2-1 IntroductionUber Technologies Inc. (Uber) is a tech startu.docx
- 1. 2-1 Introduction Uber Technologies Inc. (Uber) is a tech startup that provides ride-sharing services by facilitating a connection between independent contractors (drivers) and riders with the use of an app. Uber has expanded its operations to 425 cities in 72 countries around the world and is valued at around $70 billion, making it the world’s most valuable startup. Approximately 30 million users use Uber’s services monthly. Uber has become a key player in the sharing economy, a new economic model in which independent contractors rent out their underutilized resources such as vehicles or lodging to other consumers. The sharing economy is quickly becoming an alternative to owning resources outright. Because its services cost less than taking a traditional taxi, Uber and similar ride-sharing services have upended the taxi industry. The company has experienced resounding success and is looking toward expansion both internationally and within the United States. However, Uber’s rapid success is creating challenges in the form of legal and regulatory, social, and technical obstacles. The taxi industry, for instance, is arguing that Uber has an unfair advantage because it does not face the same licensing requirements as they do. Others accuse Uber of not vetting their drivers, creating potentially unsafe situations. Some major cities are banning ride-sharing services like Uber because of these various concerns.
- 2. Additionally, Uber has faced various lawsuits, including a lawsuit filed by its independent contractors. Its presence in the market has influenced lawmakers to draft new regulations to govern this “app-driven” ride-sharing system. Legislation can often hinder a company’s expansion opportunities because of the resources it must expend to comply with regulatory requirements. Uber has been highly praised for giving independent contractors an opportunity to earn money as long as they have a car, while also offering convenient ways for consumers to get around at lower costs. Although its “Surge Pricing” technique has been criticized for charging higher fares during popular times, it is also becoming a model for other companies such as Zappos in how it compensates its call center employees. The biggest issues Uber faces include legal action because drivers are not licensed, rider and driver safety,protection and security of customer and driver information, and a lack of adequate insurance coverage. To be successful, Uber must address these issues in its marketing strategy so it can reduce resistance as it expands into other cities. 2-2 Background In 2009 Travis Kalanick and Garrett Camp developed a smartphone application to connect drivers-for-hire with people needing rides to a destination in their city. Earlier in the year the
- 3. founders had attended the inaugural address in Washington, D.C. and could not hail a taxi. They recognized the need for a convenient, low-cost transportation service. This innovative service was originally founded as UberCab Inc., a privately held company. It was renamed Uber Technologies, Inc. in 2010. Co-founders Kalanick and Camp designed the mobile app for iPhone and Android smartphones, enabling customers to get an estimated time of arrival from the driver on their smartphone with the use of an integrated GPS system. Consumers liked the Uber app because of its convenience and ease-of-use. After the mobile app is downloaded to their smartphones, passengers can pay for the rides-for-hire service through a third party, known as a Transportation Network Company (TNC), using the UberX platform that scans or takes a picture of their credit card with the smartphone’s camera. Uber does not maintain automobile inventory for drivers, such as a fleet of taxicabs or limousines. Instead, each driver-for-hire supplies his or her own personal automobile, gas, insurance, and maintenance of his or her own car. Drivers can drive their own cars where they want when they want, providing them with freedom to run their own small businesses. A surge pricing model is used during times of peak demand. While Uber initially charged about a 20 percent commission, it later introduced a new tiered structure in some cities that charged different commission rates depending upon the number of hours worked. Due to the increased demand in the rides-for-hire industry, Uber makes about $4 billion in
- 4. revenue. The term uber has become so popular that people have started using it as a verb, much like google. Founder and former CEO Travis Kalanick sees Uber’s services as a type of disruptive technology, believing that the types of ride- sharing services Uber offers will one day make it a viable alternative to owning a car. Younger generations appear more open to using services as needed rather than owning them outright. In emerging economies such as India, many people do not own cars, which gives Uber a major advantage. As ride sharing continues to increase, Uber could find itself competing against car ownership. Uber maintains a presence in major U.S. cities including Los Angeles, San Francisco, New York City, Chicago, Washington D.C., and Boston. These cities have the most driver– partners, although many other cities also have driver–partners. Uber technology-based products are available under these various brands: Uber, UberX, UberXL, UberSelect, UberBlack, UberSUV, UberLUX, UberPool, and the logistics- request brand UberEats. Uber has also upgraded its current navigation service (Google and Apple) with deCarta Mapping Company. This new mapping system continues to improve Uber’s navigation and location technologies. 2-3 Uber’s Marketing Strategy Like all companies, Uber must understand its target market and
