Case 7 - Uber

Uber Technologies Inc. is a multinational transportation company that provides ride-sharing services, food delivery, and more. Uber was founded in San Francisco in 2009 and has since expanded its operations to more than 10,000 cities in more than 70 countries around the world. The company is a key player in the sharing economy—an economic model in which independent contractors rent out their underutilized resources, such as vehicles or lodging, to other consumers. The company has experienced resounding success and is expanding both within the United States and internationally. Due to its utilization of technology, Uber does not have as many constraints as taxicab companies do. A major reason Uber is so popular is because its app allows users to request a ride from drivers in the near vicinity. Uber's business model, which is based on independent contractors instead of employees, takes advantage of smartphone technology by linking consumers with independent drivers as its cabs, but it does not employ drivers or own the vehicles. This business model has contributed to the rise of the sharing economy in which independent contractors, drivers in this case, can rent out underutilized resources to earn money. This case will explore difficulties Uber has faced with global expansion, threats to the company's business model and the sharing economy, and ongoing controversies.

Introduction

In March 2020, Uber announced that it would temporarily suspend its carpool services in light of the COVID-19 pandemic. The week before the announcement, Americans spent 21 percent less on Uber rides compared to the previous week. Uber shares fell sharply due to investors' concerns regarding long-term effects of the virus on the economy. Though Uber Eats revenue was up as more people dined at home, it was not enough to protect the company. As a result, Uber laid off 3,700 full-time employees. Uber provided compensation with up to two weeks of missed pay to those drivers whose doctors advised self-isolation. However, drivers weren't satisfied. Drivers in Boston asked a federal judge to require Uber to start immediately treating them as employees so that they could receive sick leave, though this reclassification was never made. Overall, Uber's response time when it came to protect-ing riders and drivers was slow. It wasn't until mid-May that the company outlined a plan to adapt its business, which included limiting rides to three passengers, restricting passengers to the back seat only, and requiring both drivers and riders to wear face masks. Due to the uncertainty of the pandemic, Uber braced for a long-term slowdown for its ride-sharing business.

