You’re in New York, Paris, Chicago, or another major city and need a ride. Instead of trying to hail a cab, you pull out your smartphone and tap the Uber app. A Google map pops up displaying your nearby surroundings. You select a spot on the screen designating an available driver, and the app secures the ride, showing how long it will take for the ride to arrive and how much it will cost. Once you reach your destination, the fare is automatically charged to your credit card. No fumbling for money.
Rates take into account the typical factors of time and distance but also demand. Uber’s software predicts areas where rides are likely to be in high demand at different times of the day. This information appears on a driver’s smartphone so that the driver knows where to linger and, ideally, pick up customers within minutes of a request for a ride. Uber also offers a higher-priced town car service for business executives and a ride-sharing service. Under certain conditions, if demand is high, Uber can be more expensive than taxis, but it still appeals to riders by offering a reliable, fast, convenient alternative to traditional taxi services.
Uber runs much leaner than a traditional taxi company does. Uber does not own taxis and has no maintenance and financing costs. It does not have employees, so it claims, but instead calls the drivers independent contractors, who receive a cut of each fare. Uber is not encumbered with employee costs such as workers’ compensation, minimum wage requirements, driver training, health insurance, or commercial licensing costs. Uber has shifted the costs of running a taxi service entirely to the drivers and to the customers using their mobile phones. Drivers pay for their own cars, fuel, and insurance. What Uber does is provide a smartphone-based platform that enables people who want a service—like a taxi—to find a provider who can meet that need.
Uber relies on user reviews of drivers and the ride experience to identify problematic drivers and driver reviews of customers to identify problematic passengers. It also sets standards for cleanliness. It uses the reviews to discipline drivers. Uber does not publicly report how many poorly rated drivers or passengers there are in its system.
Many decisions required for running the business do not require humans, relying instead on finely tuned computer algorithms. For example, Uber systems use the accelerometer in drivers’ phones along with GPS and gyroscope to track drivers’ performance and send them safe driving reports. It’s Uber’s systems that decide how much to price a ride in periods of peak and slow demand and where drivers should relocate to find more ride-hailing passengers. Uber drivers receive in-app notifications, heat maps, and emails with real-time and predictive information. Uber’s driver rating system also is automated. In certain Uber services, if drivers fall below 4.6 stars on a 5-star rating system, they may be “deactivated.”
Uber is headquartered in San Francisco and was founded in 2009 by Travis Kalanick and Garrett Camp. In 2019, it had nearly 4 million drivers working in over 600 cities and 65 countries worldwide After paying for drivers, marketing, and other operating expenses, Uber still operates at a loss, with losses in developing markets swallowing up profits generated in North America, Europe, and elsewhere. Uber’s business strategy has been to expand as fast as possible, forgoing short-term profits in favor of laying the groundwork for long-term returns. As of early 2019, Uber had raised over $24 billion from venture capital investors. In the last several years, Uber has sold its operations in China, Southeast Asia, and Russia, where it had been engaged in costly turf wars with competitors, to free up capital to invest in other markets such as India, Latin America, and the Middle East.
By digitally disrupting a traditional and highly regulated industry, Uber has ignited a firestorm of opposition from existing taxi services in the United States and around the world. Who can compete with an upstart firm offering a 40 percent price reduction when demand for taxis is low? (When demand is high, Uber prices surge.) What city or state wants to give up regulatory control over passenger safety, protection from criminals, driver training, and a healthy revenue stream generated by charging taxi firms for a taxi license?
If Uber is the poster child for the new on-demand economy, it’s also an iconic example of the social costs and conflict associated with this new kind of business model. Uber has been accused of denying its drivers the benefits of employee status by classifying them as contractors, violating public transportation laws and regulations throughout the United States and the world, abusing the personal information it has collected on ordinary people, increasing traffic congestion, undermining public transportation, and failing to protect public safety by refusing to perform sufficient criminal, medical, and financial background checks on its drivers. Uber’s brand image had been further tarnished by negative publicity about its aggressive, unrestrained workplace culture and the behavior of CEO Kalanick.
Uber has taken some remediating steps. It enhanced its app to make it easier for drivers to take breaks while they are on the job. Drivers can now also be paid instantly for each ride they complete rather than weekly and see on the app’s dashboard how much they have earned. Uber added an option to its app for passengers to tip its US drivers, and Kalanick resigned as head of Uber in June 2017. (He was replaced by Dara Khosrowshahi.)
