28.09.2017
California über alles
Uber’s troubles in London are indicative of the brittleness of the Silicon Valley tech elite, argues Paul Demarty
Much controversy has followed the decision of Transport for London not to renew Uber’s taxi licence in the capital, and one must own up to curiosity as to who holds the American start-up’s British PR contract, for they have done a bang-up job.
Uber has a long-standing habit of urging its users to object to regulatory actions that affect the company; an email expressing “astonishment” at TfL’s decision and pointing readers to a petition against the decision was duly dispatched, and the petition amassed 500,000 signatures with speed (at the time of writing, it stands a little short of 800,000). A fine piece of astroturfing, except for the fact that it does not seem to have worked: London mayor Sadiq Khan continues to back TfL, which in reality would hardly have dared to make such a politically sensitive call without the go-ahead from the top man. TfL is answerable to nobody else, and if Khan is not intimidated, Uber can - as Khan’s predecessor might put it - go whistle.
If it seems for all the world as though Londoners are united in outrage at this new piece of regulation, it is worth maintaining a level of scepticism. Uber has excelled at making friends in high places, muscling its way into those government/tech industry ‘summits’, by means of which top politicians try to catch some of the reflected glory of technological progress, along with Google, Apple, Microsoft and co. In this particular connection, it hardly hurts that one of Evening Standard editor George Osborne’s other 10 jobs is with Blackrock, a major investor in Uber - a fact the National Union of Journalists has urged him to declare as a potential conflict of interest, as he turns his free daily into yet another tentacle of Uber’s PR department.
Nonetheless, the service certainly is popular, due to its speed and attractive price point - a combination that sometimes seem miraculous (and as we shall see later, reality is indeed being defied in Uber’s case). And, as TfL, the mayor’s office and Uber’s numerous critics have fought back robustly on points of fact, the narrative has changed: ‘Mistakes were made - we can change’.
Bad company
It is worth dealing initially with the facts of the case, or some of them at least, to give some context to Uber’s initial countenance of wounded innocence. Four months ago, Uber’s cab licence came up for renewal; but TfL demurred from reissuing it for a further five years, offering a four-month extension for Uber to get its act together. (It is quite striking that, having been on notice for that long, the company could claim to be “astonished” at losing the licence).
The concerns raised by TfL are fourfold, but we will concentrate on two of them. The most ominous is a series of failings in relation to handling criminal matters reported to it. A particular case was reported by senior cop Neil Billany in April, whereby a complaint was made of sexual assault by an Uber driver, but not reported to the police. A few months later, a more serious assault was alleged to have been committed by the same driver against a different woman. Uber dismissed the driver, but still did not report the matter to the police, telling instead the London cab authority, which did contact the police. According to Billany, Uber avers openly that this is company policy:
Uber hold a position not to report crime, on the basis that it may breach the rights of the passenger. When asked what the position would be in the hypothetical case of a driver who commits a serious sexual assault against a passenger, they confirmed that they would dismiss the driver and report to TfL, but not inform the police.
Our friend in blue understands well what is going on here:
The significant concern I am raising is that Uber have been made aware of criminal activity and yet haven’t informed the police. Uber are, however, proactive in reporting lower-level document frauds to both the MPS and LTPH. My concern is twofold: firstly it seems they are deciding what to report (less serious matters/less damaging to reputation over serious offences); and secondly, by not reporting to police promptly, they are allowing situations to develop that clearly affect the safety and security of the public.1
A significant part of Uber’s charm offensive is that it offers a safe, affordable travel alternative for people, otherwise vulnerable, coming home late at night. Given the nature of the allegations against it - which are absolutely routine if we look at Uber as a global concern - this seems particularly ill-judged.
The other aspect of the present charges against Uber worthy of notice is the notorious Greyball software, which Uber is known to have used in some hostile jurisdictions to evade regulation. The idea is simple - identify users of the Uber app most likely to be regulators or officials checking up on Uber’s compliance with city ordinances, and send them a bunch of fake data about who is driving where and how soon you are likely to be picked up. The existence of these methods was exposed by the transport authority of Portland, Oregon, and reported to much fanfare in the New York Times; TfL claims that it is unsatisfied by Uber’s assurances that no such software is being used in London.
It is, of course, devilishly difficult to prove a negative anyway, but - due to the structure of Uber - even harder in this particular context. Here we have to be precise. The cab operator that lost its licence is ‘Uber London Limited’; the smartphone app, however, is operated by Uber, the global company; ULL’s drivers use the same app as any other local Uber operation in the world, but do not themselves control it. Thus the body with which TfL is formally dealing cannot, by definition, offer convincing assurances of good behaviour. (The tax benefits of such a structure, of course, are hardly inconsiderable.)
The London debacle caps off a torrid year for Uber. A series of PR disasters led to the ouster of long-time CEO Travis Kalanick; in particular, the exposure of widespread sexual harassment and corporate dysfunction in Uber’s technology organisation and a leaked video of Kalanick himself berating an Uber driver. He is now the subject of a lawsuit by Benchmark Capital, one of Uber’s main investors, over claims he misled them over these and other issues (including Greyball).
