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Case Study: Uber's Unintended Burdens

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 PART 6
CASE
Uber’s Unintended Burdens
04 C h ri s to p her S . Tang an d Joche n Wi r tz

On August 13, 2020, Uber chief executive officer (CEO) Dara Khosrowshahi explained that Uber is
backing Proposition 22 that would exempt it from Assembly Bill 5 (AB5), a California law that would
require Uber to treat its drivers as employees with benefits effective January 1, 2020.1 To win over
California voters, Uber and Lyft were considering to shut down their services “temporarily” in
California as a means to appeal to voters who vote on Proposition 22 in the November ballot.

Given Uber lost over $8 billion in 2019 and was expected to lose $6 billion by October 2020, the AB5
law was expected to increase Uber’s operating cost dramatically. Also, it would be a major blow
to Uber and other gig economy (e.g., Uber Eats, Grubhub, Deliveroo) if other states in the United
States and other countries were to propose labor laws similar to AB5. In that case, Khosrowshahi’s
premonition that Uber may never be profitable when it filed for an initial public offering (IPO) in
2019 would come true.2 Was this law to become the beginning of the end for Uber?

estimated price. Once agreed, the app would match the

rider with nearby drivers and then provide the name;
customer rating; the make, model, and license plate
number of the car; the estimated time for the pickup; as
well as real-time tracking information about the location
of the driver. At the end of the ride, the rider could leave
a tip and rate the driver. This seamless service had been
well-received by riders.

Uber operated in a two-sided market. Its success hinged

THE BEGINNING
Uber had been hailed as the disruptive force of
transportation that could put taxi services out of business.
Ever since Travis Kalanick and Garrett Camp founded
Uber in 2009, this multinational ride-hailing company
has expanded its services from ride-hailing (UberX,
Uber Black, Uber Pool) to food delivery (Uber Eats),
freight transportation (Uber Freight), and electric bikes
and motorized scooter rental (through a partnership
with Lime).
Uber’s smartphone app was well-designed. By
downloading the app and linking it with a credit card,
a rider could immediately hail a ride by specifying the
destination and pickup location. The app provided the
upon massive rider and driver participation. To reduce
waiting time for riders, Uber needed many drivers. At
the same time, to reduce idle time and increase earnings
for drivers, Uber needed many riders. To entice both
riders and drivers to participate, Uber was able to use
venture capital funds3 to capture market share in many
markets by heavily subsidizing drivers and riders, getting
them to switch from taxi to Uber (Exhibit 1). Investors
had valued Uber over $70 billion even though Uber had
been losing billions of dollars every year except in 2018
— the year before it filed for an initial public offering
(IPO) (Exhibit 2).
THE INITIAL PUBLIC OFFERING
Uber celebrated its initial public offering (IPO) in May
2019 with huge fanfare, while many investors were
nervous about Uber’s profitability in the near future.
To calm nervous investors, Khosrowshahi provided

Case Studies 553

Funds raised ($bn) Implied valuation
Equity Debt ($bn)
Toyota invests $500m
10 80
SoftBank-led
9 consortium invests
8 $1.3bn
Saudi wealth 60
7
fund makes
6
$3.5bn backing
5 40
Goldman raises $1.6bn
4
in convertible debt from
3 private wealth clients
20
2 TPG and Google lead $258m
1 investment
0 0
2009 10 11 12 13 14 15 16 17 18
Excludes shares bought from existing investors
Source: Financial Times.

Exhibit 1 Venture funds for Uber

Exhibit 2 Financial performance of Uber

Year TTM (Aug 15, 2020) 2019 2018 2017

Total Revenue 13,666,000 14,147,000 11,270,000 7,932,000
Cost of Revenue 6,825,000 7,208,000 5,623,000 4,160,000
Gross Profit 6,841,000 6,939,000 5,647,000 3,772,000
Operating Expenses 11,788,000 15,535,000 8,680,000 7,852,000
Research Development 2,592,000 4,836,000 1,505,000 1,201,000
Selling General and Administrative 6,647,000 7,925,000 5,233,000 4,787,000
Total Operating Expenses 11,788,000 15,535,000 8,680,000 7,852,000
Operating Income or Loss -4,947,000 -8,596,000 -3,033,000 -4,080,000
Interest Expense 419,000 559,000 648,000 479,000
Total Other Income/Expenses Net -1,945,000 488,000 4,889,000 -87,000
Income Before Tax -7,141,000 -8,433,000 1,312,000 -4,575,000
Income Tax Expense -210,000 45,000 283,000 -542,000
Income from Continuing Operations -6,968,000 -8,512,000 987,000 -4,033,000
Net Income -6,969,000 -8,506,000 997,000 -4,033,000
Net Income Available to Common Shareholders -6,969,000 -8,506,000 1,938,000 -4,033,000

Source: Yahoo Finance.

