L09 Uber: Competing Globally PDF

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9 - 720- 404 REV: JUNE 29, 2020Professor Alexander J. MacKay and Case Researchers Amram Migdal and John Masko (Case Research & Writing Group) prepared this case. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School and n...

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For the exclusive use of S. Xu, 2020.

9- 720 - 40 4 REV: JUNE 29, 2 020

ALEXAN DER J. MAC KAY AMRAM MIGDAL JOHN MASKO

Uber: Competing Globally Uber London Limited found to be not fit and proper to hold a private hire operator licence. — Headline, Transport for London press release, November 25, 20191 In November 2019, Transport for London (TfL), the transportation authority of the British capital, denied Uber a new license to operate in Greater London. TfL claimed that Uber had exhibited a “pattern of failures” regarding existing regulations and concluded that the ridesharing company “is not fit and proper at this time.” 2 While allowed to continue operating as it appealed the decision, the news was a serious threat to Uber’s existence in London. CEO Dara Khosrowshahi lamented, “This TfL decision is just wrong. Over the last two years we have fundamentally changed how we operate in London.”3 TfL’s decision was met with approval by London’s taxi drivers, who objected to what they viewed as Uber’s preferential treatment by regulators and its increasing encroachment on their market share. “We’ve won the battle, let’s see who wins the war,” said one of London’s traditional black cab drivers.4 It was not the first time Uber had clashed with local authorities in London and elsewhere. Since July 5, 2010, when Uber’s first rider had used the app to hail a ride across its hometown of San Francisco, California, the company had engaged in a confrontational relationship with regulators and incumbents in markets worldwide. Uber cast itself as a technology platform as opposed to a transportation company, and it had a history of circumventing regulatory processes required of competing transportation operators. With venture capital backing, Uber further raised the ire of competitors by heavily subsidizing drivers and riders to get them to switch to Uber whenever it entered new markets. The denial of a new license to operate in London was the latest development in a long, fraught history between Uber and TfL. Yet the Silicon Valley-based company could ill afford to lose such a prominent and populous market, especially with increased pressure to achieve profitability as a newly public company. Worldwide, both Uber and its CEO were under tremendous scrutiny, and Khosrowshahi knew that navigating the pushback from local and national governments and established competitors was essential to Uber’s success. In the short term, he faced the immediate dilemma of responding to TfL’s decision. Could Uber find a way to adapt its business model to be successful in London? Over the long term, what strategy would ensure Uber’s global success as the transportation landscape continued to evolve?

Professor Alexander J. MacKay and Case Researchers Amram Migdal and John Masko (Case Research & Writing Group) prepared this case. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2020 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

This document is authorized for use only by Shuning Xu in STGY 681.11 MSGB F20 taught by Robert Bikel, Pepperdine University from Oct 2020 to Mar 2021.

For the exclusive use of S. Xu, 2020. 720-404

Uber: Competing Globally

Uber Company Background In 2009, Travis Kalanick and Garrett Camp founded Uber. Late the previous year, they had come up with the idea of calling and paying for a cab via a smartphone app after struggling to find a taxi on a wintry night in Paris.5 By 2011, the company had expanded beyond the Bay Area to New York City, Chicago, and other U.S. markets. In December 2011, Uber launched operations in Paris, marking its first international foray. The company expanded rapidly in subsequent years, entering Australia in 2012 and Africa, Asia, and South America in 2013 (see Exhibit 1). In 2018, Uber derived 56% of its $10.9 billion in revenue from operations in the U.S. and Canada, 18% from Latin America, 16% from Europe, the Middle East, and Africa, and 9% from Asia Pacific (see Exhibit 2). By 2019, Uber was in 700 cities worldwide, where three million drivers used the platform to provide more than 15 million rides each day. 6