- 5. maintain a strong marketing mix to be successful. Due to its technology, Uber does not have as many constraints as taxi cabs, although it has encountered regulatory obstacles and some public resistance. The Uber business model takes advantage of the smartphone technology of consumers and links them with independent drivers as their cabs. This provides a more potentially efficient and less-expensive way to purchase transportation. 2-3a Products Uber’s products are all digital. Consumers download Uber’s app onto their smartphones. When they want to request a ride, they can use the app to contact a driver in the near vicinity. The Uber app allows consumers to track the location of the car and alerts them to when the car arrives. Uber offers a few different services to customers based upon their preferences. Its most used service is UberX, the low-budget option. Drivers use their own vehicles to transport passengers. UberSelect is a more luxurious option than UberX but with lower prices than the premium options. UberBlack is for consumers who desire to have their own private driver in a high-end sedan. UberSUV connects users with SUVs, while UberLux is the most expensive service with luxury vehicles. UberXL is similar to UberSUV but costs 50 percent less. Another low-cost option includes UberPool, which allows passengers to share rides and split the costs. Uber is also attempting to expand into other services. Its UberEats is a meal delivery app that partners with local restaurants to offer meals to consumers
- 6. within 10 minutes. Uber is also looking to break into the emerging self-driving car industry (known as autonomous cars), competing against the likes of Google and Tesla. Uber partnered with Carnegie Mellon University to begin testing autonomous cars in Pittsburgh, Pennsylvania.Since it is still in the testing stage, autonomous cars have two Uber employees in the front seat ready to take the wheel if needed. The company hopes to take what it learns to improve how autonomous cars run in different terrains. These new services are allowing Uber to branch out and expand into different businesses. 2-3b Distribution Uber operates in more than 425 cities in 72 countries. One major reason Uber is so popular is because its app allows users to contact any drivers in the near vicinity. Drivers use the Uber app to provide them with directions. Los Angeles, San Francisco, New York, Chicago, Washington D.C., and Boston have the most drivers in the United States. Most Uber drivers offer their ride-sharing services on a part-time basis. To be successful, Uber engages in strategic partnerships with other companies. In the United States it partnered with American Express. Card members enrolled in American Express’s Membership Rewards program can earn points with Uber for rides. Strategic partnerships with local firms are especially important as Uber expands internationally because it allows the company to utilize the resources and knowledge of domestic firms familiar with the country’s culture. Uber has partnered with
- 7. Times Internet in India, Baidu in China, and AmericaMovil in Latin America. 2-3c Pricing Uber uses its app to determine pricing. Once the passenger completes his or her ride with an Uber partner–driver, the person’s credit card is charged automatically. Fees charged for speeds over 11 miles per hour are charged by the distance traveled. Uber operates on a cost leadership basis, claiming that it offers lower rates than taxis. However, the app OpenStreetCab suggests that Uber might be more cost-efficient only when the fare is more than $35. Uber uses an algorithm to estimate fees charged when demand is high. Called surge pricing, Uber has even applied for a patent for this type of system. This “peak pricing” strategy is not too different than when utilities or flights charge higher prices when demand is high. Passengers are alerted during times when the price is higher. However, the extent of the pricing increase has been questioned as some consumers believe Uber uses this high demand to “price gouge” passengers. In some situations, Uber’s surge pricing has led to considerable criticism. During one New Year’s Eve, pricing surged up to seven times the normal price. During a hostage crisis in Sydney, Australia, Uber charged as much as four times the normal price as an influx of people struggled to evacuate. Uber responded by claiming its price hikes encouraged more drivers to pick up passengers in the area, but consumers were outraged. Within an hour
