The Big Lie that keeps the Uber bezzle alive

Reprinted with permission of Cory Doctorow from his Pluralistic website.

Uber is (still) a bezzle (“the magic interval when a confidence trickster knows he has the money he has appropriated but the victim does not yet understand that he has lost it”). And every bezzle – every bezzle – ends.

Uber entered the market with an absurd proposition, which they papered over with an idiotic narrative…which the world ate up with a spoon.

The absurd proposition: Uber could use apps to reinvent taxis, and turn a low-margin business into a high-margin business by sprinkling it with high-tech pixie dust.

The idiotic narrative: Uber could establish itself in the market by pouring billions down the drain, losing 41 cents on every dollar it brought in, subsidizing unprofitable rides at unsustainable rates…but someday, it would make it up in volume.

Here’s how that proposition worked: Uber loses a lot of money on every ride. But someday, it will corner the market on transit (not just taxi journeys, but all transit), and it will be able to raise prices and cut wages and recover all those loses and turn a profit.

Obviously, this is stupid. Even if Uber manages to blow through its investors’ billions in habituating us to rideshares over cabs and buses, even if they manage to bribe or bully cities into allowing takeovers by unlicensed cabs, even if they manage to rewrite labor laws so they can treat their employees as contractors…

Even if all of that, then what? Then you have a market that is structured for dominance by unlicensed taxis driven by misclassified employees – that anyone can enter. The (mythical) day Uber attains dominance and profitability, someone else can start a competitor that provides exactly the same services, with exactly the same drivers and exactly the same passengers. The only difference? That new service won’t be $31 billion in the hole, unlike Uber.

In reality Uber was, is, and always will be a bezzle. The company used billions from the Saudi royal family to build up a giant, money-losing business (albeit one that maimed or killed taxi and transit services around the world through predatory pricing). All the while, they told a series of stories – produced narratives – that insisted that the red ink was transitional, that enduring profit was coming soon.

Those stories were many and varied, but they all added up to the same thing: a pile of shit this big must have a pony under it. That is, if there are lots of people who like riding in taxis where 41% of the fare is paid by the Saudi royal family, and lots of people who will drive those taxis, then the taxis must be here to stay.

It’s a variation on “too big to fail” – JP Getty’s idea that “If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” That is, if an unimportant company is a money-loser, it might fail, but if the money-losing company can grow to importance prior to its collapse, then the public will step in to keep it afloat.

Some of Uber’s narratives were pure science fiction. Take the wild tale of self-driving cars: that someday, Uber would make drivers obsolete and that this would alter its cost-basis and render it profitable. Uber spent $2.5 billion on a self-driving car division that served as window-dressing for its IPO, but which ultimately produced a car whose mean-distancee-to-lethal-crash was 0.25 miles. In 2020, they paid another company $400,000,000 to take this shitshow off their hands:

Other tales relied on draping the company in an improbable mantle of furthering social justice. For years, the company insisted that it could provide sustainable transport for low-income neighborhoods that were underserved by taxis (because they were unprofitable) and transit (because public transit is starved of revenues). No one at Uber was willing to contemplate what would happen to that service when investors were no longer willing to lose money on every ride. They certainly didn’t want to discuss whether Uber’s commitment to deregulation, wage suppression and tax evasion would exacerbate the inequality that creates low-income neighborhoods to begin with.

Uber’s narratives were always about how the private sector could provide public goods, never about the public sector. When the company IPOed, it released an S1 prospectus that promised profitability by eliminating every public transit system in the world and replacing them with Ubers:

That rapacious spirit was epitomized by the company’s founding CEO, Travis Kalanik, a bro who oversaw a culture of sexual harassment, rape, cheating and crime. When the image of Uber as a “move-fast-and-break-things” company no longer served its purpose, they replaced him with Dara Khosrowshahi and started a new narrative. Uber is now under adult supervision, run by an erudite fellow who thinks rape is actually bad.

Taken on their own, these fairy tales might not have been enough to corral suckers who’d buy into the IPO and let the Saudi royals and other insiders cash out bigtime. But these weren’t the only narratives in Uber’s storybook. They had a whole division devoted to producing funny numbers to back up its funny tales.

