IMD-7-1654

v. 12.12.2016

UBER: AN EMPIRE IN THE MAKING?

Research Associate Sarah If we can get you a car in five minutes, we can get you anything in
Hutton prepared this case five minutes.1
under the supervision of
Professor Salvatore Cantale as Such was the extent of CEO Travis Kalanick’s unbridled ambition for
a basis for class discussion Uber, the company he co-founded. And indeed, a few days later in
rather than to illustrate either early December 2014, Uber had announced the completion of another
effective or ineffective handling funding round, which gave it an estimated $41 billion valuation. At
of a business situation. just five years’ old, Uber was one of the world’s most valuable
privately held companies, with its market cap comfortably exceeding
that of many publicly listed companies, including airlines, automotive
manufacturers and tech companies such as LinkedIn and Twitter.

The $3.3 billion raised overall by the end of 2014 meant that Uber had
secured approximately ten times the funding of its closest rival, Lyft.
Uber’s meteoric growth was also evidenced by the 250+ cities in
which it was operating, and the company was adding to that inventory
at a rate of almost one city per week.

In cities where Uber was deeply entrenched, consumers (riders) loved

Uber’s services, which were very much a part of their daily lives. At
the same time, however, Uber was finding itself increasingly
embroiled in controversy. Vilified by many of the traditional taxi
operators, questions had also been repeatedly raised in recent months
around user data privacy as well as Uber’s aggressive business
practices.

Kalanick’s bold and brash approach was viewed as the trigger for
many of these issues. But at the same time, it was difficult to ignore
the overwhelming vote of confidence in the Uber management team,
and Kalanick in particular, that was demonstrated by the last round of
funding. The question was, given the cash pile Uber had just been
granted, where and what next for the company?

Copyright © 2015 by IMD - International Institute for Management Development, Lausanne,

Switzerland (www.imd.org). No part of this publication may be reproduced, stored in a retrieval system
or transmitted in any form or by any means without the prior written permission of IMD.
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What is Uber?
Uber is evolving the way the world moves. By seamlessly connecting riders to drivers through
our apps, we make cities more accessible, opening up more possibilities for riders and more
business for drivers.2

Uber enabled a user (or rider) to order a vehicle through an application (app) that could be
downloaded onto any smartphone. From a rider perspective, the experience was intended to
be simple and seamless. Rides could be requested with one tap on a smartphone. Payment
details were pre-entered and stored in the app. Credit cards, Google Wallet and PayPal were
all accepted. No tipping was required or expected; hence, there was no need for riders to
worry about cash.

The app showed a photo of the driver and the car registration then it tracked the car’s
approach for the rider. An estimated fare for the journey was calculated in advance. After
each trip, the rider would be emailed a receipt including a price breakdown and a map of the
journey, allowing the rider to query the route taken. Riders were also encouraged to engage
with Uber by writing reviews of their driver and rider experience. Uber’s aim was that it was
providing not just a ride, but also an experience, which should have the same Uber hallmark
irrespective of the country or the city.

Uber did not directly employ any drivers nor own any vehicles; instead, via the Uber app, it
matched riders to drivers. In each city or geographical location, there was an on-the-ground
operations team to manage the practical side of customer service, driver recruitment, local
lobbying, community relations, etc.

Uber’s Early Growth

Uber was established in 2009 by Kalanick and Garret Camp. The story goes that on a snowy
night in Paris towards the end of 2008, the pair struggled to find a taxi and the idea for a
“car-on-demand” app was born out of their frustration. Headquartered in San Francisco and
initially branded “UberCab,” the service was first launched in June 2010.

Initially, Uber offered an upscale alternative to the traditional taxicab in the form of a luxury
black limousine. Partly in response to burgeoning copycat competition, UberX was added in
2012, offering rides in a private car (with a qualified driver and acceptable vehicle), usually
at a cheaper rate than a traditional cab. By 2014, UberPool had been piloted and rolled out,
allowing multiple strangers to jump into the same private car for even cheaper fares.

Geographical expansion was rapid. Having already launched domestically in New York City,
Seattle, Chicago, Boston and Washington DC, Uber debuted its international operations in
Paris in 2011. The growth continued at an ever-increasing rate, both within the US and
overseas. By early 2013, Uber had also established footholds in Asia and Africa.

