UBER

It’s rare. But every now and then a company comes along that completely disrupts the
traditional ways of distributing a product or service. Amazon.com radically transformed online
selling, and Apple’s iTunes and iPod turned music distribution on its ear. Now comes Uber, the
app-based ride service that is revolutionizing urban transportation. Uber is giving conventional
taxicab and car services a real ride for their money. In just seven short years, Uber has revved up
operations in over 700 cities in more than 60 countries, already booking more than $10 billion in
rides annually through its massive network of more than four million drivers.

A Disruptive Product

Why are so many customers around the world bypassing good old taxicabs in favor of newcomer
Uber? It’s all about convenience and peace of mind. No more stepping out into busy city streets
to wave down a passing cab. Instead, Uber’s smartphone app lets passengers hail the nearest cab
or limo from any location, then track the vehicle on a map as it approaches. The Uber app gives
riders an accurate estimate in advance of the fare to their destinations (usually less than that
charged by a regular cab) eliminating guesswork and uncertainty. After the ride, passengers
simply exit and walk away. Uber automatically pays the driver (including tip) from the
passenger’s prepaid Uber account, eliminating the often-inconvenient and awkward moment of
payment. And it’s the same process anywhere in the world, from San Francisco, London, Paris,
or Abu Dhabi to Ashville, North Carolina, or Athens, Georgia. Compare the Uber experience to
the uncertain and often-unsettling experience of using a standard taxicab.

One business reporter describes waiting in line at a taxi stand while a driver tried to convince
another would-be passenger—a total stranger—to share the cab, thereby increasing his fare. The
cab itself was ancient and filthy, with ripped and worn seats. During the entire ride, the cabbie
carried on a phone conversation in a foreign language via his headset, causing safety concerns
while distractedly navigating busy city streets. The reporter’s conclusion: “I stepped out of the
taxi in front of my house and realized I just don’t have to put up with this garbage anymore. Uber
has changed my life, and as God is my witness, [wherever Uber is available] I will never take a
taxi again.”

Uber drivers range from professional drivers who’ve switched over from conventional cab and
transportation companies to regular people looking for a little adventure and some extra income
in their spare time. All Uber drivers go through an orientation that requires proficiency in a
market area’s dominant language, ensuring that they can communicate effectively with
customers. Although it may vary by location, in general Uber vehicles can be no more than ten
years old. A two-way rating system—by which riders rate drivers and drivers rate riders in return
—helps keep both sides on their best behavior. Poorly-rated drivers risk being rejected by future
passengers; poorly rated passengers risk rejection by drivers, who can choose which fares they
accept. Uber’s disruptive innovation has brought a breath of fresh air to an industry begging for
change. Urban transportation channels have long been characterized by cartel-like relationships
between cab companies and local governments, high fixed fares, poor service, and little
accountability. As one economics professor points out, the taxicab industry “was ripe for entry
[by start-ups] because everybody hates it.” Uber has also been criticized for its “surge pricing”
practices—a dynamic pricing mechanism that kicks in to raise prices when demand exceeds
supply, some-times resulting in shockingly high fares and accusations of price gouging. Uber
justifies surge pricing by pointing that it provides an incentive for more drivers to be available
during periods when passengers need them most. According to Uber, if a passenger faces a
higher-than-normal fare because of surge pricing, the alternative without Uber would more than
likely be no taxi at all. Moreover, Uber informs passengers in advance what the fares will be. If
they don’t like the fare, they can find another cab, take public transportation, or walk.
Competitors and Startup Costs Uber’s huge success has attracted a garage full of competitors,
such as Lyft, Gett, Carma, and Zimride. Uber has a huge first-to-market advantage. Its bookings
are 10 times those of nearest competitor Lyft, and Uber is adding new customers at a faster rate.
Moreover, even as competition stiffens, Uber has little to fear from like-minded competitors. In
fact, the more competitors adopt the new model, the more the revolutionary channel will grow
and thrive versus traditional channels, creating opportunities for all new car-hailing entrants.
Instead, the new distribution model poses the biggest threat to traditional taxicab and car-for-hire
companies, which are now losing both customers and drivers to Uber and its competitors.

