The real reason Uber was so paranoid.

The Real Reason Uber Was So Paranoid

The Real Reason Uber Was So Paranoid

Innovation, the Internet, gadgets, and more.
Dec. 22 2017 11:22 AM

Why Uber Was So Paranoid

Its business has been vulnerable all along.

Photo illustration by Natalie Matthews-Ramo. Photos by Justin Sullivan/Getty Images and Thinkstock.

Photo illustration by Natalie Matthews-Ramo. Photos by Justin Sullivan/Getty Images and Thinkstock.

Two years ago, Uber was valued at nearly $70 billion—more than General Motors, Ford, or Honda. If it could do for driving what Amazon did for shopping, the thinking went, it could end up controlling more of the personal transportation market than any automaker does today.

Will Oremus Will Oremus

Will Oremus is Slate’s senior technology writer. Email him at will.oremus@slate.com or follow him on Twitter.

The road to global ride-hailing dominance has proven bumpy, however. A series of spectacular scandals and blunders have led to the ouster of its founder and CEO, a high-stakes trade secrets lawsuit with rival Waymo (a sister company of Google), a damaging consumer boycott, and a criminal investigation by the U.S. Department of Justice. Meanwhile, Uber has lost ground in key markets both at home and abroad. A recent bid from Japanese investor Softbank valued the company at $48 billion, a 30 percent discount from 2015 levels.

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Conventional wisdom holds that Uber’s paranoid, unscrupulous management is largely to blame for its predicament. No doubt that’s a lot of it. But what if some of that paranoia was justified? Perhaps part of the reason Uber spent so much time trying to spy on and undermine its rivals was that its market position was always more precarious than it looked.

Historically, major automakers have ranked among the world’s largest and most stable businesses: It took global shocks such as the 1970s oil crisis and the 2008 financial crisis to shake it up, and many of the largest players survived even those. That makes sense, because mass-producing automobiles is an extremely complex and expensive undertaking, which limits competition.

Now, ride-hailing threatens to upend the industry. Uber, Lyft, and others have already taken customers away from taxi and car rental companies. And if self-driving technology proves viable, it could become more efficient for most people to simply order a ride when they need one, rather than buying their own cars. That’s why an Uber that controls a big chunk of a future global self-driving taxi industry could be such a behemoth. Even with its recent struggles, it still controls 70 percent of the U.S. market and harbors grand ambitions abroad.

So why all the cloak-and-dagger stuff? The most recent allegations, detailed in portions of a letter that was unsealed as part of the Waymo suit, depict a vast corporate espionage apparatus whose antics ranged from impersonating drivers to infiltrate private messaging groups to stealing rivals’ code to bribing foreign officials. That’s on top of the company’s long history of sabotaging other ride-hailing apps and systematically evading enforcement by local authorities around the world.

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It’s tempting to blame this all on Uber’s unscrupulous, ruthless, and misogynist corporate culture. But that leaves open the question of why the company is like that. Part of it, surely, was the tone set by the morally bankrupt man-baby at the top. Yet there are also growing signs that Uber’s obsession with much smaller competitors may have been symptomatic of deeper problems with its business model and strategy.

In contrast to automakers, Uber’s business is not particularly capital-intensive. It builds apps, not cars. It is labor-intensive—at least until the self-driving tech is ready—which might seem to pose an obstacle for rivals that have to develop their own networks of drivers. However, Uber made the decision early on to save money by hiring part-time contractors rather than full-time employees. That has been key to its ability to compete with taxis on cost. By the same token, it means that Uber commands little loyalty from its workforce, which remains free to drive for any other ride-hailing company that comes along offering better terms. In industry jargon, Uber drivers face relatively low switching costs.

The switching costs for consumers in the ride-hailing industry are even lower. If you buy a Ford, you’re probably committed to driving a Ford for a while. But you can hail an Uber in the morning, a Lyft at lunch, and a taxi on the way home without making a long-term commitment to any of them—even if you deem the Uber app better than its competitors’, which it is.

#DeleteUber took off because of the company’s PR problems. (The immediate impetus was the perception that the company tried to profit from a January protest of President Trump’s executive order banning travel from seven majority-Muslim countries.) But what made the campaign so potent was that deleting Uber isn’t that hard to do. It’s much easier, for instance, than deleting Facebook, whose powerful network effects mean that no directly comparable alternative exists.

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When your business’s value depends on dominating a market, you’d better make sure that you’re offering a product or service that others can’t easily replicate. Uber built a big lead on rivals through aggressive fundraising and a willingness to take on regulatory barriers in market after market. As a result, the company’s name has literally become synonymous with ride-hailing, even as rivals have cropped up in key markets. That has made it hard for the likes of Lyft to compete with Uber for market share on a national or international level.

But now that Uber has toppled many of the legal hurdles and created a huge market, it’s becoming clear that the barriers to competition are surmountable—especially at the local and regional levels. In Portland and San Francisco, Lyft’s market share is approaching parity with Uber’s, according to a November analysis reported on by Recode. It’s also rapidly gaining ground in Los Angeles and Seattle.

Meanwhile, Uber’s dreams of global ubiquity died in 2016 when it sold its operation in China to homegrown rival Didi Chuxing, in exchange for a tenuous partnership that included a stake in Didi. Now Didi is making major inroads in markets overseas as well, and its valuation is nearing Uber’s own. Today, Uber faces challenges in key markets around the world: Ola in India, Yandex in Russia, Grab in Southeast Asia—the list goes on.

These companies’ services are all very similar to Uber’s. Ultimately, it’s a lot easier to build an effective Uber equivalent for a single city or country than it would be to build an effective Google, Facebook, or Apple equivalent—or, for that matter, a Toyota, Ford, or Tesla equivalent. That’s probably why Google doesn’t feel the need to go around sabotaging rival search engines and Tesla doesn’t seem to spend a lot of energy spying on Fisker.

This is not to say Uber is doomed. With its new leadership apparently intent on cleaning up the company’s act and reputation, it could stop the bleeding and lock up an important position in key markets around the world for years to come, even if it’s not quite the global goliath that investors once imagined.

But it’s also conceivable that the company’s dominance will continue to erode, country by country and city by city, even after its reputation has been shored up—simply because, corporate espionage aside, it’s not that hard to compete with. Uber’s previous leadership may have been nasty in many ways, but it was neither dumb nor modest. The simplest explanation for why it felt such deep insecurity about Uber’s market position is that Uber’s market position was indeed insecure and will only become less secure with time.