Travis Kalanick

Uber’s successes, as well as its culture, were largely attributed to Kalanick: “…Kalanick is
so headstrong, so enthusiastic, and so combative that he is at risk of seeming like a parody of
today’s tech entrepreneur.”3
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Born in Los Angeles, California in 1976, Kalanick learned to code at an early age and went
on to study computer engineering at UCLA but left before graduating and joined the startup
Scour in 1998. A multimedia search engine and file-exchange platform, Scour filed for
bankruptcy in 2000 after a multibillion-dollar lawsuit for copyright infringement. It was
Kalanick’s second startup, Red Swoosh, which, when sold for around $20 million in 2007,
gave Kalanick the financial means and time to reflect on his next move. Enter Uber.

As Uber took off, the company, together with Kalanick, increasingly found itself in the
spotlight and not all the attention was positive. Kalanick was criticized for creating a “win at
all costs” culture in the Uber organization. This may have served investors very well over the
company’s short history, but the approach was coming under fire from a business ethics
standpoint.

The Traditional Taxi Industry

On launching, Uber entered into direct competition with the traditional taxi industry, which
was highly fragmented globally. Nevertheless, the industry characteristics were mostly
uniform. Licenses to operate taxis were generally tightly controlled by local authorities and
regulatory bodies; new or additional licenses were not readily granted and no consideration
was given to evolving population figures.

Existing operators were therefore heavily protected, allowing fares to climb in the absence of
free competition. David Autor, an economics professor at MIT, described the industry as
“characterized by high prices, low service and no accountability. It was ripe for entry
because everybody hates it.”4

Uber flouted the regulations imposed on the existing players, in particular the need to secure
registrations and licenses for the Uber drivers and cars. The company argued that it was in
essence putting order into what was a highly disorganized and uncompetitive industry.
Almost inevitably, in the markets Uber entered, the reaction from the existing players was
hostile and the resistance sometimes fierce.

Price Surges
Uber’s overriding service aim was to get cars to customers as fast as possible and at the
lowest possible price. To do so, it developed a proprietary pricing system and mechanism for
managing the volume and flow of vehicles.

Similar to metered taxis, the Uber fare was a function of time and/or distance. The Uber app
managed the fare calculation and handled the payment, with the rider’s credit card details
pre-entered. Uber itself extracted a flat 20% commission before paying the driver.

The difference compared to metered taxis was in periods of peak demand. The Uber platform
relied on an algorithm to increase prices to “surge price” levels in response to heavy demand
in order to attract more drivers onto the road. Customers would receive a notification when
making their reservation that prices had increased.

Adored as Uber was by consumers much of the time, riders would often complain bitterly
when price surges kicked in. Criticism had been particularly strong when surge pricing was
triggered as a result of holidays, bad weather, natural disasters or other unforeseen events.
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Uber implemented surge pricing in Sydney during the 2014 hostage crisis, with fares up to
four times the normal rate, and faced outrage from the public and media. The company later
apologized and refunded the surge fares.

In general, Uber defended the price surges as simple economics to encourage more drivers to
come onto the roads, highlighting also that the increase was transparent and the customers
agreed to the rate before getting into the car. The ideal, according to Uber, was to have an
equilibrium of supply and demand. “A perfect day is when you set an all-time record for
trips per hour with zero surges,” explained Kalanick.5

The “God View”

The algorithms in Uber’s platform learned from its own data and this had a cumulative
effect; with more users and partners and more trips, more data was fed into the algorithms,
which then became more efficient in pricing.

Uber’s algorithm department had what was commonly referred to as the “God View” into
Uber’s platform. The data crunching algorithms enabled Uber to direct more cars to the right
neighborhoods at the right time of day. Essentially, the algorithms tried to predict urban
traffic flows based on the existing data and therefore be as accurate as possible in
determining where and when customers would need a car. And as long as Uber managed this
“successfully,” there was no surge pricing and customers were happy.

Driver Recruitment
In persuading drivers to work with Uber, Uber encouraged them to view themselves as small
entrepreneurs, rather than just drivers working for commission. Uber established an
infrastructure for not only training drivers in the operational sense but also helping them
establish and manage their own businesses.

Uber also developed an innovative means of supporting new drivers who needed an
upgraded vehicle but who were hampered by a weak credit record. Introduced as a test
program in early 2014, Uber partnered with a number of automotive manufacturers
(including GM and Toyota), dealerships and financial institutions to secure favorable terms
for Uber drivers when they purchased a vehicle.

Uber itself did not get involved in the financing; instead, it was the intermediary between the
car salesperson or lender and an approved driver. In the same way that Uber deducted its
commission from customer payments before remitting the balance to the driver, it also
automatically deducted the loan repayments and remitted them to the lender.

