Case 22 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, sometimes 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.”
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-market-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/.
Discussion Question
Compare the distribution systems with taxicabs with that of Uber. That is how the customers gain access to a taxicab, compared with gaining access to an Uber ride.
What advantages did Uber create in their creation of a distribution system for people who needed transportation compared with taxicab companies?
The post Case 22 Uber It’s rare. But every now and then a company appeared first on PapersSpot.