Enter Hubert Horan, a transportation analyst with 40 years’ experience. For years, Horan has been dissecting Uber’s funny accounting and absurd explanations in devastating detail.

https://horanaviation.com/publications-uber

These have been syndicated through Naked Capitalism, and picked up by many others, including me. Here’s a long piece I wrote on Horan’s last pair of analyses, which picked apart Uber’s absolutely bonkers accounting tricks that let it claim to have finally had a profitable quarter:

And here’s a fun conversation about that article that I had with The War On Cars podcast:

Both Uber and Lyft have just dropped their year-end financials, and in them, they double down on the funny math that let them turn their stupendous losses into gains. The mainstream press – predictably – has played credulous stenographer to these claims (looking at you, CNN Business).

https://www.cnn.com/2022/02/09/tech/uber-q4-earnings/index.html

But Horan hasn’t. He’s just published a brilliant, accessible, scorching takedown of Uber and Lyft’s accounting frauds that make it clear that the companies are losing money, and any claims to the contrary are either self-serving lies or delusions:

Topline: “Uber overstated the 2021 profitability of its ongoing business operations by $3.2 billion and has now lost over $31 billion operating car and delivery services.”

How did they do that? Well, for one thing, they’re using bad math to paint losses as gains. Uber reports its financials using a made-up, nonstandard metric they call “EBITDA Profitability.”

Uber’s GAAP losses in 2021 were a little less fanciful: $496m. But the company lost a lot more than that. That figure includes “profits” resulting from the sell-off of global failing Uberalikes what Uber lost huge amounts of money on. For example, the company booked “gains” from its shares in the company that bought its dud self-driving car unit, even though no one is going to buy those shares from Uber at that price (or maybe any price). Other gains came from its shares in the companies that bought the foreign companies it desperately flogged off: Russia’s Yandex, southeast Asia’s Grab, and India’s Zomato. It also booked a loss of $3b on it share of Didi, a Chinese Uberalike. It’s impossible to overstate the absurdity of Uber’s claims to asset appreciation in these shares. For example, Uber claimed that its stake in Grab appreciated by $1.6b in Q4 2021 – the same quarter in which Grab’s actual share price declined by 50%.

Uber’s true 2021 GAAP losses weren’t $496m, they were $3.2b, and its true margin was -38%, not -3%.

Uber and Lyft’s accounting tricks aren’t limited to treating losses as gains. They also conspicuously fail to break out useful operations and revenue data. When they claim that they’re making more on rides, it’s impossible to tell if that means that more people are taking rides, or if prices have gone up, or if driver pay has declined, or whether they’ve found some heretofore unsuspected “efficiency.”

Uber also doesn’t break down its revenues geographically, making it impossible to tell whether it is losing or gaining in markets that taxis historically struggled to serve – such as the low-income, exurban sprawls it claimed it could profitably serve.

Some of this trickery is wasted, because the press just doesn’t look that hard. This week’s articles about year-on-year growth failed to emphasize that this year’s increases represented gains on the height of the lockdown, when Uber rides fell to nearly zero.

The press also repeated claims that Uber’s food delivery business had reached “break-even,” something that is demonstrably untrue for anyone who actually looks closely at the balance sheet. The reality is that Uber is losing more money on food delivery than it is on its unlicensed taxi business – 63 margin points worse than taxis in 2019 and still 25 margin points worse in 2021.

Uber has been blowing an absolute fortune on trying to corner the food-delivery market. It bought Postmates, Drizzly and Gopuff and tried to merge them into a competitor for Doordash, a money-losing food-delivery company that bought out 12 of its own competitors. Neither company has managed to explain how they can make money while losing money on every delivery, though their evident strategy is to kickstart their businesses by forcing otherwise profitable restaurants to sell below cost. When they have drained these restaurants dry, they’ll replace them with “ghost kitchens” – badly ventilated shipping containers where misclassified employees churn out meals for delivery.

There’s one way in which food delivery is good for Uber’s business: it allows the company to continue to trumpet its “growth,” and keep hope alive for the suckers who bought out the company’s early investors. The company touts its food delivery runs as “trips,” and thus shows the number of trips as rising.

That’s important. Even though Uber and Lyft aren’t to blame for the pandemic, the huge cut in volume that lockdown created for both threatened the integrity of its narrative. Remember, the companies’ whole investor-relations strategy was to trumpet their centrality to our lives as evidence of their sustainability. As the pile of shit got smaller and smaller, it was harder to insist that there might be a pony underneath it.

Uber and Lyft’s 2021 would have been a lot worse, but for the fact that they raised prices by 66%, even as driver compensation fell. Despite these skyrocketing prices, the companies still aren’t turning profits. In fact, in Lyft’s case, it’s possible that they actually lost customers, even as they reported a 14% rise in “average revenue per rider.” That’s because Lyft also reports that the journey lengths have increased, so it’s entirely possible that the 14% gain comes from riders who have no choice but to take Lyft for longer and longer distances, while those with choice are turning away from the service.

Figuring out all this stuff used to be a game of inferences and detective work, but it’s gotten a lot easier, thanks to the City of Chicago’s public repository of rideshare data, which the municipality requires Lyft and Uber to disclose:

https://data.cityofchicago.org/Transportation/Transportation-Network-Providers-Trips/m6dm-c72p

Horan’s latest analysis contains a deep dive into this data, which confirms much of what critics have long suspected about these companies and the impact they have on our cities.

