Case 12 - Uber 6g1n69

CASE 12

Uber in 2016: Can It Remain the Dominant Leader of the World’s Fast-Emerging Ridesharing Industry? Alex Edinger

McKenna Marino

The University of Alabama

The University of Alabama

Louis D. Marino

Molly Stepchuck

The University of Alabama

The University of Alabama

tanding in the streets of Paris on a cold winter’s night in 2008, Garrett Camp and Trent Kalanick had trouble hailing a cab after attending the LeWeb Conference.1 Instead of just complaining about the problem, in true entrepreneurial fashion the two developed an idea for a limo timeshare service that would be a mobile, fast, and upper-class option for travelers. Camp thought such an option would accomplish his goal of developing an iPhone app to help tackle the taxi issues in San Francisco. Camp began to work on the app in March 2009, and by mid-2009 Kalanick ed the firm as Uber’s chief incubator. The first test run was conducted in New York in 2010 and the app was officially launched in San Francisco on May 31, 2010. Little did Garrett Camp know that his prototyping of an iPhone app would revolutionize the transportation business, and impact what is known today as the “sharing economy.”2 As with many technologies that fundamentally challenge existing business models in an industry, termed disruptive technologies, as Uber and the sharing economy grew the company faced a number of challenges including increased competition from new entrants and educating the consumer base. However, in Uber’s case the company also faced questions regarding the company’s commitment to corporate social responsibility and ethics. Despite the potential social benefits associated with ridesharing,

such as a reduction in crashes due to drunk and distracted driving, ethical issues plaguing the company included accusations of assaults involving customers and drivers, concerns regarding the background screening of its drivers, alleged hardball competitive tactics by Uber executives, concerns over the privacy of customers, and the classification of Uber drivers as independent contractors versus employees. While some critics viewed Uber as a company with many faults, others saw the business as a gamechanging boost to economies, especially to those individuals who faced unemployment. In recent years where economic hardships have hit America and countries abroad harder than any time in recent memory, Uber, and the extra income that could be generated through this service, was an important lifeline to many. While speaking at a conference in 2015, Travis Kalanick, Uber founder and chief executive officer, defended Uber arguing that the company provided larger paychecks and more flexibility for its drivers than they would otherwise have received, and touted several philanthropic activities the company ed including “Ride for a Cause,” efforts to recruit veterans, and collecting donations for refugees in Europe.3 Further research conducted by Mothers Against Drunk Driving (MADD) in 2014 demonstrated that crashes involving drunk drivers

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Copyright © 2016 by Louis D. Marino. All rights reserved.

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significantly declined in areas where drivers had more transportation options such as Uber. Indeed, the report credited Uber with reducing the number of drunk-driving-related crashes by an estimated 1,800 crashes in California between 2012 and 2014.4 While the company’s commitment to ethics and corporate social responsibility may have been a topic open for debate, the company’s success at growing both in the United States and internationally was unquestionable. In less than seven years since its founding, Uber had operations in over 400 cities that spanned more than 60 countries and the company was valued at close to $68 billion, higher than Honda, General Motors, or Ford. The question facing Uber’s executives going forward was one that faced other firms that experienced explosive growth due to disruptive innovation. Specifically, could the company continue its impressive growth rate in the face of growing competition both domestically and abroad, lingering concerns regarding the company’s commitment to ethical operations and corporate social responsibility, and increasing regulation?

Launch It didn’t take long for Ubercab to take its services to San Francisco. By July 2010, the company was established there and drivers could reserve rides through the mobile app or via text messaging. It was an instant success. In just 18 months after that cold night in Paris, the duo of Camp and Kalanick had instituted a service that would interrupt taxi services in the traditional sense and bring a new kind of transportation to the general public. October 2010 turned out to be a rather eventful month in the young company’s life. Uber had generated $1.25 million in funding as investors believed this app for an effortless ride would continue to grow.8 Ubercab was on the fast track to building on its previous successes when the California Public Utilities Commission issued a cease and desist order to Uber. Many believed Uber was operating as an unlicensed cab company, even though Camp and Kalanick insisted on being a technology and lifestyle company. This prompted the company to officially change its name from “Ubercab” to simply “Uber.”9,10

COMPANY BACKGROUND The Early Years

Continued Success

From its origin on the streets of Paris, by 2009 the then-titled Ubercab was officially founded, and by August of that year the company had raised $200,000. In January 2010, Kalanick went to Twitter to find tips on business developers and managers, to which a Foursquare business developer named Ryan Graves responded with “here’s a tip. Email me.” Graves became Uber’s first employee and would eventually become a billionaire. Graves briefly became Ubercab’s CEO, but was soon replaced by Kalanick again in 2010, with Graves staying on as the head of global operations for the company.5 In 2010, Ubercab started prelaunch testing on the streets of New York City. It had only three cars, but it believed if it could be successful on such a small scale in New York City, surely it would be able to take it to the masses. In positioning Uber, Kalanick was selling a lifestyle rather than just a cheaper taxi ride. “We just wanted to push a button and get a ride,” he said. “And we wanted to get a classy ride. We wanted to be baller in San Francisco. That’s all it was about.”6 Everyone Kalanick knew began asking to experience riding in style with Ubercab.7

