Uber technologies inc case study

Business Case Study

1. Why is Uber's valuation so high?

2. What are Uber's competitive advantages? Are those advantages sustainable?

3. What is your evaluation of Uber's culture? What are the pros and cons of that culture?

On a sunny afternoon morning in September 2017, Arianna Huffington stood on a New York City street looking for a Cadillac CTS. A map on her iPhone showed her the car’s position as it approached. She saw it pull around the corner and waved to the Uber Select driver as he pulled up to her. She hopped into the backseat of the Cadillac and nodded a polite hello to driver.

Huffington leaned back and took a deep breath. The leather-trimmed interior of the Cadillac was a quiet refuge from the hustle and bustle of the city. At the age of sixty-six, the Greek-American media mogul’s lifestyle showed no hint of slowing down. She had woken up at five that morning to get in a daily fitness and meditation routine. That was followed by a morning meeting with a team of employ- ees affectionately referred to as her A-team (A for Arianna). Next, she headed to a Manhattan theater for the Women in the World Summit where she interviewed Scarlett Johansson and participated in a panel discussion with several other female corporate leaders. The Uber ride home was the least stress- ful part of her day and was a vast improvement over the New York taxi rides she endured only a few years earlier. The car arrived promptly, was clean inside and out, and the driver was polite. Uber’s app had matched Huffington to a nearby driver, picked an expedient route, and handled the payment.

Huffington was one of Uber’s biggest fans. She had even joined the ride-hailing company’s board the previous year at the request of Uber’s then-CEO and co-founder Travis Kalanick, whom she considered a close friend. “What I love about Uber is that you are clearly transforming not just transportation, but cities,” remarked Huffington during an appearance with Kalanick.1 However, over the past summer, the $68 billion startup was testing the limits of Huffington’s affection as it continued to find itself in the news for all the wrong reasons.

Uber had been a controversial company from the start. In 2010, on Kalanick’s first day as CEO, Uber’s hometown of San Francisco served the company with a cease-and-desist order for running an unlicensed taxi service.2 Kalanick shortened the company’s name from Ubercab to Uber, and con- vinced the city’s regulators to let him continue operating. Seven years later, regulation was still one of Uber’s biggest challenges. The ride service had ceased operations in Austin, Texas and several other locations worldwide where it found itself unable to get along with authorities.

When not tangling with regulators, Uber was struggling to maintain its relationships with driv- ers. In 2017, an embarrassing video of Kalanick verbally sparring with Uber driver, Fawzi Kamel, was making the rounds on the internet. Kalanick was forced to do damage control stating, “This is the first

Professor Frank T. Rothaermel prepared this case from public sources. He gratefully acknowledges Eric Erzinger and Austin Guenther for research assistance. This case is developed for the purpose of class discussion. This case is not intended to be used for any kind of endorsement, source of data, or depiction of efficient or inefficient management. All opinions expressed, and all errors and omissions, are entirely the author’s. © by Rothaermel 2017.

FRANK T. ROTHAERMEL

MH0046 1259927628

REvISEd: OCTObER 2, 2017

Uber Technologies, Inc.

For the exclusive use of M. OTAY, 2019.

This document is authorized for use only by MEHMET YAMAN OTAY in BUS400-Spring2019 taught by MICHAEL ROBERTO, Bryant University from Jan 2019 to Jul 2019.

2

Uber Technologies, Inc.

time I’ve been willing to admit that I need leadership help and I intend to get it. I want to profoundly apologize to Fawzi, as well as the driver and rider community, and to the Uber team.”3 In Seattle, Uber was facing the threat of drivers unionizing, which would fundamentally change drivers’ relationships with the car-hailing service.

Finally, Uber’s image was taking a beating, making it more difficult retain customers and employees. The company was facing, among others, allegations for tolerating a hostile work environment result- ing in sexual harassment and discrimination of female employees and a high-profile lawsuit brought by Waymo (a unit of Alphabet, Google’s parent company) alleging that Uber stole proprietary self- driving car technology when acquiring a start-up founded by a former Waymo employee. Uber also had to implement an automated system to handle customer account cancellations after the grassroots campaign #deleteUber began circulating on social media.4 High-ranking executives were following customers out the door. Over the summer, Uber’s communications chief, vice president of product and growth, and a recently hired president of ride-sharing, among others, had all left the company.5 As Uber continued to garner bad publicity, many people, including Uber’s investors had begun question- ing the company’s corporate culture and leadership. All this came to a head in late August 2017, as Uber’s board forced CEO Travis Kalanick to resign, and appointed dara Khosrowshahi, then CEO of the travel site Expedia, as Uber’s new CEO.

