About Uber

Headquartered in San-Francisco Uber Inc., known as everyone’s private driver, is the largest mobile app-based transportation company in the world in terms of both network and valuation. It was founded in 2009 and underwent a period of aggressive growth unlike any other tech company. In less than six years Uber has landed its footprints in many parts of the world, dominating the ride-sharing market. As of May 28th 2015, Uber’s service was available in 58 countries and 300 cities worldwide. Nevertheless, despite Uber’s impressive strategy of monopolizing the global taxi market, its journey remains fraught with financial, legal and other challenges.

How did it start?

In 2009, the traditional US taxi industry did not have any signs of attractiveness. In fact, the entry barriers were high (a NY taxi license was traded for $1m in 2010) and the regulations were strict (a limited number of medallions), which led to the creation of an artificial shortage of supply. In addition, fares were fixed across providers and product differentiation was low. However, in line with the technological changes of that decade and a steep rise in the smart-phone appeal, Uber entered the market as an asset light enterprise that did not own a taxi fleet and had low operating costs, creating new rules of the game.

How does it work?

It acts as mediator between private/sub-contracted drivers and passengers, charging a commission fee. In more detail: the Android, iOS and Windows Phone apps connect riders with drivers using their phone’s GPS capabilities, letting both parties know one another’s location. The tech company processes all payments involved, charging the passenger’s credit card, taking a cut for itself (which ranges from 5% to 20%), and depositing the remaining money directly into the driver’s account, all in the background and completely cashless. Moreover, Uber also provides a delivery service, bringing flu shots, ice cream, and even kittens to users’ doors.

 

Competitors’ Overview

Given its global expansion Uber faces an increasing competition from different rivals in many geographies. Following is a brief overview of such competitors starting from the US, China, Southeast Asia and finally India.

Lyft

Known for its fuzzy pink mustaches, Lyft was launched in 2012 in San Francisco and it is probably the most similar company to Uber. At the moment Lyft is available in roughly 60 cities in the US.

Like Uber, Lyft offers multiple levels of service:

• Lyft Line (a shared ride option that can save users up to 60% on fare)

• Plain Lyft (a ride for solo travelers or groups up to four)

• Lyft Plus (larger cars and SUVs)

The app allows you to select which type of ride you want with a slider tool at the top of the app. As for rates, they vary by city, type of ride, and current demand.

Last December Lyft proceeded with the sale of c.$1bn of new preferred shares that could value the company as high as $5.75bn, according to private-market data firm VC Experts.

Didi Kuaidi

Moving to China, a market Uber seems to be an increasingly focus on, we find Didi Kuaidi which is likely Uber’s fiercest competitor.

Born in 2015, Didi Kuaidi is a ride service company made up of China’s two largest taxi-hailing firms: Didi Dache and Kuaidi Dache. The company dominates the country’s taxi-hailing market, and claims to have a larger share than UberChina in the private-car-hailing segment.

In its last statement the company said it booked 1.43bn rides in 2015 alone, (200m of which in December).

Didi Kuaidi is well-funded and backed by a number of wealthy investors including tech giants Tencent and Alibaba. This month Didi Kuaidi announced its plan to raise about $1bn from investors on terms that would value the Chinese car-hailing company at more than $20bn.

Grab

Founded in 2011, Grab is a ride service company that operates in Southeast Asia, primarily in Malaysia, Singapore, Thailand, Vietnam, Indonesia, and the Philippines. Like Uber, it works through an app-based platform for smartphones.

Grab has raised a total of $680m in total equity funding, with roughly 75,000 registered taxi drivers in its network.

Last December Grab has joined the Lyft/Didi Kuaidi partnership, allowing the company a chance to grow beyond its Southeast Asia market.

Ola

Founded in 2010 in Mumbai, Ola is an app-based transportation company and is one of the fastest growing businesses in India.

Through its mobile app, the company provides different types of cab services ranging from economic to luxury travel and it supports both cash and digital payment options with Ola money.

It has so far raised $1.18bn in equity funding through seven rounds from 19 investors and currently has over 40,000 cars in its network across 102 cities.