Evolution of Uber Products At its founding, the company then known as UberCab offered private luxury car service in the San Francisco area, which riders could call with a push of a button on their phones. Customers were primarily Silicon Valley executives, and UberCab was marketed as a more convenient and reliable black car service with professional livery drivers. Riders requested rides using the app, and available drivers would then receive a notification and could accept the ride. A built-in mapping function then guided the driver to the rider’s pickup location and destination. Riders paid via the app, which prestored their credit card information. At the time, rides typically cost about one-and-a-half times as much as a taxi fare, and Uber kept 20% of each fare, while the rest went to the drivers.7 In 2012, UberX debuted, allowing non-professional, individual drivers to offer rides in their own vehicles via the Uber platform. UberX fares were about 35% lower than Uber’s black cars (now called UberBLACK) and competitive with, and often lower than, taxi fares. 8 Uber continued to add products, and by 2019 the app included a cheaper carpool option (UberPOOL), an electric bike- and scootersharing option (JUMP), a meal delivery service (Uber Eats), and a number of other options (see Exhibit 3). Not all offerings were available in all locations. One Uber employee said, “When we enter a new city, we launch with a standard package. We let riders get used to our core products, and then we iterate and alter our offerings depending on the market’s reaction.”9 In 2018, the ridesharing company facilitated 5.22 billion rides worldwide on its platform and was approaching 12 billion rides offered cumulatively since 2015 (see Exhibit 4).

Uber for Riders To use Uber, riders downloaded the app on their smartphones, registered for an account, and entered their credit card information. Through a simple interface, riders submitted their desired destinations and were shown projected arrival times and pricing across available service options (e.g., UberX, UberPOOL, etc.). Once a rider made a selection, Uber alerted nearby drivers and matched a driver. The rider could see the driver’s name and customer rating, the make, model, and license plate number of the vehicle, and the estimated arrival time at the pickup and drop-off locations. The app’s map allowed riders to track drivers’ progress in real time while awaiting pickup and during rides. As rides concluded, the app charged riders’ credit cards—fares varied by product, distance, and availability—and riders could leave a tip and rate drivers; drivers also had the ability to rate riders.

2 This document is authorized for use only by Shuning Xu in STGY 681.11 MSGB F20 taught by Robert Bikel, Pepperdine University from Oct 2020 to Mar 2021.

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Uber for Drivers Eligible drivers could sign up to use Uber’s platform by registering for an account, submitting a few documents, meeting local vehicle requirements, and passing an online screening.10 In 2019, Uber charged drivers a flat fee for each trip and kept 25% of the gross fare, which was based on set per-mile and per-minute rates determined by an algorithm.11 Surge pricing raised per-mile and per-minute rates by a certain multiple, adjusted every few minutes, when there were more ride requests than there were drivers available. Uber claimed drivers earned $15–$30 per hour. 12 Fares varied by service, so drivers could, for example, earn more per ride for UberBLACK than UberX, although they might receive fewer requests for the higher-paying rides. Drivers could sign up to provide different types of Uber services, depending on their vehicle and what they thought would be most profitable. 13

Corporate Finance From early on, Uber was backed by substantial capital investments. In 2010, Uber received its first angel investment of $1.25 million, followed by series A and B rounds led by Benchmark Capital, Menlo Ventures, and Goldman Sachs. By 2012, the company was worth $330 million.14 Uber continued to add both financial and strategic investors in subsequent rounds and was valued at $60 billion in 2015. By 2018, Uber had raised $21 billion over the course of numerous funding rounds and was the highestvalued startup in the world at $62 billion. 15 In May 2019, the company went public at $41.57 per share; by year’s end, the share price fell to around $29 and market capitalization stood at about $50 billion.16