Uber’s success continued to grow in 2011 as it raised another $11 million by February and expanded its market to New York, Seattle, Boston, Chicago, and Washington, DC. Then it launched its service in Paris in December 2011. The growing did not stop there, however, as it received another $37.5 million in funding.11 At this point, Uber had raised a total of $49.95 million and the company was valued at a whopping $330 million.12 In December 2011, Uber started using surge pricing, which proved critical to its success. Surge pricing occurs when prices vary depending on the conditions in the market. According to Uber, surge pricing was simply supply and demand: When the number of drivers were low and demand was high, prices went up.13 Just two years later, Uber launched its app for BlackBerry devices.14 This sign of true continued growth led California to regulate ridesharing programs such as Uber and Lyft. California began referring to these companies as “Transportation Network Companies.”15 However, Uber desired to be considered a technology communication platform that sold

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Uber in 2016: Can It Remain the Dominant Leader

a certain lifestyle. It did not want to be considered a different kind of taxicab service. In November 2013, Uber began helping drivers attain vehicles in order to maintain the quality of cars each driver used. Some of these drivers may have had varying levels of credit history, so Uber teamed up with car and financing companies to help them.16 In 2014, Uber worked with AT&T to ensure every Android-based device would have a preinstalled Uber app.17 Being in all of these pockets instantly made Uber grow into a larger market.

Uber’s Growth Uber benefited from a quick increase in popularity both with the number of drivers and the number of s. According to Uber’s website, it saw an exponential increase in drivers within the United States. In July 2012 there were fewer than 25,000 drivers. This number had grown to over 160,000 drivers by January 2015 (see Exhibit 1). While Uber did not publicly report its financial statements since it was not publicly traded, Bloomberg.com reported in June 2015 that the company had reported to prospective investors that Uber generated annual revenue of $415 million and an operating loss of $470 million. Despite the operating loss, Uber’s valuation also demonstrated substantial growth increasing from approximately $18 billion to over $68 billion in 2016 (see Exhibit 2).18

EXHIBIT 1

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UBER’S BUSINESS OPERATIONS Uber operated through an app on mobile devices. The mobile device pinned the ’s location and allowed the to have a cab come to his or her exact location. The could then track the car’s location on the app’s map as it approached. The rider also could track the car’s location while en route, which was predetermined at the time the ride was requested. Before officially requesting a cab, Uber riders could estimate the cost of the ride. They could also choose to split the fare with other Uber s so that part of the cost was charged to another ’s . Payment for the ride was charged directly through the app to the ’s credit card. The money did not through the hands of the driver at all and tips were not expected. The fare was determined by either distance or time, depending on the city and speed of the car. Uber had developed an algorithm to surge price levels during times of high demand. s were notified when prices surged, and Uber applied for a patent for surge pricing. Businesses could also set up s for employees to use. The business could restrict who was able to use its Uber , where they could go, and at what times. This was geared toward meetings, events, travel, and late nights in the office.

Growth in the Number of Uber Drivers 200,000 175,000 150,000 125,000 100,000 75,000 50,000 25,000 0 Apr-12

Oct-12

May-13

Nov-13

Jun-14

Dec-14

Jul-15

Source: Randy, ”Chicago Taxi Driver Jobs Vs. Driving with Uber,” Uber Newsroom, May 11, 2015, newsroom.uber.com/us-illinois/tag/ taxi-cab-jobs/ (accessed July 14, 2016).

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EXHIBIT 2

Cases in Crafting and Executing Strategy

Uber’s Actual and Forecasted Revenue Growth 550

Revenue in Millions of Dollars

500 450 400 350 Actual Uber Revenue

300 250

Forecast From Uber Sources

200

Forecast Based on Current Growth

150 100 50 0 Q1 Q2 2012

Q3

Q4

Q1 Q2 2013

Q3

Q4

Q1 Q2 2014

Q3

Q4

Q1 Q2 2015

Q3

Q4

Quarter Source: Sam Biddle, “Here Are the Internal Documents That Prove Uber Is a Money Loser,” Gawker, August 5, 2015.

When using Uber, riders had the option of a few different cars:

Uber experimented with providing services as well:

∙ Uber Taxi—normal licensed taxicabs. ∙ UberBlack—higher-end models (Mercedes,

∙ Uber Fresh—online food orders. ∙ Uber Rush—package delivery service. ∙ Uber Essentials—online ordering from a list of

Cadillac) usually used for businesses.

∙ Uber X—2012; allowed drivers to drive s in their own nonluxury cars. ∙ Uber XL—a larger version of Uber X. There were also location-specific services that Uber provided, such as:

∙ Uber Chopper—NYC to Hamptons for $3,000, ∙ ∙ ∙ ∙

also in Cape Town, SA. Uber Boat—water taxis across the Bosporus Strait in Istanbul. Uber Pop—riders matched with drivers who did not have a professional taxi license; deemed illegal. Uber Pool—carpooling service for riders headed in the same direction. Uber Garage—Uber partnered with local taxicab drivers.

100 items. ∙ Uber Ice Cream—July 2012; s in seven cities could summon an ice cream truck and charge purchases to their .