a Global Pandemic

Controversy

Although the company continues to be widely successful, the year 2017 was a difficult one for Uber. Multiple controversies cast a negative light on the organization. To start off the year, Uber had to pay more than $20 million in a settlement for misleading drivers on how much they would earn. In February, a former Uber female engineer published a blog post alleging that there was widespread sexual harassment and gender discrimination at the company, which prompted an investigation into Uber's corporate culture. This investigation later resulted in 20 employees being fired for various sexual harassment and discrimination violations. In March, five executives left the company, including the senior vice president of engineering. In April, Uber faced controversy with Apple, Inc. Uber had been secretly identifying and tagging iPhones even after the app and its data had been deleted from the iPhones. Uber tagged these phones to see if users were using the same phone to download and then uninstall the app repeatedly so that they could use promo codes multiple times. Although Uber was trying to detect fraud and prevent customer abuse, this action violated Apple's privacy policy. Tim Cook confronted the chief executive of Uber, threatening to remove the app from Apple's app store if Uber did not stop breaking the policy. The impact would have caused millions of iPhone consumers to lose access to the Uber app. The CEO at the time, Travis Kalanick, had developed a reputation for bending or sometimes breaking the rules in order to drive the company toward desired goals. Since its founding in 2009, Uber has gained a negative reputation for challenging the rules and causing disruption. In May, the U.S. Department of Justice launched a criminal investigation into the com-pany's use of "Greyball," a secret software that identified users who were violating the terms of services and denied ride requests to them. The users simply never got paired with a driver on the app. This software even targeted government officials who were using the app to investigate Uber and its drivers. There was controversy over the use of this software as to whether it was in violation of the Foreign Corrupt Practices Act, which bans the use of bribes to foreign officials to get or keep business. In June, Uber fired top executive Eric Alexander for obtaining the medical records of an Uber passenger who was raped by her driver for the purpose of casting doubt upon her case. Uber held an all-staff meeting to discuss reforming company culture, which was immediately followed by CEO Travis Kalanick taking a leave of absence. This ultimately led to Dara Khosrowshahi becoming his successor as CEO in August. In September, the FBI investigated Uber's software for allegedly illegally interfering with competitors. The internal program, known by Uber as "Hell," could track drivers working for the competitor Lyft. The investigation revealed that Uber created fake Lyft customer accounts to "request" rides around different cities in order to see how many Lyft drivers were nearby and what prices they were being offered for various routes around the cities. The program was also able to identify drivers who worked for both Lyft and Uber in order to give these drivers incentives to leave Lyft. The program was presumably used from 2014 to 2016. The ability to recruit and maintain drivers is a critical component of how ride-share companies operate. Every major city has users who engage with both apps to determine the most cost-effective option for their trips. Having inside knowledge of the competition and being able to dominate the market in this way was invaluable toward gaining more custom-ers on a more consistent basis. On the other hand, these activities can also violate laws on fair competition. Also in September, Uber lost its license to operate in London due to a lack of corporate responsibility, as discussed earlier. In November, it was revealed that Uber suffered a data breach in 2016, in which email addresses, names, and phone numbers of 50 million global Uber riders were stolen. The personal information of drivers was also compromised, includ-ing driver's license numbers. Uber had an obligation to report hacking incidents to regulators and drivers whose information was taken. However, at the time, Uber kept the data breach quiet by paying the hackers to delete the data. It was in the process of negotiating with the Federal Trade Commission about the proper handling of consumer data. Uber reported that it believed none of the data was used by the hackers and offered free identity theft protection and monitoring to victims of the hacking. The data breach was not made public until almost a year after it occurred. As a result of this incident, the chief security officer and the legal director of security and law enforcement were fired. Uber's troubles did not stop there. Uber also faced difficulties with accidents and trage-dies outside the inner-company operations. In 2018, a self-driving Uber car struck and killed a pedestrian in one of the first video-recorded accidents involving the death of a pedestrian. It was later learned that Uber had disabled the vehicle feature that carries out emergency brakes for dangerous situations in order to prevent erratic vehicle behavior. Uber settled a civil case with the pedestrian's family, and Arizona prosecutors decided not to criminally charge Uber. It seemed unclear whether the car or the victim was at fault. Uber responded by suspending its self-driving program for a few months and resuming the program after changing its approach to self-driving vehicles. Another tragedy brought Uber attention in 2019 when University of South Carolina student Samantha Josephson was murdered after getting into a car she mistook for an Uber. Following her death, Uber promoted awareness, reminding riders to verify their drivers through notifications and ads. The university encouraged students and riders everywhere to ask their driver "What is my name?" to confirm they were in the correct vehicle. Uber stated they had been working with college campuses since 2017 to educate students on detecting fake ride-share drivers and will continue to do so to help prevent future incidents. Additionally, the South Carolina House of Representatives passed a bill requiring ride-sharing drivers to display illuminated company signs in their vehicle to further prove their validity to riders. Controversy struck again after Uber sold its electric bike and scooter rental business, Uber Jump, to Lime in 2020. Shortly after the sale, photos circulated showing thousands of Uber bikes and scooters on trucks waiting to be scrapped. Of the 20,000-30,000 Jump vehicles on the market, Lime acquired only the newest bikes, and Uber confirmed tens of thousands of units would be recycled. Many believed Uber's Jump business had a positive impact, reducing the number of people riding in cars, so both consumers and Uber employ-ees were disappointed to see Uber dumping its bikes instead of donating them. According to an Uber statement, donation was not an option because of "maintenance, liability, safety concerns, and a lack of consumer-grade charging equipment." The company assured the public it was recycling the units responsibly. However, other bikeshare companies, such as Spin and Ofo, have successfully donated e-bikes in the past.

Despite Uber's challenges, the company has become widely popular among consumers and independent contractors. Supporters claim that Uber is revolutionizing the transportation service industry. Investors clearly believe Uber is going to be strong in the market in the long run. One lesson that Uber will hopefully take to heart is the need to ensure that independent contractors using its app obey relevant country laws. The company also must revamp its corporate culture to prevent more legal repercussions. Uber has to address these issues to uphold the trust of customers and achieve long-term market success in different countries.

Conclusion

In 2014, Uber launched Uber Eats, which gives users the ability to order and have food delivered from participating local restaurants. Now, Uber has partnered with more than 100,000 restaurants around the globe. Uber Eats now holds about 30 percent of the market for on-demand food delivery services, second only to DoorDash, and it provides Uber with a large revenue source. With people stuck at home during the COVID-19 pandemic, Uber Eats saw 52 percent growth in bookings, attracting many first-time customers. However, despite experiencing record growth, the service recorded $313 million in losses due to the cost of promotions and the expense of additional safety equipment. At the same time, pressure increased for the companies to reduce commissions in light of the crisis. In response, Uber Eats waived its delivery fees in the United States and Canada. Despite the struggle, Uber has remained committed to making Uber Eats a successful platform. Case in point, Uber introduced grocery delivery in 2020 to expand the Uber Eats platform and meet consumer demand. Uber expects the demand for grocery delivery will be sustained over the long term. Uber has also invested at least $2 billion to research autonomous vehicles and test different fleets of these vehicles, which may be used to deliver meals and groceries in the future.