Principled Confrontation From the company’s inception, Kalanick operated Uber with an ask for forgiveness, not for permission mentality when it came to expansion into new markets and interactions with regulators and competitors. As early as 2010, the company clashed with San Francisco and California transportation authorities over its lack of a proper taxi license.17 Then-CEO Kalanick responded by removing the word Cab from the company’s name and rebranding as Uber, without changing strategy or operations.18 Over the coming decade, Uber would regularly clash with regulators in markets from Boston to Las Vegas in the U.S. and, worldwide, from Colombia, to China, to Ghana, and beyond. Often, disputes centered on Uber’s definition of itself as a technology firm, not a transportation company. Uber did not own vehicles nor employ drivers, but rather provided a platform that riders and drivers used to connect with one another. The company frequently began operating in markets without obtaining transportation licenses or meeting regulatory standards required of typical taxi operators. According to one writer, “Uber developed an aggressive expansion technique called ‘principled confrontation’ in which Uber simply began operating in a city or region until being told that it didn’t have permission to do so. At that point the firm would mobilize public support for its service, using an array of lobbyists, followed by a political campaign to change the local regulations.” 19 Uber took a similarly confrontational approach with existing taxi operators. It subsidized drivers aggressively and offered steep discounts to customers in new locales in order to gain market share. Backed by venture capital, Uber could afford to outspend many competitors and typically sent advance teams to new cities before launching in order to recruit drivers and quickly gain the scale necessary to reliably match the number of riders and drivers using the platform. Uber’s tactics led to passionate and at times violent opposition from competitors in the form of massive taxi driver strikes, protests, political lobbying, and physical attacks on Uber drivers and passengers. In some cases, Uber had been required by regulators to stop operations or chose to exit from markets (see Exhibit 5).

3 This document is authorized for use only by Shuning Xu in STGY 681.11 MSGB F20 taught by Robert Bikel, Pepperdine University from Oct 2020 to Mar 2021.

For the exclusive use of S. Xu, 2020. 720-404

Uber: Competing Globally

Culture Problems at Uber As Uber expanded globally, company culture problems developed. Early challenges and bad publicity centered on privacy and user data and on the safety and reliability of the rideshare model. In 2014, press reported on a feature colloquially called “Creepy Stalker View,” which allowed Uber employees to track individual users by GPS.20 In 2017, a blog post by former Uber engineer Susan Fowler accused the company of having a misogynistic culture. Uber commissioned an investigation headed by former U.S. Attorney General Eric Holder, whose report detailed a toxic corporate culture and recommended that Kalanick’s responsibilities be lightened. 21 These problems, pressure from key investors, and mounting legal challenges in various markets led to Kalanick’s resignation in June 2017. 22 In August 2017, Dara Khosrowshahi, previously CEO of Expedia, became Uber’s chief executive.23 In 2019, Uber employed more than 22,000 engineers, data scientists, designers, marketers, product managers, product operations managers, and other corporate workers.24 However, reporting continued to identify past and ongoing incidents of sexual harassment, use of threatening and bigoted language at the highest corporate levels, lack of responsiveness to internal allegations of racial discrimination, failure to address thousands of reports of sexual assault involving drivers and passengers, an endemic lack of corporate transparency, and other issues.25 Ahead of its spring 2019 IPO, Uber identified cultural issues as an investment risk, acknowledging, “Our workplace culture and forward-leaning approach created significant operational and cultural challenges that have in the past harmed, and may in the future continue to harm, our business results and financial condition.” 26

New York, U.S.A Initial Launch and Motivation In May 2011, Uber began operating in New York City, its first market beyond Silicon Valley. With more than eight million residents, New York was the most populous city in the United States and boasted a robust public transportation system that included subway, bus, and rail. Taxi licensing was regulated, meaning each taxi required a city-issued medallion. Between the 1930s and 1990s, the city did not release any new medallions, and by 2011 some medallions auctioned by city regulators sold for more than $1 million each. 27 Investment firms typically owned medallions and leased them to independent operating companies or individual taxi drivers, who paid $1,000 annual medallion renewal fees.28 Regulators also set meter rates, with an initial flat fee plus per-mile, wait-time, and other charges. In 2011, around 13,000 medallion taxis operated in New York, along with limousines, ambulettes, and hired car services that charged by the hour.29 However, many taxis were in poor repair or unclean, and service quality varied. Only some taxis accepted credit cards or had GPS, and finding cabs at certain times of day and in certain locations was challenging. 30 Prior to Uber’s arrival, more than 1,000 New Yorkers had already signed up for the app. “We decided to respond to the demand. We were coming to New York eventually—why not now?” said Kalanick. 31 At the time, Uber charged a base fee of $8 for each ride, plus an incremental amount based on time, distance, and speed of the ride.32 The minimum cost of the black car service was $15 per ride, which included the tip for the professional livery driver, and fares worked out to around 1.75x as much as a similar ride using a traditional taxi.33

4 This document is authorized for use only by Shuning Xu in STGY 681.11 MSGB F20 taught by Robert Bikel, Pepperdine University from Oct 2020 to Mar 2021.