Despite its explosive growth, Uber—like every other ride-hailing company—has yet to turn a
profit. Like Facebook, Amazon, and so many other revolutionary companies in today’s internet-
driven economy, Uber’s start-up model is to build a big user base first, then worry about making
money later. Uber keeps 20 to 30 percent of each fare—the rest goes to the driver. But Uber
plows back most of its take into expansion and promotional expenses. Investors seem confident.
Uber has raised more than $10 billion in venture capital. It went public in 2019 with a valuation
of $82.4 billion. Your Lyft did an initial public offering (IPO) earlier in the same year that placed
its valuation at $24.3 billion.

Challenges
Like any innovator, upstart Uber faces some significant challenges. For example, Uber has been
criticized for exercising too little control over driver quality and security. So far, the company
has ridden beneath the radar of industry regulators by not directly employing drivers (all Uber
drivers are independent contractors) and not owning any vehicles (all vehicles are driver-owned).
There have been charges of sexual harassment within the company and by drivers for Uber.
Waymo a subsidiary of Alphabet, the parent company of Google, filed a lawsuit against Uber.
Uber had acquired Otto, a self-driving company. The suit alleged an employee of Waymo
downloaded confidential files of Waymo before leaving to start Otto. These incidents helped lead
to the Uber replacing its founding CEO with Dara Khosrowshahi, the former CEO of Expedia.

Defining Its Business Beyond Ride Sharing Under the new CEO Uber’s mission became “We
ignite opportunity by setting the world in motion,” replacing, “Make transportation as reliable as
running water, everywhere, for everyone.” This expanded Uber’s mission beyond just delivering
people to their destinations. Uber is now looking at expanding into healthcare, package delivery,
and other areas. As the population ages, many older people need rides to and from medical
treatments. Uber Eats, a restaurant delivery service, has been very successful. “Once you’re
delivering cars in five minutes, there are a lot of other things you can deliver in five minutes.”

QUESTION FOR DISCUSSION

1. You are thinking about using Uber Eats as a delivery service for your restaurant. Currently
you do not have a delivery service, customer have to pick up food to go at the restaurant. The
manager has asked you to do a research project to see if it would be feasible to use Uber Eats.
What information would you gather to provide your answer to the manager?

Sources
“The Fall of Travis Kalanick Was a Lot Weirder and Darker Than You Thought,”
https://www.bloomberg.com/news/features/2018-01-18/the-fall-of-travis-kalanick-was-a-lot-
weirder-and-darker-than-you-thought (accessed May 16, 2019);

Uber.com (accessed May 16, 2019); Eric Newcomer and Ellen Huet, “Battling Lyft for Market
Share, Uber Again Turns to Discounting,” Skift, January 22, 2016,
http://skift.com/2016/01/22/battling-lyft-for-mar-ket-share-uber-again-turns-to-discounting/;

Alan Murray, “Uber-nomics,” Fortune, January 2015, p. 6; Jim Edwards, “Uber Has Changed
My Life and as God Is My Witness I Will Never Take a Taxi Again,” Business Insider, January
22, 2014, www.businessinsider.com/ uber-has-changed-my-life-and-as-god-is-my-witness-i-will-
never-take-a-taxi-again-where-available-2014-l#ixzz3TYF7ZY29;

Brad Stone, “Invasion of the Taxi Snatchers: Uber Leads an Industry’s Disruption,”
Businessweek, February 20, 2014, pp. 38–42; Tracey Lien, “Lyft Defies Predictions by
Continuing to Grow as a Rival to Uber,” Los Angeles Times, January 5, 2016,
www.latimes.com/business/technology/la-fi-0105-lyft-growth-20,160,105-story.html;

Jon Russell, “Uber Makes First Big Expansion in China as It Aims to Reach 100 Cities in 2016,”
TechCrunch, January 18, 2016, http://techcrunch.com/2016/01/18/uber-sichuan-expansion/.