Uber: Most Ethically Challenged Tech Company?
UBER’S VALUATION REACHED $70 billion in 2017 and became the most valuable private startup ever. Yet in the process of achieving such success, Uber’s unethical, if not illegal, activity generated controversy after controversy. Before we look more closely at those ethical issues, we need to understand the business success that could have tempted Uber to engage in ethical shortcuts.
Travis Kalanick, Uber’s co-founder and former CEO, came to be seen as too much of a liability for the comfort of major Uber investors and was pressured to resign the key post. The relentlessly ambitious and combative entrepreneur was well aware of his reputation, which he described during a speech celebrating Uber’s fifth anniversary: “I realize that I can come off as a somewhat fierce advocate for Uber. I also realize that some have used a different ‘a’-word to describe me.”
RECORD-BREAKING GROWTH
In comparison, Facebook took seven years to reach a valuation of $50 billion for a private, venture-capital-backed firm; Uber only five. If we compare Uber with car rental giant Hertz—with some 150 locations, a fleet of 500,000 cars, and about 30,000 employees—it’s astounding to learn that Hertz reaches only about 1 percent of Uber’s valuation!
Uber reached this astronomical valuation because it successfully expanded both in the United States and globally to some 500 cities in 70 countries. As a powerful platform business, Uber’s popularity grows exponentially, as it already transports millions of riders daily and continues to expand rapidly here and abroad. Although Uber is still losing money as it continues to subsidize customer fares, its revenues race ahead, from $400 million in 2014 to more than $8 billion in 2017.
ETHICALLY CHALLENGED?
Trailing Uber’s meteoric rise are multiple lawsuits and accusations, often tied directly to decisions and actions by its co-founder and now former CEO, Travis Kalanick. Consider just some of the incidents and issues in the company’s short history:
Early disregard for laws, rules, and regulations. Within months of its San Francisco launch, the local Metro Transit Authority and the state Public Utilities Commission had to order Uber to cease and desist. They called out Uber as an unlicensed and illegal taxi service. Similar injunctions followed in major markets, including New York City, Los Angeles, Toronto, Paris, London, Berlin, and Delhi. Uber’s response? The company ignored all such warnings.
Dynamic pricing. Unlike the taxi industry, in which pricing is fixed by regulation, Uber uses dynamic pricing, following the model of airlines, hotels, and other industries. Uber’s fares go up or down based on real-time supply and demand. During a snowstorm or on New Year’s Eve, short Uber rides can cost hundreds of dollars! Kalanick argued that surge pricing efficiently matches supply and demand. But many Uber users rant online against the practice and call it price gouging.
Punking the competition. Lyft, the competing ride-share company, accused Uber of ordering over 5,000 rides from Lyft, and then canceling, so Lyft drivers lost business from legitimate rides.
Punking their own drivers. Reportedly Uber told its drivers in New York that they could not work for both Uber and Lyft because of city regulations. No such regulations exist.
Poaching drivers. As part of Uber’s secret Operation SLOG (Supplying Long-term Operations Growth), accusers say Uber brand ambassadors actively target successful drivers from Lyft and other competitors to defect.
Poisoning competitor’s well. Startups live or die based on access to capital. Kalanick reportedly poisoned Lyft’s efforts to raise venture capital, telling investors, “Before you decide whether you want to invest in [Lyft], just make sure you know that we are going to be fund-raising immediately after.”2
Attacking critics. In 2014, Uber senior executive Emil Michael suggested spending $1 million to hire private page 420investigators to dig up dirt on journalists who wrote damaging pieces on Uber, with particular focus on Sarah Lacy, of tech blog PandoDaily. When the remarks became public, Michael apologized, Kalanick decried the attempt, but Michael was not disciplined. (In June 2017, in the wake of Kalanick’s forced resignation, Michael also resigned.)
Tech transfer by stealth. In 2015, Uber opened an Advanced Tech Center in Pittsburgh to develop autonomous cars and sophisticated mapping services. Funding research at Carnegie Mellon University’s National Robotics Engineering Center (NREC) brought Uber access to the university’s scientists. A few months later, Uber poached entire NREC research teams with signing bonuses, twice the salaries, and stock options. The NREC was left a shell, with its entire future in question.
Allegations of sexual harassment and gender discrimination. In 2017, a blog post by a former Uber engineer went viral. It alleged rampant sexual harassment, persistent mistreatment of female employees, and the company’s failure to respond to complaints. The former employee said that women engineers in her work group dropped from 25 percent to as low as 3 percent within a year because of the hostile work environment. She also claimed managers downgraded her performance review for reporting a supervising manager for harassment.