For starters, the data confirms that Uber doesn’t just compete with taxis, but with public transit (45-50% of rides substituted for transit), setting up a vicious cycle where cash-starved transit systems lose riders and raise fares, causing them to cut routes and raise prices, which reduces riders.

It’s not like Uber was prepared to continue subsidizing 41% of every ride from the areas that transit underserved before and is even worse for now. Instead, Uber created a lost decade for transit activism, in which the jingling car-keys of subsidized rideshare distracted us from the fight to provide transit equity to our whole cities.

The extent to which Uber displaces mass transit also kills another cherished Uber fairy-tale: that Uber reduces traffic. Geometry hates cars. Replacing a bus with 50 riders with 50 Ubers obviously produces congestion.

Obviously.

And that’s before you count the congestion of 50 empty Ubers driving back out to pick up their next 50 rides.

Serving transit deserts was key to Uber’s growth narrative. The inequities and underfunding of transit means that there was a lot of demand for taxis in poor areas, so offering massively subsidized cab-rides was a surefire way to pick up a lot of riders and convince a lot of investors. Unfortunately for Uber, these rides are also where it loses the most money. I mean, of course it is. That’s why those areas are underserved by other forms of transit.

The Chicago data also reveals the skyrocketing price of Uber: that’s where that 66% fare-hike figure comes from. It’s actually worse than that – since 2013, fares went up by 72%. But sadly for Uber, this data also reveals that riders are unwilling to pay these prices – as the prices rose, ridership fell.

Again, this is all data that Uber refuses to provide to investors.

It’s easy to see why not. The data proves that Uber and Lyft didn’t attain growth through “innovation.” Rather, the companies just gave stuff away at their initial investors’ expense and pretended there was a path to profitability at the end. The quarterly spectacle of their financial disclosures requires ever-greater feats of fanciful mathematics to sustain, and still it rings hollow.

Uber’s long-running bezzle represents a triumph of capitalist ideology over common-sense. True believers in our failing market system continue to insist that if we just capitalism a little harder, everything will work out.

This has created an economy that’s full of bezzles. Take the boom in municipalities buying interest-rate swaps from the biggest Wall Street banks. These are sold as a way for cities to borrow money without having to raise taxes.

Today in the Daily Poster, Matthew Cunningham-Cook tells the dismal tale of Orlando’s adventure in funding its public transit system with such a swap, at the behest of UBS, JPMorgan, Citi, Morgan Stanley, and RBC.

https://www.dailyposter.com/when-a-swap-becomes-a-swipe/

The city thought it was getting an insurance policy against future interest-rate hikes. Instead it bought the municipal equivalent of a subprime mortgage, where the low “teaser rate” blows up as soon as the economy turns sour – just at the moment where no one can afford to pay more.

Today, Orlando is suing to escape this trap, with terrible consequences for its transit system if it fails. It’s just the latest victim of predatory financial practices. Detroit had to pay $85m to escape its swap-trap during its bankruptcy. Denver got hit for $215m in “termination fees.” Chicago’s swap termination cost it $537m, which it paid even as it shut down 48 schools in Black and brown neighborhoods.

These cities get into trouble in part because the big banks have lobbied states to relax the rules on municipal participation in risky financial arrangements. The city councils are totally outmatched by the Wall Street smooth talkers who collect millions in bonuses for striking these deals.

As Cunningham-Cook writes, the Orlando suit’s got some high stakes, thanks to Florida’s False Claims Act, which could hit the banks for more than $800m. But the fact that these toxic assets are still offered for sale is a tribute to the bezzle economy. As Brad Miller, the lawyer representing the city, says, “It should have been like the asbestos settlement, or the tobacco settlement, because (financial swaps) were so far ranging. [The banks] were able to keep a lid on it because nobody wanted to say they were played for chumps. The fact was they were played for chumps.”

That’s the thing. In the bezzle economy, we are all suckers in the midst of a string of con-games. Private equity doesn’t just loot profitable businesses and destroy jobs – it also rips off its own investors like crazy:

The Uber bezzle suckers investors and drivers and restaurateurs, and then leaves riders and diners in cities where transit and taxis and restaurants are skeletonized. The credit swap bezzle guts city coffers and leaves them unable to support struggling transit or restaurants.

And even with the hard data that Horan’s analyzed so thoroughly, the bezzle marches on. As Cunningham-Cook tells us, “In Arizona an authority with close ties to Republican Gov. Doug Ducey is now embracing swaps, changing its regulations so it can enter into new deals that closely resemble the Orlando highway authority agreements.”