cars and time on their hands into motivated micro-entrepreneurs. It’s made it easier and cheaper for millions of us to get around. It’s helped make us a just-in-time society. It’s unleashed the potential of the smartphone revolution for making our lives easier, cheaper and better.

Even the argument that Uber’s low prices depend less on its efficiency and more on the colossal subsidies it’s spent on building up market share is, in the short term, hardly a problem. You’re saying that billionaire venture capitalists in Wall Street and Silicon Valley want to take £5 off my late-night taxi fare? Please, sirs, be my guest.

But at the same time, Kalanick’s leadership of the firm was distinguished by a combination of hard-charging, screw-the-rules aggression and endemic frat-boy sexism.

If you want a full list of Uber’s transgressions, there are plenty available. The highlights include threats to put journalists under surveillance; accusations of sexism, misogyny, harassment and discrimination; nights out with escorts; secret programmes that hid Uber’s activities from government investigators; secret programmes to order than cancel rides on rival services; alleged breaches of its users’ privacy; misleading drivers about potential earnings; claims that Uber misled both customers and drivers about the length of journeys and pocketed the difference; and allegations from Google that Uber’s attempts to develop self-driving cars relied on the premeditated theft of its trade secrets. (Lawsuits over the last two are still ongoing.)

The immediate question for Uber, then, is whether the basic brilliance of idea is strong enough to weather the storm that is engulfing the company – whether it can sustain its dominant position in the US and see off the challenges of local authorities and national and international regulators (the EU chief among them) who want to force it on to a level playing field with traditional taxi firms.

But more broadly, the story of Kalanick and Uber also highlights several aspects of the modern tech economy, and by extension the modern economy, that are (or should be) of pressing concern.

First among these, for many, is the devastation such firms leave in their wake. If you’re a licensed cab driver who’s paid out vast sums for a medallion, Uber’s rise has left you deeply disgruntled. And the same drivers who have remodelled their lives around their Uber work will be dropped like a shot once self-driving cars are ready for prime time.

For me, the good here far outweighs the bad. Innovation always brings disruption – and in the long run, the number of new jobs and industries created has always outweighed those lost (which isn’t to say that it’s not a deeply unpleasant experience to find your way of life disrupted out from underneath you). But it’s a reminder that we need to do more to retrain those who find themselves in the wrong industries or wrong places – and indeed to retool the education system away from the idea of three years of learning, then the same job for life.

The next issue is that of leadership and ethos. One of the dominant elements of the Silicon Valley ideology – and it is an ideology – is the idea that tech and innovation are driving the world on towards a better future. That’s largely right. But it also breeds an attitude in which those at the heads of such firms are both revered and excused. The rocket-like rise of Uber meant that people ignored or forgave the ethical corners it was cutting, and the culture which Kalanick created – until the evidence of its problems become overwhelming.

More generally, this is a culture where it’s often seen as acceptable to bulldoze past legal or regulatory obstacles in the name of a higher good. The laws and regulations may be stupid – indeed, they often are. But if others are bound by them, it means there isn’t a level playing field, or the proper competition on which capitalism depends.

But the real point about Uber’s rise – and why Kalanick’s departure will not dent its position – is what it says about the structure of the economy.

I wrote this week for the Sun about the extraordinary expansion of Amazon. One of the key drivers behind it, as I point out, has been Jeff Bezos’s allergy to profit. He wanted to reinvest every penny he can in expanding Amazon’s operations – and investors let him, because they could see the prospect of greater profits in the future. That, alongside its admirable and terrifying efficiency, made Amazon very hard indeed to compete with.

It’s the same with Uber. Those venture capitalists are not subsidising our fares because they’re nice people. They want Uber to achieve sufficient market share, or its technology to become sufficiently advanced, that competitors are driven from the market. At which point the cheap fares we’ve all enjoyed become not so cheap after all. (There is an interesting economic debate about whether this is actually possible, but it’s certainly the goal.)

What’s happening, as I’ve pointed out before on CapX, is that the economy is becoming less competitive. Or rather, that it is becoming ferociously competitive until the point where a winner emerges.

The network effects that power online services mean that tech firms are particularly prone to this winner-takes-all model – with every extra friend of yours who joins, Facebook (to give just one example) becomes both more useful and harder to compete with.

But it’s not just technology that’s tending towards monopoly – industry after industry is narrowing down to the point where a few giant super-firms dominate. Which is why people are starting to think very seriously about what monopoly laws could or should look like in this new age – an age when firms like Uber can distort the market not through doing anything wrong, but merely through doing it very, very right.

And in terms of Kalanick’s departure, there’s another point to make about the shifting structure of the markets. What has forced him out, in the end, is investor pressure. Which is exactly what accounted for Steve Jobs at Apple the first time round, before he returned to lead it to glory.

But most tech companies are very far from democracies. Recently, for example, Facebook’s shareholders voted overwhelmingly to eliminate the special class of stock that means Mark Zuckerberg can do what he likes with the company. But because of that class of stock, Zuckerberg could – and did – tell them to eff off.

Even at Uber, Kalanick’s influence is far from eliminated. As the New York Times has reported, he and his allies control classes of shares which have 10 times the voting power of those owned by ordinary shareholders. And a clause inserted into buyback deals with staff members seeking to profit from their own shares insisted that they must follow “the instructions of Travis Kalanick… with respect to any and all matters” subject to a shareholder vote. Indeed, it’s been reported that he still controls a majority of the shares, and will retain a seat on the board.

Yet an increasing number of tech firms aren’t even bothering with such contorted shareholding structures. They just aren’t going public at all.

As of 2015, the US had half the number of publicly listed companies that it did in 1996. The biggest firms, like Apple or Berkshire Hathaway, now make up a huge chunk of the stock exchange – in large part because other firms have either merged, gone private or never listed.

Venture capitalists are now funding not just start-ups, but relatively mature tech firms that would prefer to escape the scrutiny, bureaucracy and dilution of control that accompany a public listing. Which means, among other things, that the average punter is finding it harder to invest in many of the best and most profitable firms.

Many people, in the wake of Kalanick’s fall, are happy that he’s received an overdue comeuppance for his boorish behaviour. But his legacy is not the lawsuits that were served, but the firm that he built – one whose story encapsulates both the amazing opportunity and promise of the digital economy, and the challenges it poses.

Robert Colvile is Editor of CapX