Uber: From Principled Confrontation to Value Creation
By: Raunak Gera and Adam Gillman
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
A Bumpy Path
When Uber Technologies Inc. (Uber) shareholders agreed to sell a 17.5-per-cent stake in the company to a Softbank-led consortium in December 2017, the implied valuation was approximately $48 billion, a significant discount to its previous $69-billion valuation. Analysts partially attributed Uber’s decline in value to legal and regulatory issues: the company currently faces numerous class-action lawsuits, burdensome financial penalties, and bans in certain jurisdictions. Furthermore, the emergence of other ridesharing platforms has raised questions about Uber’s ability to differentiate its service offering and achieve its goal of becoming the global leader in transportation and logistics. Given that Uber’s newly appointed CEO Dara Khosrowshahi has targeted 2019 for a potential initial public offering (IPO), Uber must quickly insulate itself from competition and improve relationships with regulators to resume its previous growth trajectory.
When expanding into a new city, Uber’s traditional strategy centred around stealthily signing up drivers and aggressively discounting its service to quickly develop a large customer base. When faced with political backlash, the company would leverage public support for the service to pressure regulators and negotiate from a position of strength. If these tactics proved unsuccessful, Uber would then take extreme measures to avoid being shut down. In certain jurisdictions, the company launched controversial programs like Greyball and Ripley, which actively worked to deny rides to authorities and hide data from governments.
While this confrontational approach facilitated rapid growth, it also jeopardized operations in several key markets. In the last two years, Uber faced over $100 million in fines and was banned from critical geographies, including London, England. The company currently faces over 400 lawsuits in addition to criminal prosecution from the U.S. Department of Justice, which has significantly impeded Uber’s growth efforts.
In the locations where Uber has been able to make inroads with regulators, competitors have taken advantage of the now favourable business environment and entered the market. In Toronto, for instance, Uber fought multiple court injunctions and aggressively lobbied city hall for years in order to be allowed to operate. Lyft then entered the market in late 2017—five years later—and was discreetly granted a license. Lyft Co-Founder and President John Zimmer mentioned in an interview that he learned from Uber’s mistakes when entering uncharted territory, demonstrating what analysts have called a “second-mover advantage.” As a consequence, Uber has been losing considerable market share to Lyft. Since its inception in 2012, just three years after Uber was founded, Lyft has grown its market share to capture 23.4 per cent of the U.S. ridesharing market.
A Different Tone
Having witnessed the success of ride-hailing company Grab and its expansion model in Southeast Asia—working with governments before entering markets instead of subverting them—Uber is now changing its approach to dealing with regulators and leaving behind the “principled confrontation” approach used under former CEO Travis Kalanick.
In May 2017, Uber launched a pilot program with the town of Innisfil, Ontario that generated little publicity, but could be at the foundation of its new expansion strategy. Instead of developing its own public transit infrastructure at an estimated cost of C$1 million, Innisfil opted to partner with Uber to provide on-demand microtransit. The arrangement gave Innisfil residents a C$5 discount for any Uber ride within the city and lowered the cost of transiting to key destinations to fixed rates ranging from C$3 to C$5. In a report evaluating the impact of the pilot program, Innisfil’s senior policy planner revealed that the partnership with Uber required an average gross subsidy of C$5.73 per passenger, compared to a projected subsidy of C$33 per passenger for a permanent bus route.
For larger cities with higher transit ridership, Uber can be used to complement existing public transportation infrastructure. Uber’s partnership with the Pinellas Suncoast Transit Authority (PSTA) in Pinellas County, Florida, proves to be an interesting case study. The program attempted to solve the “first-mile-last-mile” problem of getting riders to their nearest bus stop, and from bus stops to their final destinations. The county was split into zones with stops that serve as transit hubs for multiple bus routes and Uber. For trips within the same zone that start or end at the designated transit hubs, the PSTA covers $5.00 of the $5.95 fare, leaving the rider to pay the remaining amount. The program, in its piloted version, saved the PSTA $100,000 per year while simultaneously improving transit services.
A Menu of Public Services
Uber’s pilot programs have not only demonstrated the advantages of using Uber to provide public transit services but have also validated the idea of Uber entering into government partnerships to provide more efficient public services as a whole. As part of its expansion strategy, Uber could offer a menu of services to cities designed to introduce cost savings and increase constituent satisfaction by meeting each city’s unique transportation and logistics challenges. Given Uber’s current capabilities, the company could also drastically improve the current state of wheelchair-accessible transportation and non-emergency medical transport to hospitals.
Microtransit
Uber’s two successful pilot projects have demonstrated the viability of microtransit. Moving forward, the company should consider launching value-added features to further improve its transit offerings.
For instance, Uber could offer a metropass extension in partnership with transit operators that would offer passengers a fixed number of discounted rides to and from public transit hubs in exchange for a monthly fee. The added passenger volume associated with such a service would deter drivers from leaving the platform while reducing rider churn, as commuters who habitually use Uber to connect to public transit would be unlikely to switch to Lyft for a private taxi ride.
Microtransit can also increase the value that Uber provides municipalities through data analytics. Namely, Uber could predict volume to and from transit stops, enable cities to better estimate demand in real time, and optimize route frequency. By incorporating actionable, real-time data into its value proposition, Uber can carve out a niche as, effectively, the Research and Development (R&D) arm of transit commissions. Such partnerships could in turn offer Uber unparalleled insights into commuter habits and allow the company to gain an advantage in data analytics over its competitors, which may pave the way for future Uber ambitions like its autonomous vehicle program.