The legal troubles do not end there. Uber’s self-driving car project is in jeopardy, as, Anthony Levandowski - an employee it poached from Google’s subsidiary, Waymo - was accused of taking 9.7 gigabytes of Google’s intellectual property with him. Uber has since fired him, but is still embroiled in litigation over the affair and on the hook for close to $2 billion in damages if Waymo gets what it wants. To that must be added the parlous state of the company’s sub-prime car-leasing division - never intended to be a profitable operation, but a sacrifice in the service of increasing driver numbers - whose losses look to be far more severe than projected. By some counts, Uber stands to lose $9,000 for every car in the scheme, at which point it may as well have just given away second-hand cars for free, with a total loss of $360 million.
Valley of the dolts
Some more simple-hearted readers may be surprised to learn, however, that the running total of the potential losses mentioned above is dwarfed by the actual operating loss of no less than $3 billion ‘enjoyed’ by the company last year.
Such readers, alas, are trapped in the outdated paradigm, which says that businesses should be expected to make a profit, and pay dividends and bond yields to their investors. How antediluvian such attitudes seem from the vantage point of Silicon Valley, which has taken a relatively marginal investment strategy - venture capital - and, for better or worse, rebuilt the tech industry around it.
For the uninitiated, here is roughly how VC works. A firm, just like other investment companies, will start off by opening up a fund and gathering investors’ money, which will be distributed between a large number of companies - let us say, for illustration, 100. All of these investments are high-risk. Any one of the companies, taken alone, is likely to fail. However, say that each one of them has a 1% chance of succeeding to the level of a Facebook, finally coming in glory to the public markets. The odds might be fairly good that one of them will come in, and come in big enough to wipe out all the losses in the portfolio.
So far, it is hardly that eye-catching. Nor is it that surprising that VC is a big thing in tech, which (in theory) involves the inherent risk of research and development and proving out new things in a market that has never seen anything like its product before; hence the connection between the one wing of financial and the other of industrial capital long predates the current tech bubble. Bound up with this strategy, however, there is now a standard story of how a venture-backed start-up can ‘win big’.
The idea is to take investment money and plough it into revenue growth above all else. Costs are (or should be) controlled, but not in the pursuit of short- or medium-term profit, but of keeping the lights on long enough for the company to reach a kind of inflection point, where enough of the addressable market uses its products for the much-prized ‘network effects’ to kick in and growth to become exponential and self-sustaining. The end result is a difficult-to-shift monopoly, from which economies of scale will follow and substantial rents can be extracted.2Then you go public; and the demands of ‘normal’ investors for dividends, etc, kick in.
At this point, we might innocently ask what could possibly go wrong,3 and there are many answers. We should say up front that VC investment is so plentiful in part due to the general economic environment, in which large institutional investors are driven away from their traditional haunts by near-zero interest rates towards more esoteric propositions. (Blackrock, whom we already mentioned, is not a VC fund as such, but a pension manager.) The Federal Reserve once again chickened out of raising rates recently, but presumably will do so eventually.
The risk Uber poses has to do with the internal modes of failure of the VC-backed-tech-start-up model, however. Written into it, as always, is the assumption that not even millions of dollars of free money sloshed at a company can buck the market: it is to be expected that those businesses which cannot reach ‘escape velocity’ will in the end be unable to attract further investment, or at least not at higher valuations, and will fall by the wayside. Indeed, this ‘works’ most of the time, with the half-life of VC-backed start-ups still pretty short.
But does it work all the time? Imagine - if you can! - a VC-backed taxi company. The ‘total addressable market’ of the taxi business is everyone who could ever want to be transported from one place to another relatively nearby place, which surely includes billions of people. It is merely a matter of finding a price that people will pay for it in ever increasing numbers - and, remember, for the time being, it does not matter if that price is less than the cost of the journey, for now; and so it is also possible to ‘overpay’ (from the capitalist point of view) the drivers. A few million dollars come in, and San Francisco (of course) is conquered first. Then you go back to the VC market for a few tens of millions - thus expanding into New York, and other major cities in the United States - their complacent taxi services and regulators reduced to spluttering, impotent rage. Then another round, for hundreds of millions, and on to conquer the world ...
Notice that the script is being followed to the letter. Revenue keeps growing. The valuation at which investors buy in keeps growing. Yet we are no closer at all to a sustainable business. There are no economies of scale in taxis, to start with. To expand your taxi business, you need to expand the number of taxis and drivers in direct proportion to the number of rides. You cannot just buy a bigger warehouse, like Amazon. The network effect sort of works: more service users means more drivers, means faster response times, means ... But in reality, this is dependent wholly on subsidising rides with investors’ money. In order to run Uber at a profit ever, you would need either to drastically increase the price of rides, in turn drastically reducing revenue; or attack the drivers, leaving them open to the idea of going elsewhere, and thus degrading the service for the users with longer wait times.