There were no plans initially for Uber to directly profit from the scheme. According to Brent
Callinicos, Uber CFO, “Right now, we feel it would be penny wise and pound foolish to do
so.”6 Although the financing scheme was initially only present in some of Uber’s major
markets, Callinicos had ambitions of launching it simultaneously with the operational
launches in new cities.
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Competition and Expansion

It did not take long after Uber’s launch for copycat companies to emerge and try to emulate
the model. By early 2012, as Uber had already expanded to half a dozen cities in the US, two
newcomers – Lyft and Sidecar – started making their presence felt.

The two companies swiftly went one step further than Uber and used drivers with their own
private cars instead of focusing purely on the upscale limousine-style service. This gave
them a cost advantage as well as offering the same convenience as Uber.

Uber did not take a back seat for very long and by July 2012 had launched UberX in
response, which offered rides in private vehicles such as Toyota Priuses. The move created
some internal dissent however, with the Uber black car drivers’ ride revenues suffering some
degree of cannibalization.

Domestically, Lyft emerged quickly as the more serious competitor to Uber. Differentiating
itself both physically (the cars initially sported bright pink moustaches on the front grilles)
and culturally (a Lyft ride was marketed as one taken with a friend, not a driver), the
company also raised significant venture funds $332.5 million by April 2014. However,
compared to the $3.3 billion reaped by Uber, the company was clearly operating on a very
different scale.

Internationally, local competitors had also emerged and were continuing to do so, e.g. Ola in
India, GrabTaxi in Malaysia, Hailo in the UK, LeCab in France, GetTaxi in TelAviv, etc.
Some had also made international moves, but none had come close to the same scale and
speed of expansion as Uber.

Product Innovation

Uber Garage was set up in April 2012 and described as “a workshop where the company will
experiment with new ideas for urban transportation.”7 The first project out of the lab was a
Chicago-based experiment allowing users to choose between a taxi and an Uber vehicle, all
through the Uber app. According to Kalanick, the aim was to assess the feasibility of
working with existing firms in a more collaborative way.

Even prior to establishing Uber Garage, Uber had maintained a rapid rate of product
innovation. New services or extensions to existing offerings, some intended as experiments,
others for longer-term inclusion in the portfolio, were frequently announced with fanfare on
the Uber blog. While some were purely internally derived, many were the fruits of yet
another collaborative agreement Uber had established.

Geographical Growth

By December 2014, Uber had operations in over 250 cities across North, South and Central
America, Africa, Europe, the Middle East and Asia Pacific. Sales were rumored to be
growing at around 40% a quarter with an estimated $300–400 million in net revenues
(excluding driver pay) for the year. By the end of 2015, Uber expected to be operating at an
annual net revenue rate of close to $2 billion.
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With its first forays into new locations, the Uber team would scrutinize the competition and
demand data of different cities to determine where to launch. Establishing the Paris
operations in 2011 was an enormous event for Uber. Kalanick himself oversaw the
recruitment of the three key people running the local office. The minutiae of the market, both
physically and commercially, were picked over beforehand.

Roll forward and by 2014 the picture was very different and the location decisions more
pragmatic. As Austin Geidt, head of global expansion for Uber, explained, “At this point we
go so quickly, I wouldn’t say it particularly matters. If we’re not there now, we’ll be there in
a week.8 In early 2015, it seemed Uber was indeed adding new cities to its inventory almost
at a rate of one every other day.

Uber had established what it referred to as its “launch playbook,” which consolidated the
guidelines for launching in any given location. For example, three critical people – the
marketer, the recruiter for drivers and the general manager – were recruited for each new
operation to deal with the local authorities, competitors and other stakeholders.

The general approach was to get a foothold in the local market in any way possible,
including ignoring existing regulations, then, once users had downloaded the app, expand the
services as a second step. Once operations commenced in any given location, there was
generally opposition from local regulators and labor groups complaining that the company
operated as an unlicensed taxi service and drained money and jobs from the existing
transportation markets. Anti-Uber protests were common across Western European cities as
well as several in the US.

At times, Uber suffered a ban or a fine but the company had already hired local lobbyists and
lawyers in parallel to deal with those challenges and invariably secure a regulatory
backtrack. Kalanick called the approach “principled confrontation.”9

Uber’s PR Problems
Uber’s aggressive approach – to regulation, to competitors, to recruitment, to its adversaries
– was widely acknowledged as one of the keys to its success, with Kalanick acting as the
principal architect. However, this did not mean that Uber’s aggressive tactics, in whichever
domain, were allowed to play out unchallenged, particularly when critics decried them as
unethical.

