Uber technologies inc case study

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.

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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.

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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.

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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.

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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.

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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.