The Cadillac turned onto Mercer Street and stopped in front of a stately apartment building. Huffington thanked the driver and stepped out of the Cadillac. Her phone buzzed. Uber’s app was prompting her to review the driver. Huffington dutifully filled out the review giving him a five-star rating. As she climbed the front steps of her apartment, Huffington could not bring herself to put Uber’s troubles into the back of her head. She was tasked by Uber’s board of directors in guiding the new CEO through this transition period, to help make Uber a less ethically-challenged company, and to turn around its public image. Huffington made some fresh espresso, booted up her laptop, and began to outline some of the challenges that Uber would need to address.

A Brief History of Uber

Uber’s co-founder and long-time CEO, Travis Kalanick, began his entrepreneurial career in 1998 when he dropped out of the University of California, Los Angeles (UCLA) to join the founding team of the file sharing platform, Scour. Scour had attracted millions of users because it offered free but illegal copies of music and movies. The platform quickly drew the ire of movie studios and record labels who sued it for copyright infringement. Scour’s investors declined to fund the company further and it was forced into bankruptcy.6

The failure of Scour inspired Kalanick’s next venture, RedSwoosh. Kalanick transformed Scour’s file-sharing software into an enterprise version that allowed media companies to distribute large files over the web. “The idea was to take those 33 litigants that sued me and turn them into customers,” remarked Kalanick.7 In 2007, RedSwoosh sold to a rival for $23 million, leaving Kalanick enough money to buy a house and make some angel investments.8

In the winter of 2008, Travis Kalanick and his friend Garrett Camp were travelling together in Paris when a snowstorm interrupted their travels. Their struggle to hail a taxi during the storm inspired them to create a ride-hailing system.9 Within a year, the two founded Uber, a mobile application for connecting passengers to private black-car drivers. They chose the name Uber when inspired by the

For the exclusive use of M. OTAY, 2019.

This document is authorized for use only by MEHMET YAMAN OTAY in BUS400-Spring2019 taught by MICHAEL ROBERTO, Bryant University from Jan 2019 to Jul 2019.

Uber Technologies, Inc.

3

idea of using a Mercedes limousine and driver instead of a regular cab -- the German word uber means “over” or “above.” by 2010, Uber raised $1.45 million and begun operations in San Francisco. Uber expanded their ride-hailing services from the upscale black car to include lower cost everyday vehi- cles (UberX), SUvs (UberXL), luxury vehicles (UberSelect), carpools with other customers (UberPOOL), and even helicopters in certain locations. Uber has also actively pursued the wider mobile transporta- tion and logistics markets, introducing a courier service (Uber Rush) and a restaurant meal delivery service (Uber Eats).

The Taxi Industry

The concept of hiring an individual transportation vehicle for a local trip goes back at least to the horse-drawn carriages of the 17th century. Cities began regulating the industry in response to concerns for passenger safety. Today, most cities in the United States require a taxi to purchase one of a limited number of “medallions” that certify the taxi company is in good standing with local authorities. Taxi drivers typically lease the medallion cab each month from the taxi company, and are dispatched to passengers from a central office or by chance encounters on the street between appointments.

because of the limited supply of taxi medallions and the overwhelming demand for ride-hailing in large cities, these medallions were a fantastic investment for decades. From 2004 to 2013, the average price of a medallion in Philadelphia increased by 600%, and single medallions have fetched prices as high as $400,000. In New York City, taxi medallion reached a sticker price of $1.3 million in 2003. This created an artificial limitation on the supply side, driving up prices for taxi rides and creating shortages of rides available, combined with notoriously poor service. but Uber and other ride-hailing services such as Lyft would change this cozy arrangement between city officials and the few taxi medallion owners. To wit, by 2017, the price for a New York City taxi medallion had fallen to some $200,000.10,11