UBER’S BUSINESS MODEL Uber was part of what was known as the sharing economy, along with other companies such as Airbnb, Turo, and Etsy. The sharing economy could be defined as a “socio-economic ecosystem built around the sharing of human and physical resources. It includes the shared creation, production, distribution, trade, and consumption of goods and services by different people and organizations.” Ridesharing services were not the only businesses that were part of the sharing economy. Airbnb was the world’s

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Uber in 2016: Can It Remain the Dominant Leader

fifth-largest lodging company, and it didn’t own a single room. The sharing economy was a system of collaborative consumption and could increase revenue for sellers while simultaneously minimizing costs for buyers. The rise of technology and entrepreneurship fostered the growth of the sharing economy. The sharing economy strengthened communities, decreased barriers of entry into business, and reduced environmental impact. However, the sharing economy also provided a way for people doing business to avoid paying taxes, obtaining proper insurance, or following all government regulations. Uber, just like other sharing economy , thrived because of the benefits, but also came to many road blocks and lawsuits along the way. In a broad sense, Uber classified itself as a technology company, rather than a transportation company, and asserted that it simply provided a platform for riders and drivers to connect, and therefore did not provide the actual transportation. Because of its self-classification into this category, it did not obtain the same licenses and registrations that a regular taxi company had to obtain. Uber’s profits increased because it did not have to pay car registration fees to local governments in most cases. Lack of registration requirements also allowed Uber to enter markets more easily. Another crucial and unique aspect of Uber’s model was that its drivers were not considered employees of Uber. Instead, they were said to be independent contractors. This lessened Uber’s liability for drivers’ actions and obligations to pay certain taxes. Drivers were also then unable to unionize or receive benefits from Uber. Uber claimed that this was necessary to its business model and success. However, this was a blurry line that Uber walked. The IRS had a 20-point checklist that could be used to determine whether someone was an independent contractor.19 Drivers could be considered contractors given the fact that they drove their own car, made their own schedule, and were not limited to just driving for Uber. However, drivers could lean more toward the side of employee as well, as Uber had claimed in other lawsuits that its services were not offered to the general public. Additionally, driver services were an integral part of Uber’s business. Drivers in return could be too dependent on Uber’s technology to be a contractor.

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The interpretation of Uber drivers as independent contractors was challenged by a driver who brought suit against the company in California in 2015. The California Labor Commissioner ruled that in this specific case the Uber driver should be considered an employee rather than independent contractor. However, the ruling was not meant to be precedent setting and Uber settled a class action lawsuit in 2016 with drivers in California and Massachusetts for $84 million and an additional $16 million if Uber went public before the end of 2017. As a key element of this ruling, Uber was allowed to keep classifying drivers as independent contractors which allowed the company to maintain its labor based cost advantage. The drivers won the right to a formal grievance procedure with Uber and the ability to post signs in their cars saying that the drivers could accept tips. While Uber won this suit pertaining to the classification of its workers, concerns remained throughout the sharing economy regarding the employment classification status of its workers.20

COMPETITION IN THE RIDESHARING INDUSTRY The taxi and limousine services industry in the United States was relatively fragmented with the largest companies generating less than 3 percent of the industry’s overall projected $16.2 billion revenue in 2016.21 The industry could be segmented into two basic types of companies including traditional taxi and limousine services and transportation network companies (TNC) or transportation network services (TNS) as they were sometimes called, such as Uber that used technology to facilitate ridesharing by connecting customers with drivers acting as independent contractors who owned their own businesses. Historically, Yellow Cab Company was the largest operator in the industry until 1960 when regulations established regions across the country and forced companies that wanted to operate across regions to have a headquarters including a repair center, an office and a lot in each region. Further complicating the establishment of national operations were the diverse rules and regulations that existed across regions. In 2016, the single largest operator was Yellow Cab Chicago which maintained 2,600 vehicles but ed for less than 1 percent

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of industry revenues.22  Industry experts estimated there were over 236,000 businesses operating in this industry, and projected that growth would slow from an average annual rate of 3.3 percent between 2011 and 2016 to an annual rate of 2.4 percent from 2016 to 2021.23 Industry growth was attributed to a strong economy, GDP growth, and increase in tourism and business travel. Industry profitability was significantly influenced by oil prices, and traditional taxi and limousine services often faced regulations including mandated vehicle inspections, and rules that controlled the prices they could charge for standard fares, the price they charge per mile traveled, and any additional fees. Entry into the traditional sector of the industry could be very expensive, with potential entrants having to meet regulatory restrictions and purchase a license, also known as a medallion. These medallions could cost as little as $1,000 in a small market to as much as $1 million in large markets such as New York City. Access to these licenses was controlled in many markets making entry difficult. In some major markets drivers could lease a license from a corporate medallion owner, but these leases could cost each driver over $100 a day.24 However, the entry of Uber into the transportation industry reduced the value of medallions in some major markets such as New York City with the average price of a medallion falling from $1 million in 2014 to $690,000 in 2015, leading to the loss of

EXHIBIT 3

over $4 billion in value in New York City alone in one year (see Exhibits 3 and 4).25 Technology evolution had changed the way traditional companies interacted with their customers, causing some to develop their own ride-hailing apps, and had caused the rise of TNC companies that led to increasing competition from independent drivers entering the market. To combat Uber and other TNC services, traditional taxi companies tried to develop their own services such as Curb that they hoped would provide a similar service experience to Uber. While most of the apps from traditional taxicab companies met with failure, it was hoped that Curb could build on lessons learned and help improve the level of service provided by taxicabs. Curb was born out of a relaunch from the Taxi Magic app and was backed by Verifone Systems which provided entertainment and payment services in about half of New York City’s green and yellow taxis.26 The company was launched in 2016 and started small with only 16,000 cabs, but planned to expand its reach rapidly. Curb allowed s to hail and pay for metered taxis and to have the taxi waiting for a customer at a designated place and time. Curb charged a $1.95 service fee for each ride and the rider paid the normal taxi fee in addition to the service fee. TNC companies such as Uber were not technically considered to be direct competitors in this market, but were considered to be complementary

Total Percentage of Rides: Uber vs. Taxi Services 100 90 80 70 60 50 40 30 20 10

Ja n1 Fe 4 b1 M 4 ar -1 Ap 4 r-1 M 4 ay -1 Ju 4 n14 Ju l-1 Au 4 g1 Se 4 p1 O 4 ct -1 N 4 ov -1 De 4 c1 Ja 4 n1 Fe 4 b1 M 4 ar -1 4

0

Taxi, Limo Airport Shuttle % of Total Rides

Uber % of Total Rides

Source: Tangel, Andrew. “Uber Logs Major Gains in New York City, Figures Show.” WSJ. Wall Street Journal, 25 Oct 2015. Web. 14 July 2016.