Slow response. It took public outcry for Kalanick to act on the allegations of sexual harassment, although once he took action, he went big. He hired former U.S. Attorney General Eric Holder to lead an internal investigation, working with Arianna Huffington, Uber’s only female board member.
Operation Greyball. Also in 2017, The New York Times exposed Uber’s use of stealth technology for a number of years to foil law enforcement and regulators investigating Uber and its drivers. In a secret operation code-named Greyball, Uber programmed its software to set up GPS rings around government offices and track low-cost phones and credit cards linked to government accounts. Thus, when law enforcement officers posed as Uber customers, Uber showed them dummy screens with fake Uber cars moving, none of which would stop and pick them up. Greyball was deployed worldwide, especially in cities where Uber was outlawed.
Kalanick caught on video. Kalanick did not realize he was being filmed by a dashboard cam when an Uber driver complained about recent fare cuts. As Kalanick left the car, he told the driver, “You know what, some people don’t like to take responsibility for their own sh**,” and slammed the door. The driver uploaded the video to social media, where it went viral. Waymo lawsuit. Waymo, a unit of Alphabet (Google’s parent company), is suing Uber for stealing Waymo’s proprietary self-driving technology. Uber acquired the autonomous-vehicle startup Otto, which was founded by Anthony Levandowski, but at the same time Levandowski was working for Waymo on its autonomous-vehicle program. Waymo claims Levandowski stole more than 14,000 proprietary files. The stakes are high because experts predict that only one or two technology standards will prevail for self-driving technology. Waymo wants to become the default operating system for self-driving cars with its proprietary technology.
FORCED TO RESIGN
Such issues came to a head in mid-2017. In May, the results of the Holder investigation, along with 50 recommendations, were delivered to the Uber board. On June 13, Kalanick took an indefinite leave of absence, citing the recent death of his mother and his need to deal with that personal issue. And then June 21, responding to a letter from key investors, he formally resigned. The investors had expressed no confidence in Kalanick’s ability to continue to lead the company he co-founded.
A Reputation to Live Down. You could say the company developed a reputation to live down. Uber’s ethical challenges were called out publicly throughout its rise, and as early as 2014, venture capitalist Peter Thiel called Uber the “most ethically challenged company in Silicon Valley.”3 Of course, Thiel, the billionaire co-founder of PayPal and Palantir (a data analytics company), is also an investor in Lyft, Uber’s main competitor. Lyft (featured in ChapterCase 9) has a valuation of only $7.5 billion, a bit over 10 percent of Uber’s.
Its Own Worst Rival. Echoing Thiel’s assessment, The Wall Street Journal (WSJ) argued Uber itself—rather than Lyft or old-line taxi and limo services—is its own biggest threat, thereby functioning as its own biggest rival. The competitive tactics and comments by Uber executives and constant scandals surrounding Kalanick are harming the company’s reputation and becoming a liability, the WSJ argues.
DISASTER AVERTED?
Whether symbolic or substantive, Kalanick’s resignation may mark the point at which Uber embraced the ethical standards required to thrive in the big leagues and for the long term. Kalanick’s resignation may come to be seen as the step that saved Uber from itself.
WILL TRAVIS KALANICK’S departure as CEO allow Uber to develop a more grounded and ethical corporate culture? It may take several years to answer that question confidently. But in thinking about Uber’s future, we can make some observations.
A Cynic’s View. Critics may see the resignation of Kalanick as just one more stunt to reduce heat and scrutiny, and unlikely to result in meaningful change. Corporate culture is never easy to change, this line of reasoning goes, and Kalanick, as co-founder, remains a strong presence in two ways. First, even should he sever all ties with Uber, as co-founder he contributed much of the company’s DNA (through the imprinting process discussed in Chapter 11), so the company is prone to lapses by nature. And second, Kalanick has not cut his ties; he still remains intimately involved in the company. Although no longer CEO and chairman, he keeps his board seat. In fact he remains one of three company insiders on the board, along with co-founder Garrett Camp and early employee Ryan Graves. This block holds a majority of the voting rights. Camp, Kalanick’s long-time business partner, is now chairman of the board.
Beyond Cynicism. On the other hand, business as usual for Uber is becoming increasingly problematic. For years running, Uber seemed willing to flout rules, laws, and regulations because the service was liked by users who would not like the service to be removed. Uber’s customers were happy because they could hail rides conveniently and cheaply, often in areas that were underserved by regular taxis; drivers were happy because they could choose when and how long to work; and local politicians were cautious about throwing a monkey wrench in the works. Why make your voters unhappy?