Business Model Innovation

Uber operates as a private limousine service, thereby avoiding the expensive regulatory regime that requires traditional taxi operators to purchase a “medallion” and undergo rigorous screening processes for drivers. Uber’s business model upended several key components of the traditional taxi business model. Traditional taxi operators receive customers in two ways: 1) chance interactions when the taxi is available and happens upon a customer, or 2) a scheduled appointment that typically requires advanced notice or the customer to wait for a prolonged period of time while the taxi travels from the central dispatching station. An Uber customer, on the other hand, requests a ride from their smartphone app where the request is matched to a nearby driver, often in less than a minute. The customer’s price is also typically lower than a traditional taxi. Uber takes about 25 percent of each fare as a commission for matching the driver and passenger.12

Uber’s innovative revenue model appears to be viable because it is supported by an equally innova- tive operational cost model. A traditional taxi company has a fixed supply of cabs and drivers that are available at any given time. When demand for the cabs exceeds the available supply, such as after a sporting event, the taxi company has no method for increasing its supply of cabs to that location.

For the exclusive use of M. OTAY, 2019.

This document is authorized for use only by MEHMET YAMAN OTAY in BUS400-Spring2019 taught by MICHAEL ROBERTO, Bryant University from Jan 2019 to Jul 2019.

4

Uber Technologies, Inc.

Uber, on the other hand, does not own any of the cars that serve its customers (so-called “asset-light”), nor does it directly employ any of the drivers. Instead, the drivers are independent contractors who are responsible for providing their own vehicle.

Unlike taxis, Uber varies pricing to match supply to demand. When the demand for Uber cars exceeds the available supply, Uber temporarily raises fares in that location. This “surge pricing” incentivizes drivers to serve that location and encourages price-sensitive customers to shift their use of Uber to a time with lower demand. This market-based approach to pricing occasionally results in very high fares and consumer backlash. For example, in January 2016, Uber customer bonnie Lieb generated a $640 fare for a ride to Reagan National Airport on a snowy Monday morning that would normally have cost $50 to $70. “I nearly passed out. I thought ‘This can’t be right. This has to be a mistake. This is ridiculous,’” remarked Lieb to a reporter.13 Asked to comment on the fare, Uber’s spokeswoman Kaitlin durkosh said that the fare was on the high end, but defended the price, stating, “We strive to be reliable at all times. Had dynamic pricing not been in effect, there’s the possibility that no ride would have been available.”14 To Uber’s defense, riders do see the expected fare prior to ordering and commencing a trip.

Uber’s substantial funding, raised from debt and equity investors (close to $70 billion), allows Uber to subsidize fares and to attract more drivers to its platform. All this is done to create network effects based on a large installed base of Uber drivers and users. Although Uber is still losing money as it continues to subsidize customer fares, its revenues are increasing rapidly, from $400 million in 2014 to more than $8 billion in 2017.

If Uber is lower-priced, then more people will want it. And if more people want it and can afford it, then you have more cars on the road. And if you have more cars on the road, then your pickup times are lower [and] your reliability is better. The lower-cost product ends up being more luxurious than the high-end one.

– Travis Kalanick, Uber co-founder and long-time CEO15

In 2014, the company introduced UberPool, a service that allows riders to split fares with other pas- sengers reducing their costs. Uber’s app matches passengers taking similar routes and combines their trips creating a carpool. In 2016, Uber stated that UberPool accounts for more than half of its rides in many cities.16 In 2017, Uber offered services in over 600 cities and in over 60 countries worldwide.

Two people taking a similar route are now taking one car instead of two. Not only is it much less expen- sive than taking a cab or owning a car, it has the potential to be as affordable as taking a subway, or a bus, or other means of transportation.

– Travis Kalanick, Uber then-CEO (Fast co)

Drivers

Uber refers to its drivers as “partners.” The requirements to become a partner vary with location but generally include passing a background check, submitting insurance and license documentation, completing a city-knowledge test, and a vehicle meeting Uber’s quality standards.17 Uber’s drivers are legally independent contractors allowing them to choose when and where to offer their services.

