Reference no: EM132830739

CASE: CAN UBER CONTINUE TO GROW IN AN EVOLVING MARKET?

Uber, then called UberCab, began in 2009 in San Francisco, California. The company boasted the ability to hail a cab using a smartphone application. This initial idea has grown worldwide to 81 countries, with a combination of smart technologies and a large decentralized base of independent drivers (uber.com/our-story). The company relies on drivers to be available to transport customers on their own schedules. A suite of technology solutions, focused around a smartphone application, allows customers to match themselves with the driver nearest to them. The company's offering has grown and now includes several different classes of cars and even self-driving cars in limited markets (see nextjuggernaut.com/blog/how-uber-works-business-model-revenue-uber-insights). All of this success has spread talks of an IPO in 2017. The company's current valuation is $68 billion (Vellanki 2016). Uber is now a global company operating in hundreds of cities.

Uber is considered a major disruptor (Chap. 5), but can the company be expected to grow in the future or at least grow at the current rate? While Uber has seen many successes in the past, there are several hurdles visible in its future. These challenges may affect the company's ability to remain competitive and profitable in the years ahead. Leaders at Uber will need to face issues with the company's overall business model, growing regulatory burdens, and competition from similar providers.

Business Model

One issue that Uber has always faced is the fundamental soundness of its business model. While the company is growing quickly, so are its losses (Solomon 2016). Company leaders see these losses as a prelude to future growth and a sign that the company is aggressively expanding and maintaining its market dominance. Others are concerned that these losses may never cross over into profits, as the company is faced with competition and legal issues. While an exact description of the businesses profit and loss is not completely available since the company is private. However, leaked information has allowed analysts to make some estimates. It is estimated that the company lost $570 million in Q1 2016 and $750 million in Q2 2016 (Vellanki 2016 and Kolodny 2016).

Part of the business model is collaboration with auto manufacturers and with Hertz and Enterprise Rent- A-Car (for short term car rental programs). The company also collaborates with Sears.

Regulation

In addition to financial issues, the company faces a wide variety of regulatory challenges. The first set of challenges strike directly at the company's business model and the ability to use independent drivers. A number of legal issues around this model have sprung up. The first issue is that Uber is acting as a taxi service, but is not paying the appropriate licensing fees for that service. Cities argue that Uber must pay the same licensing fees as taxis and that, by not, they are defrauding the city of revenue and competing unfairly (Posen 2015). Plaintiffs in another case contend that Uber's drivers are not truly independent but are acting as employees. In this role, employees would be eligible for benefits as well as overtime, which Uber does not provide (Ross 2015). The final issue is in direct relation to Uber's new driverless car service. In California, the state has held that driverless cars are illegal, and Uber has recently canceled its pilot project in San Francisco, largely due to this complaint (see nytimes.com/2016/12/21/technology/san-francisco-california-uber-driverless-car-.html).

Competition

As Uber has continued to grow, others have noticed their success, and that success has brought about competition that did not initially exist. This competition can take the form of a direct competitor, such as Lyft, or changes in the business models from existing companies like Yellow Cab. Lyft has a business model that is very similar to Uber, using independent drivers and a smartphone app to connect them (lyft.com). Lyft has a smaller domestic footprint but sees its potential in international markets where firm business boundary is not yet established (see cnbc.com/2017/01/13/lyft-to-go-global-take-on- uber-outside-the-us.html). Companies with a history in the taxi business, such as Yellow Cab, are changing their business models to meet some of the same demands of Uber's customers. This includes smartphone applications and lower prices in some markets (see theverge. com/2016/9/26/13035642/nyc-taxi-cab-android-touchscreen-tablet-verifone).

Future Plans

Uber started to test driverless cars (Griffith 2016). They already encounter difficulties in testing as discussed earlier. Self-driving car may kill jobs (McFarland 2016). Therefore, there could be political oppositions.

Note: Walton's history has been one of fast growth and many successes. The changes in competitive landscape and lingering issues about the business may cause concern for its future.

Sources: Compiled from Griffith (2016), Kolodny (2016), Posen (2015), Ross (2015), McFarland (2016), and uber.com (accessed February 2017)

Questions:

1. What is the reason for Uber's rapid growth in both users and revenue?

2. Why is Uber valued at $68 billion, at the time that it is not profitable?

3.. Should Uber drivers be treated as employees or independent contractors?

4. Should cities and states be allowed to charge Uber license fees like taxi companies?

5. What can Uber do to remain competitive against companies like Lyft?