The company had come under fire from competitors for its blatant attempts to poach drivers,
with Uber sales representatives climbing into the front seat next to the rival’s drivers and
enticing them over to Uber with promises of a cash bonus. Drivers for Gett (GetTaxi) in New
York were bombarded with Uber text messages offering $50 just to hear a pitch from Uber.

Another area where Uber had been heavily criticized was regarding its background checks
for drivers. Uber asserted that every driver was screened and subject to police clearance. This
had been called into question in several instances, including a fatal accident in San Francisco
where it transpired the driver had a citation in Florida for reckless driving that had not been
picked up by Uber’s checks.
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Data Privacy Storm

There was growing tension in the public sphere around the quantity and quality of data that
Uber had accumulated during its short existence. As one critic cautioned, “The greater part
of [Uber’s] business plan is that they’re going to amass the greatest database of consumer
habits that the world has ever seen.”10

Following several high-profile incidents and mounting public concern over data misuse, the
US government waded in. Senator Al Franken, chairman of the United States Senate
Judiciary Subcommittee on Privacy, Technology and the Law, addressed a letter to Uber in
November 2014 with a series of specific questions for the company regarding its policies and
practices around customer data privacy.

A Softer Approach
Uber’s bullish approach to rolling out the playbook guidelines in new locations was
softening to some extent. Instead of setting up shop with disregard for the existing regulatory
framework, the company was taking more of a preemptive approach by striking up strategic
collaborations with organizations and allies that would help clear the entry path.

On the safety and security front, Uber promised to tighten controls around background
checks for drivers and vehicle inspections. The company also pledged to ensure it had
sufficient insurance policies in place, particularly for UberX drivers and their vehicles.

In response to Senator Franken’s letter, Uber hired a law firm to perform an internal review
of its data privacy policies and practices to enable it to respond effectively. As Kalanick
admitted in a December 2014 blog post on the Uber website, “This kind of growth has also
come with significant growing pains. The events of the recent weeks have shown us that we
also need to invest in internal growth and change. Acknowledging mistakes and learning
from them are the first steps. … Done right, it will lead to a smarter and more humble
company …”11
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References

1
Swisher, Kara. “Man and Uber Man.” Vanity Fair, December 2014. <www.vanityfair.com/news
/2014/12/uber-travis-kalanick-controversy> (accessed May 22, 2015).
2
Company website <www.uber.com/about> (accessed May 22, 2015).
3
Lagorio-Chafkin, Christine. “Resistance is Futile.” Inc., July 2013. <www.inc.com/magazine
/201307/christine-lagorio/uber-the-car-service-explosive-growth.html> (accessed May 22, 2015).
4
Stone, Brad. “Invasion of the Taxi Snatchers: Uber Leads an Industry’s Disruption.” Bloomberg
Business, February 20, 2014. <www.businessweek.com/printer/articles/184857-invasion-of-the-taxi-
snatchers-uber-leads-an-industrys-disruption> (accessed May 22, 2015).
5
Malik, Om. “Uber is the New Google.” Fast Company, June 2014. <www.fastcompany.com
/3029457/technovore/uber-is-the-new-google> (accessed May 22, 2015).
6
Lashinsky, Adam. “Uber Banks on World Domination.” Fortune, September 18, 2014.
<http://fortune.com/2014/09/18/uber-banks-on-world-domination/> (accessed May 22, 2015).
7
Rao, Leena. “Uber Experiments With Lower-Priced Taxis In Chicago Through Newly Launched
Labs Group, ‘Garage’.” Techcrunch, April 18, 2012. <http://techcrunch.com/2012/04/18/uber-
experiments-with-lower-priced-taxis-in-chicago-through-newly-launched-labs-group-garage/>
(accessed May 22, 2015).
8
Saitto, Serena. “Uber Blocked From Brazil to California as Hurdles Mount.” Bloomberg Business,
December 9, 2014. <www.bloomberg.com/news/articles/2014-12-10/uber-blocked-from-brazil-to-
california-as-legal-hurdles-mount> (accessed May 22, 2015).
9
Swisher, Kara. “Man and Uber Man.” Vanity Fair, December 2014. <www.vanityfair.com/news
/2014/12/uber-travis-kalanick-controversy> (accessed May 22, 2015).
10
Timberg, Craig. “Uber Executive Stirs Up Privacy Controversy.” The Washington Post, November 18,
2014. <www.washingtonpost.com/business/technology/uber-executive-stirs-up-privacy-controversy
/2014/11/18/d0607836-6f61-11e4-ad12-3734c461eab6_story.html> (accessed May 22, 2015).
11
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May 22, 2015).