For the exclusive use of M. OTAY, 2019.

This document is authorized for use only by MEHMET YAMAN OTAY in BUS400-Spring2019 taught by MICHAEL ROBERTO, Bryant University from Jan 2019 to Jul 2019.

Uber Technologies, Inc.

5

Uber provides drivers with commercial insurance while they are driving for the service.18 drivers are responsible for their own driving-related expenses including fuel and maintenance of their vehicles.

For most drivers, Uber is an opportunity to earn additional income. About two thirds of Uber driv- ers are employed either part- or full-time at another job.19 Research conducted by Uber shows that after adjusting for expenses, its drivers earn as much or more than taxi drivers and chauffeurs. For example, an Uber driver in boston could be expected to earn $20.86 per hour after expenses while a comparable taxi driver or chauffeur would only earn $12.96.20 Uber’s drivers tend to be younger and better educated than taxi drivers and chauffeurs. Exhibit 1 shows demographic data collected by Uber compared to taxi drivers and chauffeurs as well as all US workers.

According to The New York Times, Uber experiences roughly 25 percent turnover in its drivers every three months.21 Uber has turned to gamification to retain drivers and keep them on the road longer.22 Uber’s driver-facing app displays metrics including the number of trips in the current week, earnings, and the driver’s rating.23 The company has supplemented these with badges driver can earn for providing passengers with excellent service, entertaining drives, and go above and beyond. “The whole thing is like a video game,” explains Uber driver Eli Solomon.24

In early 2017, Uber agreed to pay $20 million to settle a lawsuit brought by the Federal Trade Commission alleging that the company had misled drivers about earnings potential and vehicle financing. The commission alleged that Uber had claimed that the median income for drivers in New York and San Francisco exceeded $90,000 and $74,000 respectively, when in fact less than 10 percent of drivers in those cities earned that amount.25 Exhibit 2 shows hourly earnings of Uber drivers com- pared with taxi and chauffer drivers.

Passengers

In the spring of 2016, the Pew Research Center reported that just 15 percent of Americans had used a ride-hailing service like Uber. Of those, 17 percent used the services daily or weekly, 26 percent monthly, and the remaining 56 percent used them less often than monthly.26 Not surprisingly, Pew’s research indicated that more frequent use of ride-hailing services correlated with lower car owner- ship. Much like Uber’s drivers, ride-hailing service passengers tend to be younger and better educated than the general U.S. adult population. Exhibit 3 shows the popularity of ride-hailing services by demographic.

Growth

In december 2015, Uber announced that its drivers had delivered one billion rides since the found- ing of the business. Only six months later, on June 18th, 2016, Uber announced that an additional billion rides had been delivered – representing an average of 5.5 million rides delivered per day over those six months.27

At the end of 2016, Uber was operating in 75 countries valued at $69 billion, making it the most valuable privately-held startup (“unicorn,” a privately held start-up worth more than $1 billion). In

For the exclusive use of M. OTAY, 2019.

This document is authorized for use only by MEHMET YAMAN OTAY in BUS400-Spring2019 taught by MICHAEL ROBERTO, Bryant University from Jan 2019 to Jul 2019.

6

Uber Technologies, Inc.

2016, Uber’s gross bookings (total value of fares) were $20 billion, doubling its 2015 figure. This resulted in $6.5 billion in net revenue from the commissions Uber earned on fares. despite its con- tinued growth, the company recorded a net loss of $2.8 billion for the year excluding its operations in China (which it exited by selling its stake to didi Chuxing).28 Exhibit 4 shows the exponential growth of Uber’s valuation.