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EXHIBIT 4

Uber in 2016: Can It Remain the Dominant Leader

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Percentage Change in New York City Since Jan. 2015 in Avg. Daily Trips 70 60 50 40 Uber 30

Green Cabs

20

Yellow Cabs

10 0

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Source: Andrew Tangel, “Uber Logs Major Gains in New York City, Figures Show,” The Wall Street Journal, October 25, 2015.

goods that helped facilitate transactions that could be considered substitutes to traditional taxi services. The extent to which these independent contractors had to adhere to the same regulations as traditional companies varied substantially and these conditions were set by each city independently. In some cities, drivers using the TNC services were not required to have a business license but were required only to a background check provided by the TNC. In other cities the TNC drivers were required to have their vehicles inspected, undergo more extensive background checks, provide proof of proper insurance (many personal policies will not cover accidents that occur while their clients are driving for a TNC), and have a business license but not a taxi license. By the end of 2015, 37 states had enacted laws or regulations relating to TNCs, especially having to do with insurance requirements. Uber was the first TNC company, but its success gave rise to numerous competitors both in the United States and abroad. In the United States competition grew for Uber both at the local and regional level, but Uber’s most significant competitor nationally was Lyft, which was founded in 2012. Lyft was based in San Francisco and worked similarly to Uber. Like Uber, Lyft offered multiple levels of service including Lyft Line (s shared rides to save money), Plain Lyft (single riders or small groups), Lyft Plus (SUVs and larger cars), and Lyft Premier (luxury vehicles). Lyft differentiated its vehicles by having drivers use pink mustaches

on its vehicles. Similar to Uber, Lyft and its pink mustachioed cars also had prices well below taxis. However, Lyft’s “Prime Time” pricing maxed out at three times the regular rate. Uber’s surge pricing was known to go seven or eight times the normal cost. Lyft also conducted background checks, but drivers only needed to be 21 compared to Uber’s minimum age of 23. The biggest difference between the two was the reported “feel” between the two cars. Uber strived to make the experience feel like a private driver. Lyft tried to make the experience feel more like a “buddy picking you up from a bar.” Oftentimes Lyft riders were encouraged to sit in the front seat, focusing even more on the “buddy” aspect as opposed to the private driver feel of Uber. Smaller rivals for Uber sprouted up regularly as well. These companies often did not have the funding to compete directly with Uber and so, instead, chose to target niches in either services Uber did not offer or in markets in which Uber did not compete. One such competitor was San Francisco–based Via which focused on drivers using smart cars. Another was Los Angeles–based HopSkipDrive which used rigorously screened CareDrivers to give rides to unaccompanied minors, and Zum which offered a similar service in San Mateo, California. In Boston, Fasten competed with Uber by paying drivers more, offering a minimum hourly guarantee to drivers, and ing the cost savings on to consumers. In markets such as Austin, Texas, where Uber chose not to compete due to regulatory concerns, ridesharing

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services such as Get Me developed to fill the need. However, success was not guaranteed for these niche services and a number, including Huddle, a San Francisco ridesharing service targeted to kids, and Sidecar, also a San Francisco–based company, ceased operations due to lack of funding. One of the major challenges for new startups was to secure sufficient funding until the company could achieve satisfactory scale to benefit from network effects that grew as the number of drivers and customers using the system expanded. Competitive pressures against Uber grew internationally as well. In China, Uber’s largest competitor was Didi Kuaidi; it was estimated that in 2015 Didi controlled over 75 percent of the market compared to Uber’s 11 percent share. Didi Kuaidi, a strategic partner of Lyft, was founded in 2015 by a merger of China’s two largest taxi-hailing companies and operated in more than 400 cities in China. By the end of 2015 the company had booked

EXHIBIT 5

1.43 billion rides and in May 2016 Apple invested $1 billion in Didi. Apple had planned to help Didi expand its ridesharing platform that served 300 million s in China and facilitated up to 11 million rides a day.27 In India, another market that was poised for significant growth, Olacabs, formed by a merger of Ola and TaxiForSure in response to Uber’s entry into the market, controlled approximately 14 percent of the market compared to Uber’s 4.5 percent. In December 2015 four of Uber’s international rivals including Lyft in the United States; GrabTaxi Holdings, Pte. Ltd. used in more than two dozen cities in Southeast Asia in countries such as Vietnam, Singapore, and Indonesia; Ola in India; and Didi Kuaidi ed forces to allow s of each app to book and pay for rides in each competitor’s respective country. For example, a GrabTaxi traveling in the United States could book and pay for rides through Lyft using the GrabTaxi app already installed on the ’s phone (see Exhibit 5).