 

Uber’s Valuation

Following the completion of the latest round of financing via Morgan Stanley’s network of high net worth clients, the San Francisco-based tech start-up’s valuation should be close to $62bn (as of January 2016), surpassing Chinese smartphone company Xiaomi and another player on the sharing-economy arena, Airbnb, with valuations at $46bn and $25bn respectively. Some argue that valuations have reached an all-time high and may be overheated, while others believe that they may also be justified.

On the one hand, Silicon Valley start-ups have seen an unprecedented level of interest from venture capitalists, hedge funds and other institutional investors, who in turn are pricing up the valuations of the early stage tech companies. In fact, Uber has been backed by billions of dollars in financing from companies such as Fidelity Investments, Wellington Management, Summit Partners, BlackRock, venture capital firm Kleiner Perkins Caufield & Byers, Google Ventures and Menlo Ventures. On the other hand, comparing today’s sky-high valuations of tech start-ups with those of the late 90s, one could definitely distinguish the presence of at least a clear monetization mechanism and growth potential for companies like Uber, which lacked back then.

Nevertheless, the valuation of the tech company has come under a lot of criticism, namely by Aswath Damodaran, a finance professor at NYU Stern School of Business. The valuation expert values the ride-hailing company at c. $24bn, which is significantly below the value recently determined by the market. According to him, the big difference in the valuation is the story told to the market about Uber. In fact, if one buys Uber’s story of “Being a logistics company globally”, the company indeed is worth a lot of money. However, Damodaran believes that Uber’s challenge is going to be showing how profitable it really is, especially amid increasing competition as well as its ability to withstand the regulatory hurdles the company faces around the world.

 

Industry evolution

When it comes to a new disruptive industry such as the one Uber crafted, it is hard to come up with a uniform definition. For the sake of pragmatism in this article we will refer to the “ride-hailing” or “ride-sharing industry”.

It is hard to make an estimate of the current value of this new industry. Yet, there is consensus that it has been growing at an impressive pace in the last few years becoming a global phenomenon.

In order to better assess the extent of such growth it might be useful to examine the graph below, which depicts Uber’s growth in 2014 and 2015. The company’s value as of Jan. 2016 has been estimated around $60bn.

Picture1

Uber has not been the only company to benefit from the success of the industry. Indeed, in the past 3 years a number of competitors have raised both in the US and in the other markets. (See paragraph above for a detailed competitors’ overview).

The large number of new players definitely slowed Uber’s terrific growth rates. Yet, with the exception of Didi Kuaidi in China and arguably Ola in India, they did not pose a serious threat to the American Giant’s global leadership. Things might change in 2016 with the raise of a global partnership that has already be named by media as the “Anti-Uber Alliance”.

In an unprecedented move that might hit Uber’s business in Asia and the US Lyft, Ola, Didi Kuaidi, and Grab have entered into a partnership. Starting in 2016, the four companies will allow users to book cabs from each other’s apps in all the regions where they operate thus allowing one another to expand their markets. Furthermore, Lyft and Didi Kuaidi confirmed their intention to release joint partner products sharing technology, local market knowledge, and business resources.

The execution of the ridesharing agreement will be key and not without hurdles, particularly considering the volatility of this business environment. Yet, the 4 companies together will, potentially, reach almost half of the world population.

Collectively, the international anti-Uber alliance has raised over $7bn – about 70% of Uber’s total funding received to date.

 

Strategy

Since its inception at the end of 2009 Uber has seemingly taken the world of transportation by storm. Many all over the world praise CEO Travis Kalanick’s vision and the firm’s radical business strategy. Those in support of the firm claim the company’s successes are a manifestation of this great entrepreneurial vision. However, once we begin to look at Uber’s careful use of strategy, and how the driving logic behind many of its actions come from a careful understanding of its competitive landscape, we can see a much more opportunist and calculative firm.

Past

By admission of Travis Kalanick, Uber’s original concept was not to disrupt existing taxi services; instead it sought to simply provide an enjoyable experience for travelers: “In the beginning, it was a lifestyle company. You push a button and a black car comes up. Who’s the baller? It was a baller move to get a black car to arrive in 8 minutes.”

