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Nine months ago, it was unclear how committed Alphabet was to beating Uber. Now, it has two powerful motivators: Revenge and $70 billion

By Sarah Lacy , written on May 23, 2017

From The Travis Shrugged Desk

Editor’s Note: “Uber Tuesday” is a new weekly column by me all about Uber. To protect my sanity, I’m (mostly) confining everything I have to say about the Valley’s most highly valued and most toxic startup to one day of the week. Enjoy.

Remember, about nine months ago, when the battle between Google and Uber in self driving cars was just getting going. When Google’s Dave Drummond had left Uber’s board, and smart commentators were handicapping a battle between a company with maps, a technology lead, endless capital, a publicly traded stock, and a wildly profitable core business to support long-lead investments in uncertain new areas and….Uber.

Ben Thompson, for one, gave the slight nod to Uber, citing its startup pluckiness:

That leaves Google and Uber, and, despite yesterday’s news, I still like Uber’s chances.

First, it matters that the development of self-driving cars is, in Kalanick’s words, “existential” for the company. Never underestimate the motivating power of simple survival, and, on the flipside, keep in mind how poorly Google has done in any business that is not advertising-based.

Of course, what Thompson couldn’t have known then was what a disaster Uber was internally. Focus is not the company’s strong suit. In-fighting and jockeying for position are.

Beyond Susan Fowler’s explosive blog post about Uber’s culture, multiple people I’ve spoken with say they’ve gone through three or more re-orgs a year, shipping precious little code, or even having clear deliverables. He couldn’t know that in 2017, Uber’s culture would be considered so rotten that five C-level officers would depart and both The Guardian and Re/Code (Re/Code!) would report that employees who want to flee Uber are having a hard time getting hired elsewhere. It’s so bad that the tech world wants to quarantine the extreme Uber virus of bro.

So much for the galvanizing advantage of a startup’s focus.

But Thompson and I agreed on one thing that could be the biggest variable in this fight: Would Alphabet really be focused on it? After all, Alphabet was starting to show signs of middle age and moonshot fatigue. And employees had been leaving Waymo, frustrated by how slowly the company was already moving after an early lead with this technology.

It was clear even nine months ago that Alphabet certainly could win this fight: It has the advantage of Android and its two billion users. It has the maps most drivers rely on between Google Maps and Waze. It has a more trusted consumer brand. It has a ten-year head start in self driving car technology. It has vastly greater sums of cash and a solid underlying business that continues to grow and has nothing to do with transportation.

Compare all of that to Uber having existing rider data and an app. (Both things Alphabet could pretty much buy if wanted to acquire Lyft.)

But the question remained: Was this really the battle Alphabet was going to pick to determine its future? Or, as Google and Facebook continue to vie for the entire digital ad spend and the lead in online videos, would self-driving cars take a back seat? Would a battle between Google and Microsoft or Google and AWS become the focus? Would it be the battle of Google and Apple when it comes to hardware and mobility? What about those in-home digital assistants everyone is so obsessed with?

Nine months ago, there seemed bigger, easier fights, where Google would have more advantages. Certainly the business of ads and enterprise software and services are more known, profitable quantities, than something as (still) futuristic sounding as self-driving cars, with unknown consumer appetites and an unknown regulatory climate.

To Thompson’s August point: This was must-win for Uber. If Uber is late or loses in this market? Poof! $70 billion up in smoke, according to Kalanick himself. That’s a powerful motivator for an egomaniac and his investors. Meanwhile, if Alphabet lost in self-driving cars, it may not even impact the stock.

Even nine months ago, I didn’t have a ton of confidence that this would be the singular battle Alphabet would put its technology and market share might behind.

Indeed, the game in big tech seems to be going away from physics and things and back to digital entertainment generally. Alphabet announced at I/O last week that one billion people watch YouTube. Everyone from Facebook to Google to Buzzfeed are exploring long-form original programming like Netflix and Amazon. Snap is living the pain of how indefensible the entertainment business is in the glare of Facebook. At I/O last week, tech reporters marveled at the three way battle of assistants and AI and voice playing out between Amazon, Google, and Facebook.

Check out this visualization of how the largest tech companies make their money. It isn’t from complex, highly regulated, uncertain bets on things like self-driving cars. It’s increasingly just from ads. It’s from shipping small packages next day. And, to a lesser degree, the hardware people use to do those things. Basically, the same things that drove Silicon Valley in the 1990s, and the dot com revolution to begin with. Not something as audacious as building a “New Detroit.”

Sure, Alphabet created its holding company structure so that each part of its business could focus on what they do. Waymo can live and breathe self driving cars, YouTube can slug it out in music, video and entertainment, and neither has to have their focus pulled towards the cash cow of search. And yet, it hasn’t quite worked that way in practice. Alphabet has been pulling back on some of the more unprofitable of its moonshots, with the ambitions of Fiber and Nest both curtailed.