554 Case 4 ▪ Uber’s Unintended Burdens


some assurance by emphasizing that (1) Uber was well-
positioned to penetrate a $12 trillion addressable market;
(2) Uber’s platform was poised to become the “Amazon
of transportation;” and (3) other companies like Amazon
and Facebook also had rocky IPOs. Uber debuted on the
New York Stock Exchange at $42 per share, which was
lower than its expected price at $45. Since its IPO in 2019,
the share price was hovering around $30 per share in
2020 (Exhibit 3). Was this a reflection of investors’ doubts
about Uber’s long-term success?
ROCKY ROAD
One of the premises of Uber was that it could grow
and capture markets worldwide. As an online platform,
Uber’s asset light model could enable the firm to scale
its operations in many markets without a huge setup
cost. However, Uber encountered many road blocks as
it expanded into other countries. The following are some
key examples.
China and beyond. Due to growing demand for taxi
service in Shanghai and the fact that new taxi licenses
had not been issued since 1990, Uber launched its service
in Shanghai in 2014 and then expanded into over 100
cities in China. By using the same success recipe as in
the United States, this strategy turned out to be costly.
First, to compete with the incumbent Didi Chuxing that
captured 80% of the market, Uber undercut Didi’s price
for riders to even below the bus fare for an equivalent
trip and offered extra incentive bonuses for drivers. This
pricing strategy resulted in close to $1 billion of burn
rate per year. Second, as Google Maps did not work
well in China, Uber had to switch to Baidu Maps, which
was costly and time consuming. Third, most Chinese
consumers did not have credit cards, and Uber had to
switch to Alipay for payment.
Even with all these localization changes, Chinese
consumers were reluctant to switch because the service
was undifferentiated and Didi’s service was more
convenient because its app was embedded within WeChat
with WeChat Pay, which was used by virtually all riders.4
After losing $2 billion, Uber exited from China and
sold its business to Didi whereby Didi agreed to invest
$1 billion in Uber, and Uber took an 18% stake in Didi
in 2016.5
After Khosrowshahi succeeded the founding chief
executive officer (CEO) Kalanick in the late 2017, Uber
exited its operations in eight countries in Southeast Asia
PART 6
(Singapore, Indonesia, Thailand, Philippines, Malaysia,
Vietnam, Myanmar, and Cambodia) by selling its
operations to Grab (Singapore) in early 2018. Instead of
cash, Uber received a 27.5% stake in Grab.
Latin America. There was a lack of quality transportation
alternatives besides private cars in Latin America. This
fact attracted Uber and other ride-hailing services to
enter the market. In 2013, Uber started its service in
Bogotá, Colombia. At that time, e-hailing was nonexistent
and there was no regulation. However, as Uber expanded
its services in Colombia, taxi drivers launched complaints
and the Ministry of Transportation banned Uber
nationwide unless Uber registered as a taxi company.
Uber refused and continued to operate covertly. After
the government ordered Uber to cease its operation in
late 2019, Uber suspended its operations for 3 weeks and
then resumed its operations in February 2020, claiming
that its operations comply with Columbian law.6
In 2014, Uber entered Brazil and boasted an 80% market
share by 2019.7 However, Uber remained unprofitable
because it was engaging in a price war against Cabify, 99
(which is now owned by Didi of China), and Easy Taxi.
Would Brazil become a repeat of another attrition game
that Uber engaged with Didi in China?
India. Uber debuted its services in 18 Indian cities
in 2014. To scale up its operations, Uber offered free
smartphones and cash bonuses to drivers. In addition,
Uber offered leasing options with incentives to enable
drivers to use better and newer cars. Instead of doing
background checks, Uber was relying on the background
checks performed by the government as part of the
chauffeur licensing process. After an Uber driver was
accused (and later convicted) of raping a female
passenger in 2015,8 Uber was banned temporarily until
the ride-hailing firm agreed to implement various safety
measures including conducting background checks,
installing panic buttons, and enabling passengers to allow
Case Studies 555
Source: Yahoo Finance.
Exhibit 3 Uber stock price history (since initial public offering in 2019)
their contacts to track their journey during an Uber ride.
But surge pricing was outlawed in Delhi by the end of
2016.9 By the end of 2019, Uber operated in 40 Indian
cities, trailing behind the local incumbent Ola. Would it
be possible for Uber to win in the second biggest ride-
hailing market in the world?
United Kingdom and the European Union. After some
initial success in its Uber Black pilot program in London,
Uber decided to roll out its UberX in 2013 with heavy
subsidies for riders and drivers. Besides pushback from
black cab drivers, a British tribunal ruled in 2016 that
Uber should not classify their drivers as independent
contractors; instead, these drivers should be treated
as employees and receive benefits and pensions. 10
Subsequently, Transport for London (TfL), a local
government body responsible for the transport system
in Greater London, did not renew Uber’s license when
it expired in 2017. Despite appeal, TfL declined to renew
Uber’s license by the end of 2019.11 Despite losing its
appeal in the lower court, Uber made its final appeal to
the United Kingdom’s Supreme Court and the hearing
began in late July 2020.12 Would Uber lose its final appeal,
and would this end its operations in the United Kingdom?
Uber’s ventures in various European countries were
bumpy. Besides the ban in Demark, Hungary, and
Bulgaria, a German court disallowed Ubers’ “work-
around” business model that offered rides through rental
car firms in December 2019. Uber was appealing this
decision in the German court and its final fate remained
to be seen.13
556 Case 4 ▪ Uber’s Unintended Burdens
BACK TO THE UNITED STATES
After a stormy odyssey in foreign countries that began
in 2013, Uber continued to dominate the ride-hailing
service in the United States. However, its market share
declined from 87% in January 2016 to 70% by May 2020
as Lyft gradually captured more market share rising from
13% to 30% over the same time period.14
In the United States, Uber had encountered many
challenges. First, in August 2018, New York City
Council voted in favor of limiting the number of new
licenses for ride-hailing services to operate (the total
was around 100,000), and imposed a mandatory $17 per
hour minimum wage for ride-hailing service drivers.15
Second, after years of complaints about its safety, Uber
disclosed its safety record in late 2019. It revealed 3,045
sexual assaults and nine murders in 2018 alone. Since
then, Uber improved its background checks of drivers and
improved its app to enhance rider safety. Third, after an
exposé written by a former Uber female engineer expressing
concerns over sexism and sexual harassment, other
employees came forward reporting past and ongoing
incidents of sexual harassment, retaliation, and bigotry.
By the end of 2019, Uber settled the claim with the Equal
Employment Opportunity Commission (EEOC) for
$4.4 million. Also, Uber agreed to improve its internal
culture.16

