Uber Company’s Business Model

Uber Technologies, Inc., is an American transportation network company that operates by connecting passengers with drivers through a smartphone app. The paying customers use the app to submit a request for a ride, which is then communicated to the Uber drivers, who use their own cars (Pilieci par.7). The company is multinational and offers its services in 66 countries. Despite seemingly operating at moderate incomes at best, Uber is receiving massive investments and has been valued in the billions.

This is closely tied to this business being defined as “disruptive.” This word has become perceived as a yet another buzzword that is being attached to any new idea or concept in order to sell it better, as is the case with terms like “innovative,” “transformative,” and the others. Uber, along with it’s the related online taxi services, such as Hailo in England, Chauffeur-Prive.com in France, Cabify in Spain and Latin America, and Lyft, a competitor on Uber’s home turf in the USA, are living up to this word.

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Their business models are notable for subverting the traditional ways of providing transportation and are a grave danger to traditional businesses (Christensen, Raynor, and McDonald par. 6-7). What is even more important is that as Uber’s business model is quickly becoming popular; other companies have begun offering similar “on-demand mobile services,” both for transportation and in other industries, such as the hospitality industry (irBnB service), film viewing industry (Todou), and courier and in-city delivery services (Gett).

It has already been claimed that Uber not only presents a new approach to transportation service but is pioneering a new trend for enterprises worldwide that will redefine the business landscape. The proponents of this idea point out that it allows the fragmented idle resources and small players to enter the labour market, and to compete in it on par with major businesses while retaining a degree of independence and flexibility that traditional institutions cannot match (“The Uber-all Economy: A Challenge to Traditional Business Models” par.1)

However, due to its marketable disruptiveness, Uber, and enterprises that have turned to Uberification, are facing ongoing opposition from traditional businesses and governments around the world. The complaints are due to presenting unfair competition, and not operating within existing regulations that demand, in the case of transportation companies, the drivers to be trained, licensed, and insured. This has resulted in a number of legal disputes, as well as protests in France, Germany, England, Canada, China, and other nations. At the same time, governments have been unable to stop activities of Uber and other similar companies due to them primarily working through the Internet.

The purpose of this paper is to study the Uber business model, the opportunities and problems it offers, as well as discuss how the governments are attempting to regulate it based on a case study.

Uber Business Model

Uber is striving to provide its customers with high standards of service at low cost. Their business model as a digital distribution business is to find drivers in search of a good salary and organize them using its online service to create a distributed, well-scaled transport services. Customers can easily and comfortably hire these drivers using Uber’s online software (mobile app). Use of an app also allows the company to provide the best service through a review system and by analyzing app data to manage efficiency (Damodaran par. 3-5).

The key partners in this business model are drivers with their cars; payment processors, which allows simple payment and salary transactions; map API providers, for tracking services; and, of course, the investors. Due to the nature of the service, Uber takes a more laissez-faire approach to its drivers, who are responsible for their vehicles, skills, and facilities. The key activities of the company itself are product development and management, marketing and attaining customers, customer support, driver hire, and payment management. Therefore, its key resources are the service’s technological platform and skilled drivers.

Uber’s business model offers both its customers and driver-partners a solid value proposition. The clients can expect and are drawn to the service by minimum waiting times, an easy and comfortable way to pay for the rides that don’t involve cash and instant app support that allows them to track their driver’s approach on a map. The drivers receive an additional source of income, with an easy payment procedure, and a flexible, highly variable work schedule.

In general, Uber is appealing to those customer segments that need to be driven to a location and enjoy style and comfort, and to drivers who would like to earn money through driving but enjoy more freedom than is offered by the transport industry. Good customer relations are achieved through the use of social media, customer support, and a useful feedback system in the app.

The business’ cost is structured around maintaining and upgrading the technological infrastructure, salaries, and various marketing activities. The revenue is calculated according to the distance or time of the trip, depending on the car’s speed, as well as numerous services they provide on top of customer transportation, such as cargo transportation.

The main achievement of Uber’s business model, and other Uberified businesses like the mentioned above Hailo, Chauffeur-Prive.com, Cabify, and the others, is that while its current trade of higher quality for higher prices makes it competitive with taxis and other transportation businesses of the old model; the value it offers to its drivers makes it a serious threat even to established businesses, which lose their market share as their employees switch to Uber.

Regulations

Naturally, due to being a new practice that is both disruptive to established, tax-paying businesses, and is in a very vague, undefined legal area, Uber Technologies is facing continuous protests and legal actions from governments and traditional transportation service providers to the point of being outright illegal in many jurisdictions and, for example, outright banned in Spain.

Nationwide

The principal legal argument against Uber is that the majority of its drivers don’t have their car insured for commercial use. This means that in an event of a car crash with the driver at fault, his personal insurance would be invalid, and the insurance company would not be obliged to pay for the damages and potential health risks of the people involved (Sommerfeld par.1-6). The second issue is taxing. Due to difficulty in tracking Uber operations, as a result of the work being conducted through the internet, applying taxes to such a business and its “partners” is problematic.

Regulatory agencies also require hailed vehicles not only to be licensed but also to be marked as such. This creates yet another point of concern about the Uber drivers, who rarely have such markings on their cars.

However, the nature of the service and the difficulty in its regulation means that it is very difficult to track law infringements successfully, allowing the Uber drivers and the company itself to evade legal actions.