- 8. Uber agreed to refund users in the Sydney area who paid the higher prices. In extreme shortages, prices are sometimes hiked to as high as 6–8 percent. On the one hand, it can be argued that surge pricing increases the number of drivers during times of high demand. It is estimated that the number of drivers increases by 70–80 percent due to surge pricing. On the other hand, consumers believe this is a form of price gouging and that Uber capitalizes on emergency situations such as the Sydney hostage crisis. Uber has to reconcile these different situations to create a pricing strategy considered fair by its users. 2-3d Promotion Uber has engaged in a number of promotional activities to make its brand known. Often it adopts buzz marketing strategies to draw attention to its services. For instance, to celebrate National Ice Cream Month one year Uber launched on-demand ice cream trucks in seven major cities. In one promotion Uber partnered with General Electric to offer free DeLorean rides to San Francisco users reminiscent of the movie Back to the Future. Uber also uses promotion to portray its benefits compared to its rivals. For instance, Uber assumed a combative advertising approach to its major rival Lyft through a Facebook ad campaign. Uber advertising often stresses the convenience and low cost of its ride-sharing services. However, like all companies Uber must take care to ensure that its advertising could not be construed as misleading. A lawsuit was filed in the U.S. District Court in San Francisco
- 9. stating that Uber violated the 1946 Lanham Act that prohibits false advertising. Taxi companies claimed, for instance, that Uber’s drivers do not have to undergo fingerprinting in California as part of background checks, and yet it used advertising such as “the safest ride on the road” and sets “the strictest safety standards possible,” as well as Uber’s $1 “Safe Rides Fee.” According to the taxi drivers, these deceptive advertising practices take customers away from their services and are therefore leading to economic harm. 2-4 Uber Faces Challenges Uber faces a number of challenges including internal struggles, legal and regulatory challenges, and global issues. In the United States, major cities are considering regulating Uber. However, it faces even more challenges as it expands internationally as some countries are opting to ban Uber services. Uber will have to adapt its marketing strategy to address both domestic challenges within the United States and the various laws enforced in different countries. 2-4a Internal Challenges—Driver Relations Uber operates in an industry where trust between strangers is vital. This trust ensures a safe and comfortable ride for both passenger and driver. Uber has developed a rating system to help assure this trust and reliability between passengers and drivers, called a ride-share ratings system. Ride-share rating systems pose a unique challenge for Uber because of the way they are set up and the level of rider objectivity. Uber’s insistent policy of maintaining a five-star fleet can put drivers at a disadvantage.
- 10. Uber rivals have similar policies; for instance, Lyft tells customers that anything less than 5 stars indicate unhappiness with the ride. Low driver scores can mean drivers are forced to take remedial classes where they learn about safe driving techniques and driver etiquette. Those who fail to increase their scores risk suspension or permanent deactivation. Because consumers have different views of what constitutes quality, it can be argued that Uber drivers are placed at the mercy of the consumer’s mood. Drivers have also expressed unhappiness with Uber’s pay. Uber will often lower fare rates in order to gain a competitive advantage in different markets, which cuts into driver earnings. Additionally, drivers are driving their own cars and spending their personal funds on upkeep and insurance. In 2014 drivers working with Teamsters Local 986 launched the California App-based Drivers Association (CADA), an Uber drivers’ Union. More cities have started their own unions. Uber has begun to guarantee hourly earnings of $10–$26 per hour for its drivers, but to qualify drivers have to comply with Uber’s rules including accepting 90 percent of ride requests, doing one ride per hour, and being online 50 out of 60 minutes. Critics say these restrictions effectively keep drivers from working for other ride-sharing services. Uber drivers are independent contractors and not employees of the company, so they have the option to work for competitors. However, these new criteria may be a way to keep drivers working for
- 11. Uber and no one else. This independent contractor status has also created controversy for drivers. Drivers claim that Uber’s requirements make them more employees than independent contractors. For instance, Uber has certain rules about types of car and soliciting business. Some also claim that after Uber takes its commission, they end up earning less than minimum wage. Disgruntled drivers have staged protests and filed lawsuits against the firm. In 2015 Uber faced a setback when a California labor commissioner ruled that an Uber driver qualified as an employee. The commissioner argued that because Uber was “involved in every aspect of the operation,” including setting fares and nonnegotiable fees, it had enough control over the driver for her to qualify as an employee. Uber was ordered to pay the driver $4,100 to cover mileage and tolls. Uber continues to maintain that its drivers are independent contractors and is still fighting against other lawsuits in California. While this does not necessarily mean all Uber drivers will qualify as employees under the court system, it does set a precedent for drivers in other states to file lawsuits. If Uber encounters more issues in this area, it might have to alter its relationship with drivers and give up some control so its drivers will fall beneath the employee threshold. 2-4b Corporate Culture More recently, Uber has come under criticism for an aggressive—and some say toxic— corporate culture. Some prominent executives at Uber have left the firm, claiming that the corporate culture conflicted with their values. The problems became so serious that one of