Growing Pains

From its beginning, Uber’s growth has been accompanied by regulatory scrutiny, lawsuits, and push- back from a range of stakeholders, including drivers, riders, labor organizations, competitors, partners, and politicians. Cities, states, and entire countries have fined Uber and even banned it from operating for a range of issues including inadequate vetting and licensing of drivers, price gouging disguised as “surge pricing,” anticompetitive tactics, improper classification of drivers as independent contractors rather than employees, sexist ad campaigns, and implicitly encouraging its drivers to be distracted on the road by using the app.29

Perhaps most concerning is the physical safety of pedestrians and Uber passengers. In 2013, a San Francisco Uber driver struck and killed a six-year-old girl who was crossing the street with her family using the crosswalk. Although Uber immediately deactivated the driver’s account, the company denied liability for the death because the driver was classified as an independent contractor and the death occurred between fares. The family sued Uber alleging that the driver was using the app to find his next ride, eventually settling for an undisclosed amount in July 2015.30 In 2014 alone, several Uber drivers were accused of groping, assaulting, and kidnapping their passengers.31

At the heart of many of these problems, is Uber’s classification of drivers as independent contractors rather than employees. by classifying drivers as independent contractors, Uber can claim that drivers are entitled to operate with a degree of autonomy, thus shielding the company from actions commit- ted by the drivers. If Uber drivers were classified as employees, Uber would be responsible for driver payroll taxes, ensuring that drivers are paid at least minimum wage, and vehicle maintenance costs – all of which would substantially increase Uber’s operating expenses. In 2013, Uber drivers initiated a class action lawsuit challenging this central principle of Uber’s business model. In April 2016, Uber announced a $100 million settlement of the case that would allow Uber to continue classifying driv- ers as independent contractors. but four months later, the presiding judge rejected the settlement as inadequate for the possible damages that could be claimed by the drivers.32

venture capitalist Peter Thiel once called Uber the “most ethically challenged company in Silicon valley.”33 Thiel, an investor in Uber rival, Lyft, argues that Uber is pushing the envelope of what is acceptable, ethical, and even legal with all its stakeholders, including its dealings with regulators, gov- ernment bodies at different levels, freelance drivers, journalists, and competitors. Echoing Thiel’s assess- ment, The Wall Street Journal argues that Uber itself—rather than Lyft or old-line taxi and limo services—is its own biggest threat, functioning as its own biggest rival due to competitive tactics and comments by Uber executives harming the company’s reputation and becoming a liability.34

Uber’s preference for rapid expansion instead of compliance with local laws has frequently landed it in courtrooms and the crosshairs of politicians. Uber relies on its popular support from customers and drivers to counter regulatory interference. In 2014, Uber hired ben Metcalfe to support “citizen engagement across legislative efforts.” Metcalfe’s team has implemented email-based systems allowing

For the exclusive use of M. OTAY, 2019.

This document is authorized for use only by MEHMET YAMAN OTAY in BUS400-Spring2019 taught by MICHAEL ROBERTO, Bryant University from Jan 2019 to Jul 2019.

Uber Technologies, Inc.

7

Uber users to easily contact local politicians and lobby on Uber’s behalf. These tactics have been met with success. In 2015, New York City’s Mayor de blasio pushed to cap the number of Uber drivers in the city. Uber created a “de blasio” tab in their app showing the wait time customers would experience under the proposed cap and the ability to send a form email to the mayor. After a deluge of emails from constituents, the mayor gave up on the proposal.35

In August 2014, Uber hired david Plouffe, barack Obama’s 2008 presidential campaign manager, as Senior vice President of policy and strategy to soften Uber’s public image and lobby on Uber’s behalf. In May 2015, Rachel Whetstone was hired from a similar position at Google to replace Plouffe, who was appointed as an Uber board member and serves as a chief advisor to then-CEO Kalanick.36 In his new role, Plouffe advocated for Uber, seeing the company as an integral part of the transportation ecosystem. He argued that as more and more people live and work in cities, Uber will help to address traffic con- gestion, provide an alternative to personal cars in suburbs, reduce drunk driving, and provide reliable and safe services to underserved city and suburban areas. Plouffe highlighted that one of the reasons people remain trapped in poverty is the lack of reliable transportation, which Uber helps to overcome. Concluded Plouffe, “I don’t subscribe to the idea that the company has an image problem. I actually think when you are a disrupter you are going to have a lot of people throwing arrows.”37 In early 2017, david Plouffe left Uber to join the Chan Zuckerberg Initiative, which has the goal of “advancing human potential and promoting equal opportunity.”38

Uber had to acknowledge that it has been circumventing regulators’ efforts to crackdown on illegal Uber services using a secret tool it had developed named Greyball. Greyball was originally intended to improve drivers’ safety by showing fraudulent users of Uber a fake version of the app that steered these users away from Uber vehicles by giving them wrong information. However, the tool quickly found a new use— to thwart police sting operations in cities where Uber was operating without per- mission by identifying law enforcement using Uber’s app and using Greyball against them.39 Uber programmed its software to set up GPS rings around government offices and track low-cost phones and credit cards linked to government accounts. Thus, when law enforcement officers posed as Uber customers, Uber showed them dummy screens with fake Uber cars moving, none of which would stop and pick them up. Greyball was deployed worldwide, especially in cities where Uber was outlawed.