Uber’s Worldwide Presence and Competition

USA PC: Uber, Lyft SC: Grab, Sidecar, Flywheel, Via, Curb

PC: My Taxi SC: Wundercar Uber, Bla Bla Car

Canada PC: Uber SC: Cab Share Canada TAPPCar

Russia PC: Yandex SC: Uber, Gett

PC: Bla Bla Car SC: Uber LeCab UK PC: Uber, Gett SC: Hailo Addison Lee

Mexico PC: Uber SC: Bla Bla Car, Cabify Easy Taxi Columbia PC: Cabs, PC: Uber, Easy Taxi Peru PC: Easy Taxi, SC: Uber

PC=Primary Competitors SC=Secondary Competitors

Japan SC: Line Taxi, Hailo, Uber China PC: Didi Kuaidi PC: Uber, Yidao Yongche, Shenzhou Carpool

Spain PC: My Taxi Hailo SC: Cabify India PC: Olacabs SC: Uber, Meru UAE/Middle East PC: Uber, Careem SC: Easy Taxi

Brazil PC: Easy Taxi, Uber

Argentina PC: Easy Taxi, PC: Bla Bla Car, Uber

Nigeria, South Africa, Kenya SC: Easy Taxi, Uber, Maranoja

Uber Dominates

Other Rival Dominates

Lyft or Lyft Alliance Partner Dominates

No Dominant Rival

Singapore, Malaysia, Vietnam, Thailand, Indonesia & The Philippines PC: Grab SC: Uber Easy Tand Australia PC: Uber, Cabcharge SC: Ingogo, Gocatch, Rideboom

Ride Sharing is not a major player

Source: Liyan Chen, “Uber Wants to Conquer the World, but These Companies Are Fighting Back (Map),” Forbes, September 28, 2015.

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Uber in 2016: Can It Remain the Dominant Leader

UBER AND ETHICS In recent years, Uber came under fire for a variety of ethical issues. The company had been a target of scrutiny and criticism from not only taxi and other transportation companies, but also from government agencies and the public as a whole. Some of the primary ethical issues Uber faced included how they treated the drivers, recruitment tactics, a lack of background checks, aggressive engagement of competitors, and surge pricing. However, Uber had a response for each issue it faced and maintained that it employed strong and ethical business practices.

Driver Treatment Despite Uber’s 2016 settlement of the class action suits brought by its drivers, for the majority of Uber’s existence it treated its drivers as contractors and not as employees. Uber argued that the drivers were basically in business for themselves and, therefore, they did not have to adhere to any sort of basic labor protections. That meant Uber didn’t have to worry about minimum wage, overtime pay, unemployment insurance, or even protection from discrimination. When off the clock, drivers tended to open up about their true feelings about Uber. One Uber driver reported that “Uber’s like an exploiting pimp.” The Los Angeles driver went on to say that “Uber takes 20 percent of my earnings, and they treat me like shit—they cut prices whenever they want. They can deactivate me whenever they feel like it, and if I complain, they tell me to fuck off.” Tensions rose between the drivers and the management within the company as some of these drivers felt like “ants.”28 In 2013, many drivers could make between $15 and $20 an hour when working full time. As many drivers signed up, Uber began changing the pricing per mile due to competition in the market. Since Uber drivers had no say in the pricing, and they needed to carry their own insurance, they were faced with “razor-thin margins.” Some drivers who worked full time did not make minimum wage. However, there were certainly some perks to being an Uber driver. These contractors had much more free time than taxi and public transportation drivers. Additionally, the ability to become an Uber driver was simple compared to cab drivers. Applying to become an Uber driver was as easy as visiting

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the website, filling out some forms, and ing a criminal background check. Uber was also known to offer a $100 bonus.29

Uber’s Recruitment Tactics Uber’s recruitment tactics also came under fire. In 2014, Uber’s competitor Lyft experienced Uber trying to poach many of its employees. Uber hired teams of independent contractors to use burner phones and multiple credit cards to hire rides from Lyft in a program called Operation SLOG.30 These “Brand Ambassadors” got a ride from a Lyft driver and spent the trip trying to convince the driver to switch over to becoming a Uber driver. The Uber operatives used the burner phones and multiple credit cards because Lyft had a policy of banning riders it identified as recruiters.31 Uber’s approach to gaining employees contributed to Uber’s win-at-allcosts reputation.32 However, Kalanick was quick to defend his company’s approach by saying there was nothing wrong with giving the Lyft drivers information about a competing service as long as they paid the drivers the fare. Kalanick took to Twitter to state “the point is drivers deserve to have options [and] they are independent [and] shouldn’t be restricted from other [opportunities].” Kalanick also argued that Uber paid the Lyft drivers, in the form of a fare, to listen to Uber’s pitch and there was nothing illegal about the practice.33

Inadequate Background Checks Another ethical issue Uber faced involved its recruiting tactics and background check procedures. These issues raised a public concern for safety and many Uber drivers were involved in a variety of crimes directed toward engers. In fact, prosecutors in California claimed, “Uber’s background checks had not flagged 25 drivers with criminal records across Los Angeles and San Francisco.” One of these drivers had previously served 26 years in prison for second-degree murder, and others had various DUI and fraud convictions. Most transportation companies used fingerprints and the background-check service called Live Scan to check drivers. This allowed the company to search through the FBI criminal record database. San Francisco District Attorney George Gascon said that a background check without fingerprints

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was “completely worthless.” Uber, on the other hand, did not use fingerprints. Instead, it ran a social security trace to identify addresses associated with drivers and did criminal checks through national, state, and local databases for convictions in the past seven years.34 In 2016 both Uber and Lyft suspended operations in Austin, Texas, rather than comply with a regulation ed by Austin’s city council in December 2015 that had several stipulations including required fingerprinting for drivers, restrictions on where engers could be dropped off or picked up, a cumbersome data reporting system, and a requirement that cars had to be clearly marked with the company’s logos.35  The justifications for these regulations included rider safety and a need to create a fair playing field between ridesharing services and traditional taxis. The ordinance ed in a special election on May 7 by a vote of 48,673 for regulation and 38,539 against regulation in a city of 885,000 people. By June of the same year former customers of ridesharing turned to Facebook to arrange ridesharing and looked to other apps and services including Fare, Fasten, Wingz, zTrip, RideAustin, and InstaRyde.36