Despite Uber continuing to dominate the US market, it
was not able to put taxi firms out of business or get Lyft
to exit. In fact, customer loyalty eroded over the years
as more disloyal riders were using both Uber and Lyft
services by choosing the one that has shorter waiting time
and/or lower prices. By the end of 2019, 34% of riders in
the United States used both apps, Lyft and Uber, and over
15% of riders used Lyft exclusively.17 At the same time,
more drivers were serving both platforms to get more
rides and reduce idle time.
To improve rider loyalty and driver loyalty, Uber
launched its customer loyalty program “Uber Rewards”
in early 2019 that operated just like a typical airline
loyalty program with different levels of loyalty perks,
depending on the number of rides.18 To increase driver
loyalty, Uber offered bonuses to drivers who drove a
certain number of rides within a specific time window,
creating incentives for drivers to drive exclusively for
Uber. Furthermore, Uber launched the Uber Driving
Rewards19 by offering various perks including discounts
on gas, mobile phone service, vehicle maintenance,
money management services, and complimentary
“access” to a health insurance marketplace provided by
Stride Health.
Uber’s loyalty programs for riders and drivers were
matched by Lyft immediately and some taxi company
programs offered even more perks. As Uber and Lyft
continued to offer subsidies to recruit and retain riders
and drivers, neither firm reached profitability.
PART 6
Amid the COVID-19 pandemic, Uber took a nosedive
during the prolonged shutdown in many major cities.
However, as residents stayed at home, there was a sharp
increase in meal delivery services. Uber Eats experienced
a dramatic increase in demand, even though DoorDash
dominated the meal delivery platform market in the
United States. To seize the moment, Uber acquired its
competitor Postmates in July 2020 for over $2 billion.20 The
intention was to leverage Uber’s information technology
to grow this new market. However, competition in this
market was getting fierce as JustEat (United Kingdom)
acquired Grubhub in June 2020, making it the biggest
meal delivery platform in the United States.21 On top
of that, these meal delivery drivers could not remain
independent contractors and would become employees
with the related cost increase if Proposition 22 backed
by Uber failed to pass in November.22
After many different attempts, Uber’s ambition to
dominate the $12-trillion market had February 2, 2021
hit various roadblocks in many countries as well as the
United States. Investors now wondered if and when these
once hailed as disruptive business models would become
profitable. Specifically, what are the contingency plans
that Uber could have taken?
Case Studies 557
 Endnotes
1 https://www.latimes.com/business/technology/story/2020-08-12/
uber-lyft-california-shutdown, accessed February 2, 2021.
2 https://www.reuters.com/article/us-uber-ipo/uber-unveils-ipo-
with-warning-it-may-never-make-a-profit-idUSKCN1RN2SK,
accessed February 2, 2021.
3 Venture capital funds provided by Softbank, Saudi Arabia’s public
investment fund, Malaysian retirement fund, etc.
4 https://fortune.com/2015/09/30/will-china-be-ubers-waterloo/,
accessed February 2, 2021.
5 https://www.cnbc.com/2016/08/01/5-reasons-why-uber-sold-its-
china-business-to-didi-chuxing.html, accessed February 2, 2021