The U.S. department of Justice has opened an inquiry into Uber’s use of Greyball in Portland, Oregon and Philadelphia.40 In March 2017, Joe Sullivan, Uber’s chief security officer stated that the company would be reviewing the company’s past use of the tool and would be, “expressly prohibiting its use to target action by local regulators going forward.”41

China

Uber began operations when entering the Chinese cities of Guangzhou and Shenzhen in 2013 with a ride-hailing service for licensed limousines.42 In China, Uber was immediately challenged by didi Chuxing, a local competitor, which had the backing of internet giants Alibaba and Tencent. In 2014, Uber expanded its services by adding People’s Uber, a new product using private drivers like its UberX service in the U.S. The move prompted government raids on Uber’s Chinese offices by authorities who questioned the legality of the practice. Undeterred, Uber continued operating and by June 2015 Uber was providing 100,000 rides per day.43 “To put it frankly, China represents one of the largest untapped opportunities for Uber, potentially larger than the U.S.,” wrote then Uber then-CEO, Travis Kalanick in 2015.44 despite Uber’s popularity, the service was generating massive losses in China. In many cases

For the exclusive use of M. OTAY, 2019.

This document is authorized for use only by MEHMET YAMAN OTAY in BUS400-Spring2019 taught by MICHAEL ROBERTO, Bryant University from Jan 2019 to Jul 2019.

8

Uber Technologies, Inc.

Uber was paying drivers more than the fares they were collecting.45 In August 2016, Uber announced the merger of its Chinese operations with didi Chuxing, in exchange for a 20 percent equity stake in the Chinese firm – making Uber the largest shareholder of didi Chuxing.46 With a valuation of $50 billion, didi Chuxing is the world’s the second most valuable private start-up.

Autonomous Vehicles

The concept of autonomous vehicles goes back decades, but recent advances in computational power, wireless communication, and machine vision and learning have made self-driving cars tech- nologically feasible. Companies such as Tesla and Google’s Waymo have logged millions of miles with vehicles driving fully autonomous, but under test conditions (Level 5 Automation). Tesla vehicle for public sale in 2017 are equipped with Level 3 Automation (see definitions of different levels of Automation in Exhibit 5).

Uber has invested heavily in developing self-driving car technology, with the goal of replacing its drivers with computers. Commenting on this strategic intent, Uber co-founder Travis Kalanick stated: “The reason Uber could be expensive is because you’re not just paying for the car — you’re paying for the other dude in the car. When there’s no other dude in the car, the cost of taking an Uber anywhere becomes cheaper than owning a vehicle.”47 After an outcry by Uber drivers on social media such as Facebook and Twitter, Kalanick backpedaled by stating that he doesn’t think autonomous cars will be ready for widespread use until 2035.

In the spring of 2015, Uber opened its Advanced Technology Group in Pittsburgh, Pennsylvania, to develop autonomous cars and sophisticated mapping services. Uber gained access to scientists when it funded research at Carnegie Mellon University’s National Robotics Engineering Center (NREC). A few months later, Uber poached entire NREC research teams with signing bonuses, twice the salaries, and stock options. Uber built a super-modern research center adjacent to the CMU campus. The NREC was left a shell, with its entire future in question. To add insult to injury to Carnegie Mellon, Uber rented a billboard next to its computer science department, reading, “We are looking for the best software engineers in Pittsburgh.”48 In September 2016, Uber piloted a fully autonomously con- trolled version (Level 5) of its UberX service in Pittsburgh. The human in the front seat was merely a required “safety driver” but did not do or touch anything.