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Reaction by Consumers, Competitors, and Regulators New York’s existing transportation options were generally considered more convenient than those in the Bay Area. However, a majority of New Yorkers owned smartphones, and, with no existing rideshare or e-hailing culture, Uber experienced several years of nearly unrestricted growth. By 2015, there were 78,000 for-hire vehicles in New York, about 20,000 of which were affiliated with Uber.34 From 2014 to 2015, Uber’s share of all for-hire and taxi pickups in New York City increased from 4% to 15%, while the overall number of pickups remained level.35 By 2015, Uber’s encroachment on the incumbent taxi industry led to a decline in medallion prices, to around $740,000. 36 As Uber and other app-based ridesharing services increased their presence, New York’s existing operators and city authorities pushed back. Mayor Bill de Blasio claimed in a 2015 opinion article that Uber drivers were in part responsible for New York’s growing congestion and traffic problems.37 He wrote that ridesharing drivers were less efficient than taxis, completing an average of eight rides per day, compared with 32 by the average medallion taxi. 38 Meanwhile, taxi drivers—and their financial backers, who owned or financed the medallions—brought and lost a lawsuit against Uber in New York State court. Uber also faced a variety of other legal, political, and public relations efforts to battle its ascendance, which an industry advocate referred to as “a catastrophe,” claiming, “[the] entire [taxi] industry continues to be illegally destroyed, while elected officials allow it to happen on their watch.”39 In 2015, de Blasio championed a bill that would limit the number of registered Uber cars allowed in Manhattan and impose a minimum wage for drivers. Uber responded aggressively, spending over $3.2 million in ads opposing the proposed regulations.40 Uber also added a satirical feature to its app— called the “de Blasio” option—that warned riders of 25-minute wait times if the mayor’s plan was enacted.41 In July 2015, de Blasio tabled the bill, but in 2018, the city council passed many of the same regulations, making New York the first major U.S. city to strictly regulate Uber.42 The city issued a freeze on the number of new rideshare cars licensed to operate (the total was around 100,000), imposed a mandatory $17-per-hour minimum wage for drivers, restricted the amount of time drivers were allowed to spend on the road while waiting to pick up new riders, and introduced a new company license that large firms like Uber would have to renew each year by submitting detailed financial and operating information to the city.43 As of 2019, both Uber and competitor Lyft were suing the city over the law. 44

Regional Developments Uber’s experience in New York City mirrored its confrontations with regulators in other U.S. cities. For example, in 2016, the city council of Austin, Texas, passed a law requiring strict background checks for rideshare drivers, including fingerprinting.45 Both Uber and Lyft argued that the requirement would negatively affect driver sign-ups, and the two companies poured $8 million into political lobbying to stop the law from going into effect.46 When the new rules were affirmed by a public vote, both Uber and Lyft left Austin. In 2017, the companies lobbied the state of Texas to institute a ridesharing licensing regime that would supersede city rules. In 2018, they successfully achieved new legislation with softer background checks and moved back into Austin. In 2018, following protests by drivers, the California state legislature passed a law making it more difficult for companies to classify service providers as independent contractors as opposed to employees.47 This meant companies like Uber and Lyft could be required to treat drivers as employees and offer health insurance, minimum wage protections, overtime pay, paid parental leave, paid rest breaks, the right to unionize, and workers’ compensation. 48 The law was scheduled to take effect in 2020, although Uber and Lyft claimed that their drivers ought not to be included under the law.49 5 This document is authorized for use only by Shuning Xu in STGY 681.11 MSGB F20 taught by Robert Bikel, Pepperdine University from Oct 2020 to Mar 2021.

For the exclusive use of S. Xu, 2020. 720-404

Uber: Competing Globally

Bogotá, Colombia Initial Launch and Motivation In September 2013, Uber arrived in Bogotá, Colombia, a city of eight million residents and the second Latin American market Uber enter...