- 12. Uber’s biggest shareholders and other investors pressured Travis Kalanick to resign as CEO, although he will remain on the board. Kalanick was well known for his aggressive strategies, and according to critics, this behavior began trickling down to employees. Investors began to question how Kalanick’s temperament might impact his leadership capabilities after some high-profile negative events. For instance, an Uber driver driving Travis Kalanick had a heated exchange with Kalanick that was recorded and released to the public. Kalanick was highly criticized for his participation on President Donald Trump’s president advisory panel, and accusations that Uber had weakened a taxi union strike protest led to 200,000 customers deleting their accounts. Autonomous car company Waymo, owned by Alphabet Inc., has sued Uber, claiming that one of its employees stole trade secrets. Like many Silicon Valley startups, Uber has also been criticized for its lack of diversity. One woman who worked as an engineer for the firm maintains her sexual harassment claims were dismissed after complaining of unwanted sexual advances by her superior. She wrote a blog detailing her ordeal. In response, Uber launched an investigation into the claims. However, it initially resisted calls from the media and Civil Rights leader Reverend Jesse Jackson to disclose the demographics of its workforce. Uber’s resistance to releasing its diversity statistics coupled with accusations of sexual harassment led to a backlash among certain investors. Two prominent investors wrote a
- 13. letter to Travis Kalanick claiming that Uber had a toxic culture that needed to change. Uber agreed to release its first diversity report, have its employees undergo diversity training, and hire a new chief operating officer. The company hired Bernard Coleman, who was chief diversity officer for Hillary Clinton’s presidential campaign, as its chief diversity officer in order to help increase the diversity of its workforce. It also fired 20 employees it believed were involved in harassment, discrimination, or other improper behaviors. Travis Kalanick responded to the negative press by apologizing for his behavior and admitted he needs leadership help. When morale dropped after the engineer’s sexual harassment allegations, he met with a group of female employees to discuss their concerns. Despite these positive actions, it was not enough to quell shareholder unease. Travis Kalanick agreed to resign as CEO due to the pressure from investors. The challenge Uber faces is that it has become so associated with its founder that it may be difficult to change leadership while maintaining such rapid expansion and success. 2-4c Legal Challenges Regulation is a constant challenge for Uber. As it becomes more popular, Uber will become subject to more legal and regulatory requirements common to other big businesses. For instance, the Americans with Disabilities Act is becoming a challenge for Uber. Since the Uber service is usually operated within a driver’s personal vehicle, many of the vehicles are not wheelchair friendly.
- 14. Taxi lobbies are also pressuring local governments to block Uber in many cities. They claim that Uber hurts their businesses and has an unfair advantage as Uber drivers are not subject to the same restrictions as licensed taxi drivers. Cities have taken action against Uber by blocking ordinances that provide a path to legalization for mobile ride-booking apps and issuing cease-and-desist orders. With Uber looking into expanding into self-driving vehicles—a new industry that will prompt a number of safety laws—its encounters with regulators are not likely to decrease any time soon. Uber has often taken an aggressive stance against regulations that would place limitations on its services. For instance, in 2012 when Washington D.C. attempted to force Uber to accept a price floor to operate in the city, Travis Kalanick accused regulators of price fixing and encouraged Uber users to contact their representatives. The result was a flood of angry responses. Kalanick’s approach to negotiating with regulators could be described as antagonistic as he often ignored his lobbyists’ advice to seek compromise. Uber has also been accused of blatantly disregarding laws in other countries that forbid ride-sharing services, a criticism that will be discussed more in-depth in a later section. In addition to having an unfair competitive advantage, another accusation levied against Uber is that it does not adhere to proper safety standards. Allegedly, Uber drivers were involved in three rapes in Delhi, India; Chicago; and Boston. These rapes harmed Uber’s reputation and cast its safety into question. A lawsuit was filed