So there was no reason to believe that Waymo would become a competitive juggernaut in a crowded, fragmented space, with an uncertain future. It had already backed away from building the actual cars, for one thing. It was losing talent, frustrated at the slow pace of development already.

Thompson’s reasoning was right, even if his prediction is looking horribly wrong: Uber would (allegedly) “do anything” to win. It’s just that “anything” may be a far different definition for Uber than other startups. Waymo argues that “anything” included colluding with an employee to steal Google’s documents and set up a shell company that Uber would purchase for close to $1 billion. I don’t think that was the kind of startup hustle Thompson anticipated. And that “hustle” seem to have motivated Alphabet into the fight of its life.

In doing whatever it took to win, Kalanick may have once again become his-- and his company’s-- own worst enemy.

To recap:

  • This suit is very out of the ordinary for Alphabet, whose executives have said before they never would sue engineers for stealing secrets, according to Bloomberg.
  • Waymo is trying to ban Uber from developing this technology at all, and has so far had a major legislative win in Uber not being allowed to force arbitration.
  • Waymo has inked a partnership with Lyft to collaborate on its autonomous driving future
  • Waymo is bulking up on self-driving car patents
  • Google even has a new partnership with Ola, yunno, the Uber competitor in India. India is Uber’s best shot at winning a major international market at this point. Ola is also backed by Uber’s Chinese competitor/rival/partner DiDi. (Ola is the Lyft of Asia-- It seems to benefit more by being the Uber rival than it does through its own actions.)

It’s as competitive as I’ve ever seen Alphabet, and it seems to be working. Just last week, Uber threatened to fire Anthony Levandowski if he doesn’t cooperate.

Meanwhile, out of the courtroom, Uber is testing out variable pricing-- or a way to alleviate its broken business model and runaway burn rate by charging rich people more money for the same ride.

This seems like an idea born out of desperation. I know plenty of cheap “rich” people. I know plenty of VCs and entrepreneurs who marvel at how cheap they can get from Palo Alto to San Francisco on Uber. Plenty of “rich” people are that way because they are frugal. They’re also not hugely into being gouged just because they make more money. Those who like to show off how rich they are, probably have a bespoke black car service, not Uber.

Beyond that, this plan threatens to make Uber’s issues with racism all the more pronounced. One of the reasons taxis can not have this kind of variable pricing is that taxis would only drive in rich neighborhoods.  

But beyond these obvious-- obvious-- flaws with the plan, there’s the issue of Uber’s valuation: The reason it has argued it’s worth so much more than the taxi industry is because it isn’t about replacing taxis, it’s about replacing car ownership en masse. That doesn’t happen with individualized surge pricing. There has to be mass convenience and economic incentive for that to happen. Uber isn’t close to offering either and it’s already burning capital at unsustainable levels.

And yet, that doesn’t mean me or Thompson or Kevin Kelleher, who first wrote about Alphabet’s middle age problem, were wrong to count Waymo’s fire out. It’s impossible to re-run the same scenario again and see what happens if Levandowski doesn’t (allegedly) steal the documents. Plenty of people have focused on the self-inflicted harm of this move on Uber’s business. But the more devastating repercussions may have been Uber motivating Waymo to win this fight at all-- legal-- costs.

That’s not all. Today, Morgan Stanley details a new incentive for Alphabet: It has estimated that Waymo could be worth some $70 billion if it were a standalone company. Even for Alphabet, that’s a big number. We’ve already argued if Uber were to raise money today, it would likely be worth less than DiDi. It would also almost certainly be worth less than Waymo’s estimated stand alone valuation. All of the sudden the company that was one time the most highly valued company in the history of Silicon Valley, may be number three in its own category.

So now Waymo has two powerful motivations: Greed and revenge.

The timing of all of this is important as the results of the “investigation” into Uber’s culture of sexual harassment are due out at the end of the month. The speculation is that director Ryan Graves and CTO Thuan Pham may be forced to leave, but no one expects serious repercussions for Kalanick.

It seems there are still people clinging to the idea that an escalation of $70 billion in paper wealth makes you a good CEO. That somehow that that outweighs:

  • Creating an admittedly toxic workplace for your employees
  • Developing software that lead to a Department of Justice inquiry
  • Motivating a much bigger rival to make you the fight of its life
  • Going from the undisputed market leader to number three in valuation in less than six month’s time

Recently, an Op-Ed was making the rounds arguing that if Donald Trump were actually a CEO, he would have been fired if he operated the way he has as President. Apparently, not if he had control of his board.