But that tactic works best at the local level, and Uber’s challenges are increasingly broader, both nationally and internationally. Uber now fights well-funded lawsuits instead of hamstrung municipal bureaucrats. So Uber can no longer fly under the radar. Uber is so big and established that the CEO’s boorish behavior or an employee’s complaints about sexual harassment quickly go viral on a global basis.
Eye on the Prize. Uber may be at a point in its trajectory where investors simply won’t allow it to continue a self-destructive tendency to cut ethical corners. Too much is at stake. In this line of thought, the biggest opportunity with Uber is not its current business. Uber’s goal remains centered around self-driving cars, supported by high-powered mobile logistics networks, and online mapping systems. Therefore, in this view, its current business is secondary. Recall from the start of the chapter and ChapterCase that even The Wall Street Journal opined in 2014 that Uber’s biggest potential rival was itself—that only Uber was able to bring down Uber.64
Which takes us back to Uber’s naturally disruptive nature. With a fleet of autonomous vehicles offering cheap rides, people don’t need to own cars anymore. When car ownership is no longer needed, it will certainly impact the old-line car manufacturers. From there Uber might expand into the “delivery of everything,” taking over last-mile deliveries for Amazon.com and other online retailers. Uber might even work in concert with shippers such as UPS and FedEx.
One Possible Future. Note that in this version of the future, in which Uber is the primary player and provider for self-driving car technology, and controls the platform under which we might summon a car to our door, some of Uber’s current challenges disappear. Kalanick was pitching benefits to the consumer when he stated: “The reason Uber could be expensive is because you’re not just paying for the car—you’re paying for the other dude in the car. When there’s no other dude in the car, the cost of taking an Uber anywhere becomes cheaper than owning a vehicle.”65 Not having to deal with drivers must sound attractive to Uber, which has had antagonisms with its work force, as the viral video of the argument between a driver and Kalanick showed. Uber also still has to subsidize rates to the drivers. On the regulatory front it’s reasonable to assume that states will continue to remove obstacles page 439to self-driving cars and the companies that manage them. So in this future, many of its compliance failures go away too.
Current Challenges. But Uber has to get through current challenges to reach its future goals. Before Kalanick resigned, the most visible efforts to deal with scandals and controversies were to manage perception. In 2015 Uber hired David Plouffe as senior vice president of policy and strategy, explicitly to improve public relations and to lobby politicians. Previously, Plouffe had been the manager for the 2008 Obama presidential campaign and then a senior adviser in the administration. At Uber he pitched the social benefit of Uber’s contribution to the transportation ecosystem and its ability to fix traffic congestion, cut down on drunk driving, and provide reliable and safe services to underserved city and suburban areas—even helping to end poverty by providing greater access to reliable transportation. And he minimized criticisms as misguided.66
Exodus of Talent. Plouffe walked away in early 2017. He was followed by Rachel Whetstone, who headed policy and communications globally; she was hired in 2015 and left in April 2017. In fact, a steady trail of senior executives and lead engineers has left Uber in the wake of the continuous scandals that plague the brash startup. They include Uber’s head of autonomous car technology, head of online mapping, and an artificial-intelligence (AI) expert. Some cited issues with the company’s values as the reason for their departure. When resigning after only six months on the job in spring 2017, Uber President Jeff Jones stated, “The beliefs and approach to leadership that have guided my career are inconsistent with what I saw and experienced at Uber.”67
Keep in mind that Uber has not yet gone public, so most executives and engineers likely left millions of dollars on the table when they left. That is, they left behind promised stock options due to their premature departure. Going public is key to understanding Uber in the long run. Uber’s board may have its own timetable for that step, but an IPO will allow Uber’s investors to realize their gains in a big way. If an IPO is part of the board’s plans, the company must develop a more mature, professional, and diverse cadre of managers. Otherwise, Uber’s trail of unresolved ethical issues and lawsuits could derail an envisioned IPO, or at least of realizing full value in the market.
Hope for the Future. If Uber is able to mend its ways—and much depends on how the full board responds to major investors—Uber has a much better chance of realizing the future it hopes will unfold.
1. Have you used a ride-hailing service such as Uber or Lyft? How was your experience?
2. Would like to work for Uber? Why or why not?
3. Explain Uber’s business model and deduce its strategic intent.
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