- 15. against Uber in San Francisco for the wrongful death of a 6-year-old girl. The lawsuit alleged that a driver was distracted using the UberX app when he struck and killed the girl. Uber responded by claiming that the driver was not an agent for Uber and was not en route or transporting a passenger at the time of the accident. Once again, this brings up the issue of how much Uber should be responsible for its drivers as independent contractors. To reestablish its reputation for safety, Uber has added a “safe ride checklist” to its app, which is a pre-pickup notification that encourages riders to confirm the license plate number and verify their driver’s name and appearance before entering a vehicle. They have also added a team of safety and fraud experts to authenticate drivers and a dedicated incident response team to address rider issues in India. Insurance is another criticism. Although Uber’s website claims that it offers $1 million in liability insurance plans for its drivers, some states are issuing warnings stating that rideshare insurance may not cover them should there be an accident. This is because personal cars are being used for commercial purposes. Many states in the United States are reconsidering insurance requirements in light of this issue, and insurance firms such as Geico and MetLife have begun offering insurance packages for ride-sharing services. 2-4d Global Expansion Uber has adopted the motto “Available locally, expanding globally” to describe the opportunities it sees in global expansion. International
- 16. expansion is a major part of Uber’s marketing strategy, and it has thus far established the ride- sharing service in 72 countries. Uber is correct in assuming that consumers from other countries would also appreciate the low cost, convenience, and freedom that its app services offer. Even though it is successful in some countries, many countries have regulatory hurdles that have caused trouble for Uber to successfully operate in these areas. Perhaps the biggest is the failure to obtain licenses even though Uber drivers offer many of the same services as a taxi. Governments have responded by banning Uber or Uber services due to the lack of professional licenses for drivers. For instance, in Spain, Uber shut down its ride-sharing service after a judge ruled that Uber drivers are not legally authorized to transport passengers by unfairly competing against licensed taxi drivers. Uber has since returned to Spain with UberX, which uses licensed drivers. Police in Cape Town, South Africa impounded 33 cars operating with the Uber app because the drivers did not have a taxi license. Police in Indonesia have been prompted by taxi and transportation operators to investigate whether Uber’s start-up practices are illegal. Bans have also been instituted in France, India, and Germany. France In 2011 Paris became the first city outside of the United States where Uber set up operations. However, an attempt was made to ban one of its services because drivers did not need to be licensed. French police even raided Uber’s Paris office. A French law was
- 17. passed mandating that operating a service that connects passengers to non-licensed drivers is punishable with fines of over $300,000 and up to two years in prison. Hundreds of Uber drivers in France were issued fines for operating illegally. Uber challenged that law, claiming that it is unconstitutional because it hinders free enterprise. A French court decided against banning Uber’s service and sent the case to a higher court. This has generated strong criticism from taxicab officials in France as they claim that they have to license drivers while Uber is currently free from this restriction. French courts later ruled against Uber, and the company no longer uses unlicensed drivers in the country. India India is Uber’s second largest market after the United States. India rejected Uber’s application for a taxi license. In New Delhi a woman’s rape allegation led to a ban against app-based services without radio-taxi permits in the capital. In response to the alleged rape, Uber began installing “panic button” and tracking features to its app. Uber also began offering its service in New Delhi without charging booking or service fees. Despite these changes, Uber continued to run afoul of Indian authorities. India asked Internet service providers to block Uber’s websites because it continued to operate in the city despite being banned. However, it did not ban the apps themselves because doing so would require it to institute the ban across the entire country. Uber must tread carefully to seize upon opportunities in India without violating regulatory requirements. This is more
- 18. difficult as Uber drivers are independent contractors that set their own schedules and make their own decisions about whether to work. Germany In 2015 a German court banned Uber services if they used unlicensed drivers. Uber argued in court that the company itself is only an agent to connect driver and rider. Rules that apply to taxi services do not apply, and all services are deemed to be legal, according to Uber. The court ruled that Uber’s business model clearly infringes the Personal Transportation Law, because drivers transport riders without a personal transportation license. The injunction includes a fine of more than $260,000 per ride for non compliance. If the injunction is breached, drivers could go to jail for up to half a year, in addition to an imposition of fines. The German Taxi Association (Taxi Deutschland) was pleased with the outcome and claimed that taxi services will remain in the hands of qualified people and keep everyone safer. Despite the ruling, an Uber spokesperson said that the company will not give up on Germany because other Uber services that use licensed drivers remain unaffected by the District Court’s verdict. 2-5 Uber Addresses Risks Long-term sustainability of Uber depends on managing future risks in five key areas: 1. Drivers: The number of disgruntled drivers could get out of control if Uber increases its profit share deductions. With recent laws mandating healthcare insurance, drivers