Driver Violence Another significant safety issue cited by Uber critics was the number of assaults, rape, kidnappings, and even deaths associated with the drivers. Critics argued that Uber’s delay in tightening its screening process resulted in multiple cases involving alleged sexual assaults of female engers by male Uber drivers. In August 2015, a 39-year-old middle school teacher from Charleston, South Carolina, who moonlighted as an Uber driver, was accused of kidnapping a female enger and demanding that she pay her fare in sexual favors.37 In December 2014, a Boston driver pled guilty to multiple charges in the alleged rape of a enger. In June 2014, Daveea Whitmire was charged with a misdemeanor of battery of a enger. What was worse was that Whitmore had multiple drug-related felony convictions and yet somehow ed Uber’s background checks. Uber stated that at the time of Uber’s background check, the driver had ed and its process was top of the line. In October 2014, a woman was taken on a 20-mile ride in the middle of the night that ended in a dark, abandoned lot. The driver then

locked the doors and trapped her inside and made the ordeal last for well over two hours. Uber later apologized saying it was an “inefficient route” and refunded her fare . . . partially. The most tragic of these Uber horror stories was in January 2014 when Uber driver Syed Muzaffer struck and killed a sixyear-old girl in San Francisco. Uber claimed the driver was not technically logged onto the Uber app at the time of the accident, and took zero responsibility for the incident. To make matters worse, Muzaffer already had a reckless driving conviction, which Uber either did not uncover or deemed disqualifying during its background check.38

enger Refusal Uber’s success and actions did not go unnoticed or unquestioned. There were multiple instances of clashes with drivers and riders with disabilities. With 40 reported cases of drivers refusing to pick up blind engers, the National Federation of the Blind brought a suit to Uber. The suit claimed “systemic civil rights violations” and told stories of drivers refusing due to their service animal, or abusing their service animal by shutting it in the trunk. Uber and the National Federation of the Blind were still in settlement negotiations. Uber also ran into some issues with Americans with Disabilities Act (ADA) compliance. There were a number of alleged instances of drivers refusing to take a rider in a wheelchair. In some cases the drivers were reported to have claimed that the chair would not fit in their car in order to avoid the hassle. In one reported instance, the driver would not take the rider with disabilities because she “must not [have been] Christian.” However, proponents of Uber argued that while these incidents were unfortunate, it was not clear whether Uber drivers had to comply with the ADA. Specifically, they argued that while ADA compliance was required for transportation companies, it was not required for technology companies and since Uber was not technically a public service, it did not have to comply. Uber responded to individual engers who encountered problems with their service by issuing them Uber gift cards. It also denied responsibility for the noncompliance claims due to the status of its drivers as contractors and not employees. The suit also called into question Uber’s optional training program, during which drivers were told that they

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Uber in 2016: Can It Remain the Dominant Leader

must pick up engers with disabilities. Those working against Uber argued that the training program should be mandatory, not optional. This, among other problems, also led to a battle of whether Uber drivers could really be considered contractors, or if they needed to be classified as employees.39

Undermining Competitors While Uber’s success was impressive over the years, its tactics to undermine competition came into question. In August 2014 rival Lyft claimed that Uber employees ordered and then canceled thousands of Lyft rides in order to undermine their business. Uber shot back saying that Lyft employees also canceled some Uber rides, and Uber denied it ever intentionally canceled Lyft rides.40  Critics of Uber argued that this was yet another example of the company’s questionable ethics, but others argued that the company was simply playing competitive hardball and while the company may have had “sharp elbows,” it did nothing that was illegal. In 2016 Uber filed a lawsuit against Olacabs, its main competitor in India, for disrupting Uber’s service by allegedly creating fake s and canceling rides. Uber accused Olacabs of creating over 90,000 fake s and making as many as 400,000 fraudulent ride requests in order to block Uber from gaining a competitive hold in India.41

Surge Pricing While Uber stressed how surge pricing was simply supply and demand and provided increased incentives for drivers to operate during otherwise unattractive times, some critics stated that this tactic could result in absurdly high fares at peak times. A fine line was walked while Uber’s surge pricing took effect. During three high-profile instances—New Year’s Eve 2011, Hurricane Sandy in 2012, and a 2013 snowstorm—prices shot up to $35 per minute, or $175 minimum ride cost. Uber defended this by explaining supply and demand. It had to raise prices to incent more drivers to continue working and to deter some riders. If prices had stayed low, Uber argued that it would end up with unhappy customers who had to wait too long for a ride.42 There was debate as to whether these practices were really helpful for Uber’s profits, and many angry riders may have strayed away from the service even after supply and demand levels returned

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to normal. Some riders also argued that when surge pricing was active and prices were rising dynamically, this provided drivers with an incentive to cancel a ride that had been accepted at a lower rate to book a ride at the higher rate, sometimes in as little as 30 minutes of having accepted the first ride. While Uber did not condone this practice there was no way for riders to rate their driver for a ride they never received.