As a lifestyle brand however, Uber stumbled on a key feature of the taxi hailing experience; it was not enjoyable. There were many frictions involved for both the client and for the vehicle operator, the most obvious being the method of payment. As it turns out, by acting as a middle man, and cultivating a quality market of participants through the use of an app, many of the discomforts of hailing a ride could be overcome. Indeed, these services proved inexpensive and able to be implemented not just in the VIP segment, but across all rides and taxis. Nevertheless, simply acting as a glorified taxi dispatch service was not enough for the company to flourish.

Its initial focus as a lifestyle company also meant it knew that in order to be successful, significant network effects would need to be built up. Uber focused on a key city known for its early adopters of technology and its known bad taxi services: San Francisco. The company went to great lengths to push its car hailing services; even providing free rides from major conventions where known influencers would be attending. Indeed, this very local and tailor-made approach to dealing with the city became a bull mark of Uber’s operations worldwide. Uber prides itself on understanding the way in which its individual cities operate differently and capitalizing on these differences. The service has proved particularly successful in Chicago with its nightlife and sporting events and in Washington D.C.

When Uber focused on first conquering San Francisco, it quickly realized that word of mouth would provide a strong platform for advertising. Because the central tenant of the service was to provide a frictionless and enjoyable experience, it found that many users were willing to promote the firm. It is said that for every 7 rides with Uber, a new customer is introduced to the service. These network effects become particularly powerful surrounding sporting events and nightlife. As a result, Uber has long focused on these users in order to boost its adoption rate.

Lastly one of Uber’s key strategies during its early growth was to apply a business model that was already profit making from day one. By demonstrating a clear monetization path, it made itself an easy choice for VC investors and was able to access cheap funding early.

Present

Perhaps the most significant issue Uber is facing when growing is that of fighting entrenched powers such as taxi services. With dubious legality resulting from unlicensed drivers operating the cars, Uber has faced many legal challenges to its service. So far however, the firm has only lost the right to operate in a few cities and has relied very strongly on public opinion to support its legal cases. There has been much talk that the legal strategy of Uber has simply been to become “too big to fail” before regulator action steps in. By becoming so large and well liked, it would be politically difficult for most lawmakers to impose a ban on the services, even if they are in circumvention of existing regulations.

Another strategy Uber has adopted for it to remain competitive is that of implementing new ideas on a small scale and growing them if they prove successful. Uber has already delved with ideas ranging from ice-cream delivery to helicopter rides. This approach has allowed the firm to test new ideas frequently and beat competitors to potentially undiscovered market segments.

One last strategy the firm has adopted presently to deal with competition is to become a “loss leader”. In some countries Uber operates at a loss, subsidizing drivers in order to undercut the completion.  Despite a large war chest and plenty of resources at their disposal from multiple rounds of funding, this strategy has led to Uber losing a supposed 1bn a year in China. It remains to be seen whether long term network effects will be strong enough to justify these current losses, especially in such a competitive landscape.

Future

Despite continued success and large rounds of funding, Uber faces many challenges in the future. Apart from the very visible legal threats that it has been dealt around the world, Uber faces other existential threats. It is unclear how it will turn a healthy profit if it keeps competing on price with its rivals such as Lyft and Didi Kuaidi. A race to the bottom would affect all market participants, and yet it seems inevitable. The previously mentioned Asian alliance could be one form of market reaction to this destructive competitive situation. Yet, it remains to be seen how this situation plays out in the future as new entrants are abundant and the low capital requirements entice new players to enter and capture any abnormal profits that could be generated.

Indeed, with the goal to satisfy all client demands, Uber and company have begun to cannibalize their profit extraction mechanisms. The most notable example remains carpooling services. With Uber and several other players it is now possible to commit to a reduced fare in exchange for sharing your ride with someone else heading the same direction.  This offer quickly minimizes the profits that the firms would otherwise be able to obtain from each individual using their services. It remains to be seen how far down the price can be driven in such a price sensitive market.

 

Conclusion

There has been great talk over the extent to which Uber truly is a “disruptive” firm. Will Uber’s promises of revolutionizing the transport and delivery industry come to realization, or will they be unable to expand past regulators barriers? To what extent are figures and promises made reliable? Much remains to be seen in the exiting case of Uber.

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