Uber: Rising Valuations Amidst Ethical Woes

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EXCERPTS

Uber was founded in 2009 as UberCab Inc., by Garrett Camp (Camp) and Travis Kalanick (Kalanick) in San Francisco, California, US, to address the problems faced by taxi riders. In January 2010, Uber started pre-launch testing of its services when Camp, Kalanick, and Oscar Salazar hit the roads of New York with three cars. Later, in July 2010, Uber started its services in San Francisco to provide an on demand car service and took orders through an iPhone app called Uber and through SMS . It started its operations around 18-months after the first discussion held between the two founders in Paris.

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The launch of the Uber services disrupted the traditional taxi industry and was an instant hit, thanks to the fact that they offered passengers an effortless ride, and drivers the opportunity to earn more...

Uber worked as a connector (middleman), connecting the person looking for a cab with a cab driver looking for a rider. It offered various types of vehicles (cars) from premium vehicles to low-cost daily purpose vehicles which cost less than taxis. Uber charged a 20% commission on every ride. This helped it cover its expenses which included technology development, maintenance, marketing, customer acquisition cost, and employee-related expenses (Refer to Exhibit V). According to a Uber spokesperson, Uber provided insurance coverage to its driver-partners. But the driver-partners needed to have their own insurance policy and to make sure that their coverage applied when they used their personal car for commercial purposes. In addition to insurance, an Uber driver-partner spent money on vehicle rental, vehicle installment payment, toll , fuel, and vehicle maintenance. As the drivers were not Uber employees, they had to take care of tax payment...

Uber was accused of unscrupulous recruitment tactics. In August 2014, The Verge alleged that Uber had recruited a team of independent contractors referred to as ‘brand ambassadors’. These contractors used burner phones and credit cards to create accounts with Uber’s competitors’ services, mainly those of its major competitor, Lyft, with the purpose of luring their drivers. A contractor earned around US$750 as commission for successfully recruiting a new driver-partner for Uber. Uber called this program ‘SLOG’ which meant ‘Supplying Long-term Operations Growth’..

According to the Uber website, "All Uber ridesharing and livery partners must go through a rigorous background check. The three-step screening we’ve developed across the United States, which includes county, federal, and multi-state checks, has set a new standard. These checks go back 7 years….Our process includes prospective and regular checks of drivers’ [driver-partners] motor vehicle records to ensure ongoing safe driving. Unlike the taxi industry, our background checking process and standards are consistent across the United States and often more rigorous than what is required to become a taxi driver [driver-partners]..."

There were incidents reported by Uber’s riders in which they alleged that the Uber driver-partners had threatened them. In July 2014, Uber passenger in Philadelphia claimed that a driver-partner of the company had punched her in the face and punctured her neck. Later, the passenger went to court and filed a US$0.5 million lawsuit against the Uber driver-partner. In addition to this, at least seven different incidents were reported of Uber passengers being allegedly abused, raped, or sexually assaulted by Uber driver-partners. These incidents were reported across U.S. cities...

Economists across the political spectrum supported surge pricing. However, Uber riders in various countries were against the concept and many demanded that their respective governments impose price controls on Uber and similar companies. Roland Kibardin, a 19-year-old Pace University student, said, “I’m sure yellow cabs are much more affordable in that case. The city should step in … they should at least have some sort of cap.” However, Uber justified surge pricing and said that it helped both its riders and its driver-partners. Riders benefited as they got the vehicles without any delay, especially when weather conditions were not good. Surge pricing also helped to get the vehicle when demand was very high. Some Uber driver-partners mentioned that surge pricing encouraged them to come out late in the night or after a storm...

Uber also faced various regulatory issues in many countries . These countries saw Uber as a taxi company and wanted it to adhere to taxi industry norms. Uber, however, saw itself as a technology company...

Uber was able to add many driver-partners to its network as it provided them with the opportunity to become their own boss and earn more than taxi drivers. According to the U.S. Bureau of Labor Statistics, the average annual salary of cab drivers in the country in 2012 was US$22,820 whereas Uber claimed in May 2014 that the median wage for a UberX driver working at least 40 hours a week in New York City and in San Francisco was US$90,766 and US$74,191 a year respectively. However, many drivers, labor leaders, and attorneys claimed that this claim was just a marketing gimmick and they had not seen anyone who earned US$90,000 a year. In January 2015, a study on the U.S. labor market for Uber’s driver-partners stated that a typical Uber X and Uber Black driver made about US$19 an hour after paying the 20% commission to Uber.

Despite these challenges, Uber continued to attract investors. In January 2015, the company raised another US$1.6 billion as convertible debt from wealthy clients of Goldman Sachs Group Inc. Uber’s revolutionary model, which aimed at displacing the traditional taxi services and reducing the number of cars on the road, was fast growing and adding more cities across the world. Increasingly, governments around the world were also slowly starting to accept Uber’s services and bringing in legislation to regulate such services. However, Uber had to overcome the issues it was facing to ensure its success in the future.

Exhibit I: Market for Taxi and Limo Services in 2014

Exhibit II: Fund Raised By Uber

Exhibit III: Various Services Offered by Uber

Exhibit IV: Most Valuable Start Up in the World as of June 2014

Exhibit V: Diagrammatical Representation of Uber’s Business Model

Exhibit VI: Surge Pricing During Sydney Hostage Siege