Reactions to Uber Uber’s huge success demonstrated the popularity of the ridesharing service with the public at large. However, other businesses in various cities did not appear to be as happy when they saw Uber trying to drive into their towns. While Uber maintained it was a technology company to connect people, clearly one of its biggest competitors was traditional taxicab services, many of which voiced their distaste for Uber in various ways. In Maryland, companies that historically were competitors came together to protest Uber. In fact, many rival taxi executives had begun to share notes and file complaints against Uber. Cabdrivers’ main complaints were how Uber could offer services in many cases without needing to adhere to any rules or regulations. These protests became more and more common in America. However, many analysts simply said the taxi industry was behind the times technologically, and their business needed to change if they wanted to keep up in an everchanging marketplace.43 In 2015 Uber suspended services in the entire state of Nevada. Uber did not obtain licenses for its cars because it again classified itself as a technology company rather than a transportation company. Uber claimed that the laws in the state of Nevada were outdated, and did not for even the chance that someone could hail a cab over a handheld mobile device. It also claimed that its services were not for the entire public, but just available to the online community. The state did not agree, and decided that the online community was large enough to be considered the public. Nevada’s attorney general saw Uber’s lack of licenses only as a way for the company to minimize costs and maximize profits. All parties involved were fully aware of consumers’ overwhelmingly positive response to the service Uber provides. Nevada believed that Uber figured it

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PART 2

Cases in Crafting and Executing Strategy

could launch and consumer would ultimately make the law sway in their favor. After an almost yearlong suspension, Uber, as well as Lyft, received permits to operate in Nevada again in September 2015. As part of these permits Nevada implemented a new licensing category for ride-hailing companies and minor regulations. Both companies had again launched service by the end of 2015. Situations similar to Nevada’s were not uncommon on the local level as well. Uber left Auburn, Alabama, for what its general manager for region expansion referred to as “burdensome regulations that disregard our innovative business model.” Auburn had requirements for commercial insurance, licensing fee payment, driver background checks, and identifying vehicle signage. In San Antonio, Texas, Uber exited after local regulations again were not changed enough in its favor. Services in Portland, Oregon, were also temporarily suspended in order for the city to have time to formulate the rules that would allow ridesharing. In each of these cases Uber was viewed as being willing to operate in a “gray area” of the law, or in some cases to operate in a manner contrary to local regulations. Uber had a big impact not only in America, but internationally as well. Ironically, one of the biggest reactions to Uber occurred where the idea of Uber itself was born: . In June 2015, thousands of cab drivers gathered to form blockades around airports and various train stations in protest of Uber (known as Uber Pop in ). Again, the protestors complained about how Uber drivers didn’t need to buy taxi licenses, nor were they subject to regulations or inspections. An Uber Pop vehicle was overturned by the taxi drivers and many clashed with riot police. In Toronto, Canada, cabbies held multiple protests in hopes of preventing Uber from entering their city. Many resorted to ripping off their shirts to symbolize how Uber would be taking the “shirts off [their] backs.” However, Uber thought it could have a positive impact on the taxi industry. David Plouffe of Uber said, “the market for people using for-hire vehicle transportation—whether it’s taxi, limo, or ridesharing— is just going to grow. There’s a big enough pie here for everybody to be successful.” Plouffe also stated that cities should have welcomed Uber with open arms because of how little cash their drivers took

during their services. Often, when taxi drivers collected cash, it could result in underreporting their incomes.

THE FUTURE Uber tackled its share of issues, but its biggest problem may be yet to come. If more attacks against driver classification as contractors arose, it could become required to pay employees minimum wage. While a large and involved lawsuit could have the potential to take care of that, Uber’s business model could become seriously disturbed. A second area of concern had to do with increasing competition. Not only were traditional taxi companies fighting back with their own apps, a plethora of new entrants had entered the market at the local and regional levels. In 2016 the cab drivers in Austin, Texas, helped defeat an Uber- and Lyft-led ballot proposition that would have eased city regulations that held Uber and Lyft drivers to the same standard as taxicab drivers. One of the regulations that caused the most concern for Uber and Lyft was the requirement that all drivers had to have their fingerprints run through an FBI database for background checks.44  Following the defeat of the proposition by Austin voters, Uber and Lyft withdrew from the market. This void in the market led to the entry of competitors such as Boston-based Fasten Inc. and InstaRyde, a Canadian-based company that was willing to comply with Austin’s requirements. By June 2016 there were more than seven ridesharing services vying for the business Uber and Lyft had left behind. Competition for Uber was also growing internationally as startups sought to become the Uber of their country. The question of how to regulate ridesharing apps was debated in cities worldwide. In 2015 the Chinese government proposed a draft of regulations that forced ridesharing apps to operate more like taxi fleets; India also considered a set of similar regulations. The Uber X service, known as Uber Pop in European markets, which allowed individuals to offer rides in private cars, was banned in most European markets by the end of 2015.45 In June 2016 a consortium of mayors from 10 major cities including New York, Paris, Athens, Barcelona, Toronto, and Seoul ed forces to write a common set of rules for working with companies in the sharing economy such as Uber and Airbnb. The participants felt this

CASE 12

Uber in 2016: Can It Remain the Dominant Leader

move was necessary to counter Uber’s procedure of targeting each city individually. The consortium of mayors planned to release the first draft of the new rules by fall 2016 and anticipated that as many as 30 cities would immediately adopt the rules, and forecasted that the new rules would eventually be adopted by hundreds of cities. There was speculation that Uber planned to go public in 2017 or 2018.46 Analysts believed this could be beneficial given the current overall weak status of the international stock market. However,

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there was also some concern that the regulatory and competitive pressures mounting against Uber could cause the company’s valuation to drop. The original intent of Uber was to create a new lifestyle for riders. “When you open up that app and you get that experience of like, ‘I am living in the future. I pushed a button and a car rolled up and now I’m a frickin’ pimp,’ Garrett is the guy who invented that shit,” Kalanick said.47 The question that begged to be asked was, what were the true impacts on society from the creation of this lifestyle app?