6 https://medellinguru.com/uber-medellin-colombia/, accessed
February 2, 2021.
7 https://www.forbes.com/sites/lensherman/2019/06/02/can-uber-
ever-be-profitable/#2ab639657856, accessed February 16, 2021.
8 https://www.theverge.com/2015/10/20/9573003/uber-india-rape-
delhi-guilty-verdict, accessed February 16, 2021.
9 https://www.ft.com/content/742d189a-0785-11e6-96e5-
f85cb08b0730, accessed February 2, 2021.
10 https://www.theguardian.com/technology/2016/oct/28/uber-uk-
tribunal-self-employed-status, accessed February 2, 2021.
11 https://www.theguardian.com/technology/2019/nov/25/uber-
loses-licence-london-tfl, accessed February 2, 2021.
12 h t t p s : / / w w w . i n s u r a n c e j o u r n a l . c o m / n e w s /
international/2020/07/21/576328.htm, accessed February 2, 2021.
13 https://www.dw.com/en/german-court-hands-uber-another-legal-
setback/a-51743577, accessed February 2, 2021.
14 https://secondmeasure.com/datapoints/rideshare-industry-
overview/, accessed February 2, 2021.
15 https://www.reuters.com/article/us-uber-new-york/new-york-
city-votes-to-cap-uber-lyft-vehicle-licenses-idUSKBN1KT2M3,
accessed February 2, 2021.
16 https://www.usatoday.com/story/tech/2019/12/18/uber-sexual-
harassment-investigation-me-too/2694091001/, accessed February
2, 2021.
17 https://www.forbes.com/sites/stephenmcbride1/2019/09/04/
ubers-nightmare-has-just-started/#135d7bd6b7e0, accessed February
2, 2021.
18 https://techcrunch.com/2019/01/22/uber-loyalty-program/,
accessed February 2, 2021.
19 https://help.uber.com/driving-and-delivering/article/ubers-
driving-rewards-program?nodeId=d1438e75-ab16-457e-97f5-
4cebc4aedc39, accessed February 2, 2021.
20 https://www.washingtonpost.com/technology/2020/07/06/uber-
postmates-acquisition/, accessed February 2, 2021.
21 https://www.washingtonpost.com/technology/2020/07/06/uber-
postmates-acquisition/, accessed February 2, 2021.
22 https://voterguide.sos.ca.gov/propositions/22/, accessed February
2, 2021.

Study Questions

1. How could Uber retain its dominant position in the US market? Are there services and/or geographic
niche markets where Uber should have accommodated Lyft?
2. How should Uber have competed with Lyft and other providers? Was the two-sided price competition
(i.e., incentivizing drivers and riders alike to join and use its services) the right approach? How else
could Uber have enhanced its competitive position?
3. Its customers and drivers were multihoming (i.e., they signed up with its competitors). Should Uber have
aimed at exclusivity (i.e., a 100% share-of-wallet) or was it more realistic to aim to become the preferred
provider with a high share-of-wallet?

Suggested citation: Christopher S. Tang and Jochen Wirtz (2021), “Uber’s Unintended Burdens”, in:
Services Marketing: People, Technology, Strategy, 9th edition by Jochen Wirtz and Christopher
Lovelock, New Jersey: World Scientific, pp. 553-558.

Note: This case study is part of the teaching materials accompanying Services
Marketing: People, Technology, Strategy, 9th edition by Jochen Wirtz and Christopher Lovelock.
The case can be used by the authors and in courses that use this textbook as their main
reference. For other courses and uses, copyright has to be cleared with Jochen Wirtz, email:
jochen@nus.edu.sg.

The full book is available on Amazon at a

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