State-based

Many of the regulation issues of Uber drivers have been discussed in the case study “Uber: 21st Century Technology Confronts 20th Century Regulation,” which looked at Uber’s experience in different states, their clashes with the local regulations, and the company’s responses to them (Hoyt and Callander 3-9). For example, in San-Francisco, Uber was issued a cease-and-desist order, due to Uber (under the name “UberCar”), worked according to principles similar to the taxi service. While the company was threatened with heavy fines per violation, as well as jail time, it limited its actions to removing the word “cab” from the name. Despite this, no follow-up charges were issued.

In most cases, the company was able either to ignore regulations or adjust its strategies just enough to avoid further scrutiny. The most debilitating regulation presented by the case study was a fixed high minimum fair in Las Vegas, which made limousine services unprofitable.

When opening up service in new cities, Uber had the options of either attempting to find a niche in the existing regulations, to lobby for changes to in them to accommodate their business models, or to remain in a legally grey area. Often the company opted for the last choice because it allowed it the most freedom to operate. While it left Uber open to legal actions, it would limit its responses to regulations to only those that were unavoidably needed to avoid charges. If judicial actions were initiated, it would often rely on public support to push for positive statutes.

The situation in Washington, DC, was an example of contention between Uber and the local taxicab services, with the latter receiving support from the government. The government offered the business a way to legalize its activities fully, but would also limit its minimum fares. This would be detrimental to Uber’s business in DC because it was planning on decreasing its fares. The situation was made more complicated by the explicit government support for the taxis, in exchange for their support in the elections, and a political scandal around the City Mayor, who was the main supporter of regulatory actions toward Uber.

The incumbent taxi services naturally were aggressive to Uber because it broke their monopoly in transportation service and offered better quality and coverage than the taxis, as described in the case study.

The best course of action for the Uber management in this situation would be to oppose the bill regulating taxi service and minimum fares for rideshare-type businesses. In its current state, it leaves too much space for changes to the tariff system. Because it would tie Uber prices to taxi fares, the taxi industry in DC would gain the ability to push the former out of business by raising their prices to the point where the competitor, obligated to charge five times as much, would not be able to compete. The best outcome would be if Uber managed to persuade the state council to modify the bill to give Uber the flexibility in costs it required.

Competition

The foremost opponents of Uber Technologies, Inc., is the taxi business, due to the similarity in work strategies and services provided. However, as a result of Uberification, several and cheaper services have appeared both in the company’s home country (Lyft, Sidecar, Curb, and many others) and abroad (Hailo, Chauffeur-Prive.com, Grab, etc.). These companies operate with similar principles as Uber and integrate a mobile app into their services.

Some of them (Grab, for example) attempt to merge traditional taxi business with the new business models, while others copy from the original (“Who Are Uber’s Biggest Competitors?” par.1-19). Despite this, these new services are finding it hard to compete with Uber due to its already recognized brand and a strong presence in the market. For example, Sidecar has announced that it is going out of business on December 31st, 2016.

Reflection

Despite the hardships the company is facing, with opposition from the governments and other similar services, it has clearly established its intention to dominate the market. It found a business model that takes full advantage of the free market economy and modern technologies, like the Internet, to achieve success. While it is clear that the company is receiving a lot of bad publicity due to its practices, it has used this publicity to help itself grow.

The company should seek legal standing within the current system, but it is clear that in most states and countries, the system favours the traditional business models, which creates potential problems. The company is in a position where it can strive for the best conditions for itself and its drivers and should use this situation.

Future Prospects

The owners of Uber are looking forward toward the future. While the growth of its business has been staggering in the last six years of its existence, CEO Travis Kalanick has made it clear that the company is looking for new uses and potential directions for its online platform. Examples of possible future services include flower delivery, which they have tested on Valentine’s Day, and helicopter rides.

Going Global

Additionally, Uber is investing in international expansion heavily. In 2014 alone, the company made a jump from a $32 million loss globally in the previous year to $237 million. While this may seem like bad business, the company has also raised $10 billion to finance this expansion and is investing that money into creating a strong foothold abroad, strong enough that investors continue funding the company, ensuring that it will have more than enough money to fight off any legal action and to set up shop where it wants (Macmillan par.1-4).

Conclusion

In conclusion, Uber introduced an approach to delivering services that are innovative, transformative, and disruptive at the same time. This model is quickly spreading through different industries and is finding its public. One of the main reasons why the Uber business model is so successful is because it caters not only to customers but also to “partners,” making Uber a preferable alternative to other ride-sharing services not only for the client but also for the drivers. Despite the legal issues surrounding the company, its practices are bringing in profit and investors, and it is unlikely that the firm will lose its place in the global market in the near future.

Works Cited

Christensen, Clayton M., Michael E. Raynor, and Rory McDonald. “What Is Disruptive Innovation?Harvard Business Review. 2015. Web.

Damodaran, Aswath. “A Disruptive Cab Ride to Riches: The Uber Payoff.Forbes. 2014. Web.

Hoyt, David, and Stephen Callander. “Uber: 21st Century Technology Confronts 20th Century Regulation.” Stanford Business (12): 1-10. Web.

Macmillan, Douglas. “Uber Spends Big on International Expansion.The Wall Street Journal. 2016. Web.

Pilieci, Vito. “Uber Ride-sharing Program Seeks Ottawa Drivers.Ottawa Citizen. 2014. Web.

“The Uber-all Economy: A Challenge to Traditional Business Models.” The Futures Company. 2015. Web.

Who Are Uber’s Biggest Competitors?ZACKS. 2016. Web.

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