Uber Case Review PDF

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Kreft Uber in class case review / debrief notes...

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Uber Case Review In 1973, New York City deployed a fleet of 13,566 taxi cabs daily, each one possessing a “medallion” in order to operate - the medallion cost drivers $10 at the time. 44 years later in 2017, only 21 medallions were added to the market, totaling 13,587. The medallion was valued at $1.32 million in 2013. NYC was helping taxi cab conglomerates stay afloat and wealthy during this time period, ensuring large profits by artificially suppressing supply. While top executives at taxi cab conglomerates were making millions-billions of dollars per year, politicians were getting reelected (taxi cab value votes). The incumbent taxi service operated at Q1, in reference to Qe on the Supply/Demand graph, meaning that the consumer was willing to pay more than the cost of the next ride; there’s a net benefit not realized by society. Uber saw an opportunity for profitability by jumping on this artificially created shortage, and proceeded to disrupt the industry. By 2017, the medallion had fallen from its 2013 peak at $1.32 million, to just $650,000. Within the PEST framework, Uber has disrupted the incumbent taxi market with a technological shock as their method for disruption. Uber defines itself as a technology company at its core, which links two sides of the market who want to be better connected (drivers and passengers). Passenger Benefits:  Cheap Fares  Rating System  Ease of Payment  Ease of Search  Surge Pricing Reduces Demand Driver Benefits:  Flexible Times  Rating System  Use of their own cars  Uber has loans and insurance available to make it hassle free  More productive in less time  Keep 80% of the revenue per ride  Surge pricing increases supply (more drivers) Surge Pricing  Increases the amount of drivers on the road by incentivizing them to drive at busy/highly demanded times What are the competitive advantages that Uber has that allows it to disrupt the taxi cab industry? Uber’s Advantage  Efficient scaling of a 2-sided market  Uber must incentive both sides equally to keep them both satisfied 

Technology-based reductions in search costs

o Uber is a tech company in that it hires nuclear physicists, computational biologists (people who analyze the data and numbers behind how animals move  humans are animals, Uber can forecast what we do/want before we do/want it). o Heat maps show drivers where riders will want rides before they even need them. o Avoidance of regulatory costs that the taxi cab industry faces. Uber’s Legality  The incumbent forces the local politicians to challenge the legality of what Uber is doing. Their political contributions are what keep the politicians in office. The taxi industry will call upon the government to shut down such a massive threat to its existence. What type of political issue is Uber’s disruption of the taxi cab industry?  Interest Group Politics  A very small group gains the benefits of government action (taxi conglomerates), while Uber and its investors bear the costs (they can’t afford to get shut down in city after city). Furthermore, each and every city Uber enters will have interest groups on both sides of the issue.  This political issue will always come down to relative strength. Whichever side has the most relative strength in a city will win. o Initially, the taxi cab companies had the relative strength. But, over time, Uber rolled out a political campaign to change the relative strength and gain acceptance/support from communities. Institutional Threats to Uber’s Legitimacy:  Cultural Legitimacy o Uber being just a tech company, needed to create trust in both its passengers and its drivers o Right off the bat, Uber implemented its bidirectional rating system (to weed off the bads and keep the goods) o Background checks similar to most in the transportation industry ensured safe and trustworthy drivers. o No questions asked refund policy  even for complaints about high fares. 

Political Legitimacy o Uber brought in seasoned lobbyists (ex: David Plouffe – Obama’s campaign manager) o They realized they needed to hire outside consultants, while also realizing that there was no way to win in each city with a “cookie-cutter” approach. o Mothers Against Drunk Driving (MADD) & Uber  Uber is a HUGE asset in preventing and ending drunk driving altogether  Through this partnership, MADD gave passengers discounts if they supported the partnership  What can MADD do for Uber?

MADD has the exact lobbying experience that Uber needs. They will argue that Uber will help stop drunk driving, and should be allowed in numerous cities. MADD also brings cultural legitimacy to Uber, by stating that Uber will prevent such a prevalent issue  they do this by first bringing political legitimacy to Uber 

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Uber’s Business Model Going Forward:  2017 Earnings  $7 Billion o This shows that consumers LOVE the service, and are willing to pay for it. Uber’s growth strategy constitutes their advantage as a company.  Uber’s Weakness: o Political and cultural legitimacy are both still concerns  Uber sometimes makes negative headlines and still have to deal with the backlash/fight off litigation.  There is a profitable opportunity for Uber, but Uber has still not posted a profit o They have to pay so much in compliance, regulatory, and litigation fronts on all levels of government. o Their staff, tech, and R&D cost massive amounts of money o All their acquisitions are very costly as well o Very high non-market costs Case Update: Since its inception, Uber has raised over $15 billion and expanded service to over 75 countries, fueled by unprecedented fundraising from global investors. On CEO Kalanick’s watch, the company’s annual revenues grew to more than $7 billion, with a market valuation of over $62 billion. However, the aggressive expansion strategy has caused a series of legal miss-steps that triggered a branding crisis with Uber, especially given rival Lyft’s laid back, fist-bump image versus Kalanick’s abrasive management style. Legal and lobbying costs are mounting, as well as acquisition costs – this has left Uber in the red, unable to turn a profit. High profile (and costly) legal cases against Uber include:  US DoJ criminal investigation into the “greyball” software that hides Uber driver locations from city officials  FBI investigation over whether Uber interfered illegally with Lyft, using a program that tracked locations of its competitor’s drivers  DoJ’s investigation for possible violation of the Foreign Corrupt Practices Act (FCPA), which prohibits bribing, paying, or giving gifts to foreign officials.  An ill-concerned acquisition of a self-driving car start-up, Otto, which landed Uber in a costly lawsuit over stealing trade secrets from Waymo, Alphabet’s self-driving car The 20% revenue hare has not proved enough to cover the fixed costs of tech development, lobbying, and litigation. Uber has captured our energy and love for their services, and turned us into lobbyists without even knowing it. You can easily send a tweet or an email from the Uber

app in favor of Uber. They captured some of the rationally ignorant voices that weren’t yet there....