Food Delivery

In 2017, Uber launched Uber Freight, a service that connects shipping companies with drivers. The service, which operates similarly to Uber's core ride-sharing app, has seen triple-digit revenue growth, expanding both nationally and internationally. Freight transportation represents a huge opportunity for Uber, especially as the United States faces a shortage of truck drivers. Now that Uber has established itself as a pillar of the sharing economy, it stands to be a big player in this segment. However, during the COVID-19 pandemic, Uber faced steep losses, and some experts suggested the company had been winning new business by selling its service below cost. Though revenue was growing, Uber Freight struggled to turn a profit. Uber Freight will have to find its way to profitability to truly be considered a success.

Freight

International expansion is a major part of Uber's marketing strategy. Adopting the motto "think local to expand global," Uber believes that consumers from other countries will appre-ciate its low cost, convenience, and freedom. As it expands into different countries, Uber is engaging in strategic partnerships with local companies. These alliances with local firms are especially important because they allow Uber to utilize the resources and knowledge of domestic firms familiar with the country's culture. Despite Uber's international success, many countries have regulatory hurdles that have created challenges for the company. Perhaps the biggest hurdle is Uber's failure to mandate that its drivers obtain the same license types as professional taxi drivers even though Uber drivers offer many of the same services as professionally licensed taxi drivers. Governments have responded by banning Uber—and the services provided via Uber—due to the com-pany's nonenforcement of professional licenses for its drivers. For instance, in Spain, Uber was forced to shut down ride-sharing services after a judge ruled that Uber drivers were not legally authorized to transport passengers, claiming that Uber created unfair competition for professionally licensed taxi drivers. Because the taxi industry is important in many cities, governments like Spain's are not looking favorably at what they view as an unfair competitive advantage that could potentially bankrupt the industry. Uber returned to Spain in March 2018 with UberX, a tier of Uber service that uses professionally licensed drivers, placing it more on par with licensed taxi drivers. However, in 2019, Uber and its Spanish competi-tor Cabify announced that they were suspending services in Barcelona after a new law was passed requiring all vehicles to be booked with at least 15 minutes advance notice. Uber faced similar problems in France. In 2011, Paris became the first city outside of the United States where Uber set up operations. However, local authorities attempted to ban one of Uber's services because it did not require drivers to be professionally licensed. French police even raided Uber's Paris office. French law mandates that operating a service that connects passengers to nonprofessional drivers is punishable with fines of more than $300,000 (U.S.) and up to two years in prison. Hundreds of Uber drivers in France were issued fines for operating illegally, which Uber paid. Uber challenged that law, claiming that it was unconstitutional because it hindered free enterprise. A French court decided against banning Uber's service and sent the case to a higher court. This generated strong criticism from taxicab officials in France as they maintained that they had to have professionally licensed drivers while Uber was free from this restriction. French courts later ruled against Uber, and the company is no longer allowed to use nonprofessional drivers in the country. However, its past use of nonprofessional drivers continues to haunt Uber. The European Union determined that France could file criminal charges against Uber for its UberPOP service, as it had used nonprofessional drivers to operate an illegal taxi service. In another landmark ruling, French courts sided with an Uber driver who claimed he should be recog-nized as an employee, not an independent contractor. Though Uber challenged the ruling, France's top civil court sided with the driver. The ruling does not automatically reclassify all Uber drivers in the country as employees, however. Individual drivers will have to go to court to seek reclassification. Regardless, this puts Uber's business model at risk. India is Uber's second-largest market after the United States. In New Delhi, a woman's rape allegation led to a ban against app-based services without radio-taxi permits in the capital. In response to the alleged rape, Uber began updating its app to include panic button and tracking features. Uber also began offering its service in New Delhi without charging booking or service fees. The company came under fire for how it compensates Indian driv-ers. As Uber came closer to launching its initial public offering (IPO), which was filed in May 2019, it began to reduce driver incentives to build up financial performance. However, reduced incentives, together with higher diesel prices, negatively affected Indian drivers' financial earnings, causing growing discontent. Uber must tread carefully to seize upon opportunities in India without violating regulatory requirements or damaging relationships with its drivers. Uber now controls more than 50 percent of the ride-sharing market in India. In 2015, a German court banned Uber services if they used nonprofessional drivers. Uber argued that the company itself is only an agent to connect driver and rider. Rules that apply to taxi services do not apply, and all services are deemed to be legal, according to Uber. The court ruled that Uber's business model clearly infringes Germany's Personal Transpor-tation Law, because drivers transport riders without a personal transportation license. The injunction includes a fine of more than $260,000 per ride for noncompliance. After the rul-ing, Uber switched to working exclusively with professional and licensed private-hire vehicle companies. However, in 2019, a German court banned Uber from sending ride requests to rental car companies, effectively outlawing Uber's revised business model. Uber will have to adapt once again to remain viable in Germany. In 2017, London transportation authorities revoked Uber's license for a variety of rea-sons, including poor oversight of drivers. After appealing, Uber was granted a 15-month license but had to agree to additional government oversight and policy changes. After this period, authorities chose not to renew Uber's operating license in 2019 due to safety prob-lems. Uber was able to operate throughout the appeals process. The company took steps to address the concerns of regulators, including the implementation of new safety measures, and in 2020, the company's transportation license was restored. Uber faces many regulatory and legal issues outside of the United States. The company attempted to take a global approach to expansion by applying the same practices in other countries as it does in the United States. However, it is quickly realizing that it must take a more customized approach. Laws differ from country to country. Although Uber defines itself as an "agent" of its "individual contractors," many courts do not view its services in the same way. They are forcing Uber to comply with licensing laws or stop business in certain areas.