ENDNOTES 1

newsroom.uber.com/ubers-founding/. Ibid. 3 www.huffingtonpost.com/entry/ travis-kalanrick-uber-dreamforce_ us_55f9b649e4b0fde8b0cc932c. 4 “More Options. Shifting Mindsets. Better Choices,” an ad sponsored by Uber and MADD, January 2015, 2q72xc49mze8bkcog2f01nlhwpengine.netdna-ssl.com/wp-content/ s/2015/01/UberMADD-Report.pdf.  5 www.businessinsider.com/how-a-tweetturned-ryan-graves-into-a-billionaire-2015-3. 6 www.businessinsider.com/ why-travis-kalanick-founded-uber-2013-11. 7 “Uber: Rising Valuation Amidst Ethical Woes,” GBA 525 Fall Case Book, IBS Center for Management Research.  8 www.crunchbase.com/organization/uber/ funding-rounds. 9 techcrunch.com/2010/10/25/ubercab-nowjust-uber-shares-cease-and-desist-orders/. 10 “Uber: Rising Valuation Amidst Ethical Woes.”  11 www.inc.com/business-insider/how-uberbecame-the-most-valuable-startup-in-theworld.html. 12 fortune.com/2014/06/06/these-are-theventure-firms-celebrating-ubers-massive-17bvaluation/. 13 qz.com/603600/ubers-former-head-ofgrowth-on-the-early-days-surge-pricing-andon-demand-ice-cream/. 14 thenextweb.com/apps/2013/03/25/uberredesigns-its-android-app-and-launches-onblackberry-and-windows-phone/. 15 www.forbes.com/sites/ tomiogeron/2013/09/19/ california-becomes-first-stateto-regulate-ridesharing-services-lyft-sidecaruberx/#1d5bb4fc67fe. 16 techcrunch.com/2013/11/24/ uber-driver-car-financing/. 17 techcrunch.com/2014/05/28/uber-att/. 2

18

www.businessinsider.com/ uber-leaked-financials-look-ugly-2015-6. 19 art.mt.gov/artists/IRS_20pt_Checklist_%20 Independent_Contractor.pdf. 20 www.npr.org/sections/thetwoway/2016/04/22/475210901/ uber-settles-two-lawsuits-wont-have-to-treatdrivers-as-employees. 21 IbisWorld Taxi & Limousine Services Industry Report. 22 Ibid. 23 Ibid. 24 Ibid. 25 “Taxis v Uber Substitutes or Complements?” The Economist, August 10, 2015, www. economist.com/blogs/graphicdetail/2015/08/ taxis-v-uber. 26 Andrew J. Hankins, “Taxi-Hailing App Curb to Relaunch with a New Attack Plan against Uber,” March 23, 2016, www. theverge.com/2016/3/23/11294758/ curb-app-taxi-hail-uber-nyc-verifone. 27 www.bloomberg.com/news/articles/ 2016-05-13/apple-invests-1-billion-in-ubers-china-competitor-didi. 28 inthesetimes.com/working/entry/17201/ uber_s_business_model_screwing_its_worker. 29 www.quora.com/What-are-the-pros-andcons-of-becoming-a-Uber-versus-a-normaltaxi-driver-in-Singapore-for-jobless-PMETs. 30 voiceglance.com/is-ubers-audaciousrecruiting-tactic-smart-business/. 31 www.pcworld.com/article/2599900/areubers-aggressive-recruitment-tactics-legal. html. 32 Ibid. 33 www.businessinsider.com/ kalanick-defends-ubers-tactics-2014-8. 34 www.fastcompany.com/3050145/fast-feed/ ubers-background-checks-missed-murderand-dui-convictions-prosecutors-say.

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thefederalist.com/2016/05/10/ uber-lyft-were-driven-out-of-austin/. 36 www.businessinsider.com/what-happenedto-austin-texas-when-uber-and-lyft-lefttown-2016-6. 37 www.huffingtonpost.com/entry/uberdriver-kidnap-raping-female-enger_ us_55cb354de4b0923c2beac92. 38 www.thedailybeast.com/articles/2014/11/19/ the-ten-worst-uber-horror-stories.html. 39 mashable.com/2016/03/23/ uber-ola-lawsuit/#4M3NB15yGmq3. 40 www.pcworld.com/article/2599900/areubers-aggressive-recruitment-tactics-legal. html. 41 www.theverge.com/2016/3/23/11292310/ uber-ola-lawsuit-india-fake-rides-lyft. 42 www.theverge.com/2013/12/18/5221428/ uber-surge-pricing-vs-price-gouging-law. 43 www.washingtonpost.com/local/ trafficandcommuting/cab-companiesunite-against-uber-and-other-ride-shareservices/2014/08/10/11b23d52-1e3f-11e482f9-2cd6fa8da5c4_story.html. 44 Curt Woodward, “In Austin, a Display of Ride-Hailing Wild West,” May 26, 2016, www. bostonglobe.com/business/2016/05/25/ubercompetitors-flock-austin-after-demand-giantflees-regulation/VJlv00lHNa7IfS4pigTRpL/ story.html. 45 “Legal Troubles—including 173 Lawsuits in the US—Threaten Uber’s Global Push,” October 5. 2015, www.businessinsider.com/ r-legal-troubles-market-realities-threatenubers-global-push-2015-10. 46 techcrunch.com/2015/08/21/uber-plansto-go-public-in-12-18-months-according-toleaked-presentation/. 47 www.businessinsider.com/ uber-travis-kalanick-bio-2014-1.