Critics fear that Uber and other on-demand firms have the potential for creating a society of part-time, low-paid temp work, displacing traditionally fulltime, secure jobs—the so-called Uberization of work. According to one study, half of Uber drivers earn less than the minimum wage in their state. Uber responds by saying it is lowering the cost of transportation, expanding the demand for ride services, and expanding opportunities for car drivers, whose pay is about the same as other taxi drivers.
Does Uber have a sustainable business model? The company is still not profitable. Uber has competitors, including Lyft in the United States and local firms in Asia and Europe. Established taxi firms in New York and other cities are launching their own hailing apps and trumpeting their fixed-rate prices. The onslaught of competition from all sides has intensified recently, causing Uber’s losses to balloon to $8.5 billion for 2019. CEO Khosrawshahi expects Uber to turn profitable by the end of 2020. Startups backed by deep-pocketed investors (including Softbank Group, Uber’s biggest shareholder) are using heavy discounts to challenge Uber’s food delivery services in the United States, India, and Mexico, as well as Uber’s Latin American ride- hailing business. Uber’s once-robust revenue growth in Latin America has lost some of its steam. Uber’s senior management is counting on the price wars eventually easing, since Uber continues to fight back with low prices. Management is also looking for more ways to further slash costs.
Uber’s principal markets are in dense cities, but over 70 percent of the U.S. population lives in rural or suburban areas where car ownership tends to be more convenient and cheaper. Ride-hailing has lured people away from public transit, contributing to traffic congestion in major cities and spurring calls for more regulation that would limit growth.
CEO Khosrowshahi has been touting Uber as a one-stop shop for disparate categories of transportation, and has launched new services for same-day deliveries, including food delivery (Uber Eats), shared electric bikes and scooters, and a freight shipping brokerage. He sees Uber as the “Amazon of transportation,” with the potential to become the dominant force in all forms of transportation. In Uber’s vision of the future, most people won’t own cars. People will use electric bikes and scooters for short distances. Takeout dinners will be replaced by on-demand delivered meals. Self-driving cars will shuttle people around the roads and autonomous trucks will roam the highways. In the air drones will make the deliveries. Uber wants to do it all. Can it?
Along with major auto makers such as Ford and Volkswagen, Uber has invested heavily in self-driving cars, which management believes will be key to lowering labor costs and ensuring long-term profitability. (A study conducted by UBS showed a self-driving “robo-taxi” costs about 80 percent less than a traditional taxi.) But self-driving cars are many years away from being able operate safely on the road under any conditions as humans can. Autonomous vehicles still struggle to anticipate what other drivers and pedestrians will do and cannot operate safely and reliably under all weather conditions and types of terrain.
With radar, sensors, and high-resolution cameras, self-driving vehicles can detect and identify the objects on a street, including other cars, pedestrians, and cyclists. But they can’t always correctly anticipate what they’re going to do next. Self-driving cars can’t always correctly respond to unusual circumstances, such as pedestrians crossing the road when cars have the green light or cars making illegal turns. Today’s self-driving cars have about 80 percent of the technology they need to substitute for human drivers. The remaining 20 percent, however, including software that can reliably anticipate what other drivers, pedestrians, and cyclists are going to do, will be much more difficult to perfect. A computer-driven car that can handle any situation as well as a human under all conditions is decades away at best. The Chapter 11–ending case study provides more detail on this issue.
After a self-driving Uber car struck and killed a woman in Tempe, Arizona, in March 2018, Uber scaled back its autonomous vehicle program. Even before the accident, Uber’s self-driving cars were having trouble driving through construction zones and near tall vehicles like big truck rigs. Test drivers had to take over the car almost every mile. Uber and others will be wrestling with autonomous vehicle technology for many years to come. In the meantime, Uber still needs to find a way to make money. Will Uber ever be able to make money?
Sources: Dominic Rushe, “Uber to be Profitable by End of 2020, CEO Dara Khosrawshahi Says,” The Guardian, February 6, 2020; Mansoor Iqbal, “Uber Revenue and Usage Statistics (2020),” Business of Apps, March 24, 2020; Eric Jhonsa, “Uber Needs to Curb Its U.S. and Latin American Market Share Losses,” Real Money, January 21, 2020; Eliot Brown, “Uber Wants to Be the Uber of Everything—But Can It Make a Profit?” Wall Street Journal, May 4, 2019; Alex Rosenblat, “When Your Boss Is an Algorithm,” New York Times, October 12, 2018; Steven Hill, “New Leadership Has Not Changed Uber,” New York Times, March 26, 2018; Daisuke Wakabashai, “Uber’s Self- Driving Cars Were Struggling Before Arizona Crash,” New York Times, March 23, 2018.
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