Global expansion Challenges

Uber has smaller business segments that even combined make up less than 1 percent of Uber's business. This segment of its business is a catchall category for Uber's early-develop-ment-stage projects. One example is Uber Health. Uber Health is a service where healthcare professionals can schedule rides for patients and caregivers going to and from the care they need. This service is a perfect complement to its core business.

Other Bets

Rather than a ride-sharing company, Uber views itself as a technology and transportation company. Uber has greatly increased its offerings by expanding into food delivery, business transportation solutions, and more.

Other Business segments

As Uber looks to the future, it is investing in advanced transportation technology to stay ahead of the curve. Uber and Volvo partnered to create a driverless car through a $300 million alliance. Uber and Volvo revealed their first production vehicle, the XC90 SUV, in 2019. Even in the face of safety concerns, Uber believes self-driving vehicles to be safer and more sustainable than traditional vehicles. Additionally, Uber developed an urban air mobility initiative, Uber Elevate, that was acquired by Joby Aviation in 2020. Uber, which continues to be involved in the project, will face many regulation challenges and ethical concerns with this uncharted territory.

The Future

There is a significant ongoing threat to the sharing economy in which Uber operates: worker classification. Under current U.S. law, a worker either depends on an organization as an employee or is self-employed as an independent contractor. The rise of Uber and other digital matching apps has called worker classification into question. This has been a wide-spread concern because employees receive workplace protections such as minimum wage and overtime pay that independent contractors do not. Some consider the independent relationships between Uber and its drivers to be ben-eficial because of the flexibility and personal control for the drivers. However, lawmakers fear companies are evading U.S. labor laws to the detriment of the contractors. California legislators passed Assembly Bill 5 in 2019, which classified contract workers for compa-nies such as Uber as employees. The bill expanded the 2018 California Supreme Court decision known as Dynamex. Together, they established a three-point test, often referred to as the ABC test, to determine if a worker is an employee: (1) the company controls the employee's work; (2) the employee's work is a core part of the company's business; and (3) the workers don't typically engage in providing their service to other companies. This posed a major threat to Uber, which relies on low-cost, flexible labor. Not only would labor costs increase, but long-term Uber was concerned it would have to limit the number of drivers or schedule drivers in advance, eliminating the ability for drivers to work as often or as little as they desire. When Uber failed to comply with the bill, California issued an order to suspend all ride-sharing operations, but the California Supreme Court delayed the orders while Uber appealed the decision. The appeals court upheld the ruling that Uber must reclas-sify drivers as employees. Soon after, however, California voters approved Proposition 22 in 2020, effectively overturning the bill by exempting gig economy companies from having to classify workers as employees. Now, Uber will provide added benefits such as paying drivers 120 percent of the state's minimum wage when they are driving a pas-senger or en route to a pickup. Uber's lobbying efforts to be exempt from Assembly Bill 5 paid off for the company, which plans to push for legislation similar to Proposition 22 on a national level.

Threats to the sharing economy

Uber filed for an initial public offering in 2019 soon after competitor Lyft was listed on NASDAQ in March 2019. The Uber IPO was one of the largest of all time with a value of $82.2 billion, just behind Facebook at a valuation of $115 billion and Alibaba at $179 billion at the date of their IPOs. All 180 million shares of Uber stock were sold out within three days of the IPO. Uber's initial stock price was $45 a share, raising a total of $8.1 billion at a valuation of $82.2 billion in total. Less than a year after its IPO, the COVID-19 pandemic struck the United States, drasti-cally altering day-to-day life. People around the world were ordered to stay home and limit travel which hurt the ride-sharing industry as a whole. Even as businesses reopened and people returned to work and school, the demand for ride-sharing remained low. Though Uber faced substantial losses due to the pandemic, the company kept its eyes on the future. Uber acquired Postmates for $2.65 billion in the midst of the pandemic, preparing its Uber Eats division for significant growth. Shortly after, the company introduced grocery delivery in select cities to meet the needs of its customers. The ability to quickly adapt its strategies is a key strength for Uber.

Uber Becomes a Public Company