- 19. may require healthcare coverage. Training programs to improve driving skills could reduce risk from negligent drivers and decrease liability insurance costs. Additionally, if Uber successfully expands into the autonomous car industry, it will most likely have to deal with resistance as autonomous vehicles could reduce and/or eliminate the need for drivers. Finally, strong competition in the industry has caused Uber to make changes in how it compensates drivers, which has prompted some drivers to complain that they cannot make a sustainable income. 2. Competitors: Uber’s business model can be found in similar rides-for-hire services, such as Lyft and the Indian ride-sharing service Ola. More rides-for-hires could emerge, in addition to the everyday competition from taxis, limos, rental car businesses, air travel, trains, and city and chartered buses. Switching costs for customers are low, and because ride-sharing companies do not own their own fleets, costs of operating are much less than in other industries. This means that Uber must remain competitive if it wants to keep its customers loyal. Lyft is probably Uber’s biggest competitor in the United States with 20 percent market share. Its smaller size makes it easier for Lyft to subsidize drivers and lower fares. Expanding into the autonomous car industry will also place Uber in competition with Google, Tesla, and major automobile manufacturers that are also trying to enter the industry. 3. Customer Base: Increasing the demand for rides-for-services
- 20. is a continuous or future challenge that requires attention primarily to safety improvements and rates that have a cost/benefit to both passengers and drivers. Unpredictable demand is a future risk that could be met with product diversification. Currently, Uber offers technologyoriented products, and it must continue to be competitive in an industry where there is intense competition for rates. 4. Technology: Customers are wary of downloading apps, and some online businesses have been hacked for credit card information. Uber could upgrade its database security system to reduce financial or personal account information risks. Additionally, success in the autonomous car industry will take a lot of investment from Uber, and many regulators are likely to be initially wary of self-driving cars—especially since there are so few laws governing it. 5. Customer Satisfaction: Long waits, inexperienced drivers, and even sexual harassment have been reported. Better Business Bureau complaints mainly involve pricing and problems with service. Uber might use the Internet to check consumer complaints and address them to improve customer satisfaction. 2-6 Conclusion The emergence of Uber has influenced many services to follow the Uber business model. There are similar firms that offer ride-sharing services, and there are firms that want to be an Uber-type business in the way they deliver goods and services. For example,
- 21. Cargomatic has developed an app to help fill space on trucks. Cargomatic, which now operates in California and New York, has been called the Uber for truckers because it connects shippers with drivers who are looking for extra shipments to haul. This is signaling a shift in the industry, in which people are the infrastructure rather than buildings or fleets of vehicles. Uber faces a number of ethical challenges, including regulatory and legal issues both inside and outside of the United States. Laws that protect consumers specifically target taxi services, whereas Uber defines its services as “ride sharing” and Uber as an “agent” of their “individual contractors.” However, many courts do not view its services in the same way and are forcing Uber to comply with licensing laws or stop business in certain areas. Additionally,snafus by Travis Kalanick and Uber’s aggressive corporate culture has led to Kalanick’s resignation as CEO.Despite Uber’s challenges, the company has become widely popular among consumers and independent contractors. Supporters claim that Uber is revolutionizing the transportation service industry. Investors clearly believe Uber is going to be strong in the market in the long run. Uber has a bright future and expansion opportunities are great. It is therefore important for Uber to ensure the safety of its riders and the drivers. It should also adopt controls to ensure that independent contractors using its app obey relevant country laws. Uber has to address these issues to uphold the trust of its customers and achieve long-term market success. 2-7 Chapter Review 2-7a Questions for Discussion 1. What are the ethical challenges that Uber faces in using app- based peer-topeer sharing technology? 2. Since Uber is using a disruptive business model and
- 22. marketing strategy, what are the risks that the company will have to overcome to be successful? 3. Because Uber is so popular and the business model is being expanded to other industries, should there be regulation to develop compliance with standards to protect competitors and consumers?