Accessible Transportation
In order to meet the mobility needs of their constituents, many transit operators offer wheelchair-accessible “Dial-a-Ride” services for the elderly or mobility-impaired. Operators generally absorb massive losses to provide these services, given their capital-intensive vehicle requirements and low fare recovery ratios. As an example, the Toronto Transit Commission (TTC) operates the Wheel-Trans accessible transit service, which received C$119 million of government subsidies in 2016. That year, Wheel-Trans operated a fleet of 199 accessible vehicles. When Uber entered the accessibility market in Toronto with UberWAV in 2016, it had a fleet of over 550 wheelchair accessible vehicles and was able to offer trips at prices comparable to UberX, the company’s economy offering.If the TTC contracted Uber to deliver the services provided by Wheel-Trans, the city’s cost to provide these essential services would drop between C$40 million to C$80 million. Assuming consumers continue to pay the cost of a typical TTC fare, C$7 million of revenue can be expected to offset the cost of this program.
Non-Emergency Medical Transportation
In early 2018, Uber launched a partnership with Circulation, a private Health Insurance Portability and Accountability Act (HIPAA) compliant non-emergency medical transportation (NEMT) company based in the United States. The NEMT market exists to allow patients better access to care while remaining more affordable than ambulance services. Although Medicaid spends $3 billion annually on NEMT services, 3.6 million Americans continue to miss medical appointments each year due to transportation problems. While Uber’s partnership with Circulation serves as proof that the company is capable of providing this service, greater margins can be realized by partnering directly with governments.
A New Route
The recommended services offer cities an enticing value proposition: Uber can improve transportation while also reducing costs, increasing constituent satisfaction, and allowing legislators to focus on other issues.
Interestingly, a partnership with Uber can make the distribution of tax dollars more equitable. Typically, initiatives to improve transportation services require large capital investments. This requirement results in having property value increases clustered around areas that directly benefit from the projects’ completion. A common criticism is that the corresponding increase in property taxes results in taxpayers subsidizing a service they may not necessarily use; from the perspective of a politician, this results in voter attrition. A partnership with Uber would help governments meet one of their key objectives of benefiting citizens equitably through public services.
Defining Their Road Map
While the proposed services will provide some additional revenue for Uber, their greatest benefit will be the tremendous impact on the company’s traditional ridesharing business.
Ease of Expansion into New Markets
Reduced Regulatory Pressure
These partnerships would lay the groundwork for increased government collaboration in the future. Given that heavy regulations have significantly impeded Uber’s growth in the past and lobbying has been a major expense for the company, a positive relationship with the government could significantly improve the future potential of Uber’s current operations. It would similarly position the company to favourably influence regulation of the emerging autonomous vehicle industry, a space in which the company has already invested over $1 billion.
Reduced Subsidy Requirement
The greatest effect of government partnerships will be their impact on Uber’s bottom line. Uber currently absorbs substantial losses when expanding to a new city; the firm cuts prices heavily to encourage customers to adopt the service but has to maintain high wages for drivers in order to increase market penetration. While this model is effective at driving user growth, it is very costly. In 2015, the firm spent $1.7 billion on ride subsidies, with customers paying just 41 per cent of the cost for their trips, on average. In a model where governments use Uber to reduce their own costs of providing transit and other services, consumer promotions and associated discounts would be reduced while drivers would be compensated at the same level. In essence, governments would bear a significant portion of this customer acquisition cost—Uber’s largest expense during expansion.
Improved Experience for Drivers
These programs would also provide more favourable conditions for drivers, thus encouraging them to service these routes when available. Trips are more likely to be recurring and on predictable routes, allowing drivers to regularly find riders near high-traffic zones. A microtransit zoning system will ensure rides connecting passengers to and from transit hubs will be shorter in length and thus more profitable relative to total distance driven, given that base fares would be compounded over a greater number of rides. Partnerships with cities could also include clauses allowing Uber drivers access to high occupancy lanes or discounted tolls to increase the supply of drivers.
Branding and Growth
Public-private partnerships (PPPs) can serve as a catalyst for explosive growth, as government subsidies and an implicit endorsement of Uber would facilitate increased adoption, making ridesharing more accessible and desirable to a broader set of customers. For instance, it is possible that riders who previously hesitated to use Uber would trust the service more if the company became an official public transit provider.
Steering in a New Direction
When Uber selected Pittsburgh, Pennsylvania as the inaugural city for its driverless car experiment, Mayor Bill Peduto commented: “You can either put up red tape or roll out the red carpet. If you want to be a 21st-century laboratory for technology, you put out the carpet.” Going forward, Uber should embrace this co-operative approach and offer cities solutions that address long-standing pain points rather than confrontation, with a value proposition that results in increased constituent satisfaction and taxpayer savings. PPPs would also position Uber well for the mass market introduction of high-impact technology like autonomous vehicles, as they would allow the company to influence regulation of the space and become the vendor of choice once adopted by governments.
Public services such as microtransit, NEMT, and accessible transportation complement—and can be delivered through—Uber’s existing infrastructure. Servicing these new markets will increase the utilization of its core ridesharing business, which will increase its revenues. Most importantly, it will assist the company in overcoming the regulatory obstacles that have limited growth and presented challenges. Ultimately, addressing these issues in a timely manner will help Uber solidify its position as the market leader and set the stage for a successful IPO in 2019.