End is nigh
The point is this: Uber is not just an overblown start-up, but the very Platonic form of an overblown start-up. Its valuation, rather than its revenue, has reached the proverbial point of hockey-stick growth. At this point, investors are as much motivated by the ‘animal instincts’ cited archly by Keynes as VC tech-savvy - the ‘fear of missing out’ looms large among them. Yet there are signs that things might be turning. Benchmark’s aforementioned lawsuit against Kalanick, in particular, has been interpreted in some circles as part of an attempt to get this company public sooner rather than later, leaving the dozy world of publicly traded equities as the greater fool, holding onto worthless Uber stock.
Uber’s big answer to this is the prospect of getting rid of drivers altogether - moving to self-driving cars in the relatively near future (remember that, next time some shill sobs over the fate of the 40,000 London Uber drivers ... ). There are so many things wrong with this idea it is difficult to know where to begin: the technology is still a long way off, political and regulatory comfort with human and non-human drivers sharing the same roads is further off; how much of the world’s pensions need to be sacrificed before this fantasy is realised? In order to take advantage, meanwhile, Uber would suddenly need to manage its own vast fleet of cars - nobody’s idea of a trivial venture (perhaps the leasing scheme was a sort of pilot for this, in which case the results speak for themselves). On top of that, with the Levandowski fiasco, Uber may have well and truly screwed itself on this front - for not only is the most brilliant AI company in the world and leader in self-driving technology taking Uber to the cleaners in the courts, but has recently started looking at ploughing a cool billion into Uber’s nearest competitor, Lyft.
It is rare that the Weekly Worker condescends to look at the prospects of some individual capitalist firm. We want to expropriate the lot of them, so it hardly matters which ones fail. We present such a bearish outlook on Uber, at such length, because it is exemplary of a spur of groupthink in the capitalist class, and clearly the point in the tech bubble where surface tension is greatest; but beyond that because companies like it are exploited ideologically as evidence for the continued vitality and innovative thrust of capitalism.
This is, in fact, false. The great successes of the current wave of tech companies are built on fundamental technologies that were decades old, and proven out above all in the state and academia. Facebook is 10% inspiration (it noticed that the pervasive anonymity of internet culture was unattractive to broad masses) and 90% brute force. Its fundamental technological innovations can be divided into two basic categories: new ways to arrange pixels in a web browser; and new ways to conduct mass surveillance on a scale that would make a Gestapo Obergruppenführer die of a thousand orgasms. There is scant evidence indeed that VC-backed start-ups, as opposed to R’n’D-focused corporates like Google or universities and state-military actors, are well placed to prove out truly transformative new technologies like self-driving vehicles.
Perhaps the ultimate indictment of Uber, then, is not its recurrent crime problem, or its Ayn Rand-inspired hostility to regulators, but its technological modesty. It uses route-finding technology of a kind available to everyone with access to a smartphone, thanks to Google and other companies in the space. Uber’s version is certainly not qualitatively better, and indeed I have taken Uber rides where the driver was ignoring it and using their preferred app instead. It moves a lot of data from end users to suppliers via web servers, like almost any web-based commercial concern in existence. (The aforementioned allegations of sexual harassment and corporate backstabbing, while certainly an expression of the ingrained sexism of society and its strong redoubt among the world’s middle managers, also put one in mind of the old cliché: ‘The devil makes work for idle hands’. What exactly is this vast technology organisation doing, and therefore what else can we expect its lecherous, treacherous time-servers to get up to?)
In the London (and British) media, Uber’s setback has been treated in part according to a narrative it would like better than mine - that black cab drivers and even minicab firms are under pressure from a threat to their complacent incumbency. There is a certain, limited reality here. The black cab monopoly is founded on the particular sliver of guild-maintained intellectual property called ‘the knowledge’ - the exhaustive recall of inner London’s highways and byways, the polyrhythms of congestion, that will get you, within its purview, more quickly from one place to the next than any other method. That is probably still true.
However, it is not true enough in relation to the present state of automated route-finding to sustain it in the long run, and indeed its limits become pretty stark, as soon as your life takes you south of the Thames. There is a real benefit in automating things like this, and ‘the knowledge’ is already primarily a matter of London’s cultural heritage, which does not yet realise that - if it is to survive - it needs to be preserved in the same manner as the Tower and Buck Palace. Communists are by no means opposed to technological progress: merely its identification with capitalist social organisation; we do not defend the petty bourgeoisie from the obsolescence of its economic methods, but only from the penury that follows under our present mode of production.
Foolish indeed, however, is the starry-eyed techno-utopian who sees Uber as the future, even if the black cab’s time is past; for they buy into precisely the complacent fetishism of the new and shiny that so reliably brings capitalism to grief.
paul.demarty@weeklyworker.co.uk
Notes
1. https://cdn.londonreconnections.com/2013/12042017-NB-to-Helen-Chapman_Redacted-1.pdf.
2. This rent-seeking is rather more pervasive than the apparently ‘innovative’ technology at work in the industry would lead you to suspect: witness, above all, the bewilderingly intrusive collection and hoarding of data on consumers by Google, Facebook and the like - a most unpleasant variety of rentier parasitism.
3. Also at this point, I feel obliged to disclose that I am in the process of leaving one VC-backed start-up to join another.