Case Study #1: Everything on Demand: The Uberization of E-Commerce

Everything on Demand:

The “Uberization” of E-commerce

if you were trying to pick iconic examples of e-commerce in the two decades since it began in

1995, it is likely that companies such as Amazon, eBay, Google, Apple, and Facebook would be high on the list. Today, there’s a new business model that is becoming the face of e-commerce as

it enters its third decade: on-demand services. Uber and other firms with similar business models, such as Lyft (a ride service similar to Uber’s), Airbnb (rooms for rent), TaskRabbit (house-hold chores), Heal (doctor home visits), Handy (household helpers), and Instacart (grocery shopping), are the pioneers of

a new on-demand service e-commerce business model that is sweeping up billions of investment dollars and disrupting major industries, from transportation to hotels, real estate, house cleaning, maintenance, and grocery shopping. Uber is perhaps the most well-known, as well as the most controversial, company that uses the on-demand service model. Uber offers a variety of different services. The two most common are UberX, which uses compact sedans and is the least expensive, and UberBlack, which provides higher-priced town car service. UberPool is a ride-sharing service that allows users to share a ride with another person who happens to be going to the same place. In several cities, Uber is developing UberEats, a food delivery service;

UberRush, a same-day delivery service; and UberCargo, a trucking service. Uber, headquartered in SanFrancisco, was founded in 2009 by Travis Kalanick and Garrett Camp, and has grown explosively since then to over 600 cities in 80 countries. Uber currently has over 450,000 drivers in the United States and over 1 million world-wide, and reportedly has 40 million monthly active riders. In 2016, riders spent $20

billion on the Uber platform, generating $6.25 billion in revenue for Uber, but it still lost $2.8 billion, with losses in developing markets swallowing up profits being generated in North America, Europe, and elsewhere. Uber’s strategy is to expand as fast as possible while foregoing short-term profits in the hope of long-term returns. As of July 2017, Uber has raised over $12.5 billion from venture capital investors. Uber is currently valued at around $68–70 billion, more than all of its competitors combined. In 2016, Everything on Demand:

The “Uberization” of E-commerce

EC14_CH01.indd 3

11/20/2017 10:50:31 AM

4

CHAPTER 1

The Revolution Is Just Beginning

Uber sold Uber China, where it had been engaged in a costly turf war for Chinese riders,

to Didi Chuxing Technology, its primary Chinese rival. Uber received an 18% interest in

Didi Chuxing and Didi agreed to invest $1 billion in Uber. In doing so, Uber converted a

reported $2 billion loss on its Chinese operations into an interest in an entity now valued

at over $50 billion, and freed up capital to invest more heavily in other emerging markets

such as Indonesia and India where it does not have such significant competition.

Despite the fact that it is not yet operating at a profit, Uber offers a compelling

value proposition for both customers and drivers. Customers can sign up for free, request

and pay for a ride (at a cost Uber claims is 40% less than a traditional taxi) using a

smartphone and credit card, and get picked up within a few minutes. No need to stand on

a street corner frantically waving, competing with others, or waiting and waiting for an

available cab to drive by, without knowing when that might happen. Instead, customers

using the Uber app know just how long it will take for the ride to arrive and how much

it will cost. With UberPool ride-sharing, the cost of a ride drops by 50%, making it

cost-competitive with owning a car in an urban area, according to Uber. Uber’s value

proposition for drivers is that it allows them to set their own hours, work when they like,

and put their own cars to use generating revenue.

Uber is the current poster child for “digital disruption.” It is easy to see why Uber

has ignited a firestorm of opposition from existing taxi services both in the United States

and around the world. Who can compete in a market where a new upstart firm offers a

50% price reduction? If you’ve paid $1 million for a license to drive a taxi in New York

City, what is it worth now that Uber has arrived? Even governments find Uber to be a

disruptive threat. Governments do not want to give up regulatory control over passenger

safety, driver training, nor the healthy revenue stream generated by charging taxi firms

for a taxi license and sales taxes.

Uber’s business model differs from traditional retail e-commerce. Uber doesn’t sell

goods. Instead it has created a smartphone-based platform that enables people who want a

service—like a taxi—to find a provider with the resources, such as a personal automobile

and a driver with available time, to fill the demand. It’s important to understand that

although Uber and similar firms are often called “sharing economy” companies, this is

a misnomer. Uber drivers are selling their services as drivers and the temporary use of

their car. Uber itself is not in the sharing business either: it charges a hefty fee for every

transaction on its platform. Uber is not an example of true “peer-to-peer” e-commerce

because Uber transactions involve an online intermediary: a third party that takes a cut

of all transactions and arranges for the marketplace to exist in the first place.

Uber has disrupted the traditional taxi business model because it offers a superior,

fast, convenient taxi-hailing service when compared to traditional taxi companies. With

a traditional taxi service, there is no guarantee you will find a cab. Uber reduces that

uncertainty: the customer enters a request for pickup using his or her smartphone and

nearly instantly (under the best of circumstances), Uber finds a provider and notifies the

customer of the estimated time of arrival and price. Riders can accept the price or find

an alternative.

Uber’s business model is much more efficient than a traditional taxi firm. Uber

does not own taxis and has no maintenance and financing costs. Uber calls its drivers

EC14_CH01.indd 4

11/20/2017 10:50:31 AM

Everything on Demand: The “Uberization” of E-commerce

5

“independent contractors,” not employees. Doing so enables Uber to avoid costs for

workers’ compensation, minimum wage requirements, driver training, health insurance,

and commercial licensing.

Quality control would seem to be a nightmare with over 1 million contract drivers. But

Uber relies on user reviews to identify problematic drivers and driver reviews to identify

problematic passengers. Drivers are evaluated by riders on a 5-point scale. Drivers that

fall below 4.5 are warned and may be dropped if they don’t improve. Customers are also

rated with a 5-point system. Drivers can refuse to pick up troublesome customers, and

the Uber server can delay service to potential customers with low ratings or ban them

entirely. Uber does not publicly report how many poorly rated drivers or passengers there

are in its system. Academic articles have found that in similar on-demand companies,

such as Airbnb, there is a built-in bias for both sellers and buyers to give good reviews

regardless of the actual experience. If you routinely give low reviews to sellers (drivers),

they will think you are too demanding and not service you in the future. If a driver gives

low reviews to passengers, they might not rate you highly in return.

Rather than having a dispatcher in every city, Uber has an Internet-based app service

running on cloud servers located throughout the world. It does not provide radios to its

drivers, who instead must use their own smartphones and cell service, which the drivers

pay for. It does not provide insurance or maintenance for its drivers’ cars. Uber has

shifted the costs of running a taxi service entirely to the drivers. Uber charges prices that

vary dynamically with demand: the higher the demand, the greater the price of a ride.

Therefore, it is impossible using public information to know if Uber’s prices are lower

than traditional taxis. Clearly, in high-demand situations they are higher, sometimes ten

times higher, than a regulated taxi. There is no regulatory taxi commission setting uniform

per-mile fares. Consumers do face some traditional uncertainties regarding availability:

during a rain storm, a convention, or a sports event, when demand peaks, not enough

drivers may be available at any price.

If Uber is the poster child for the new on-demand service economy, it’s also an iconic

example of the social costs and conflicts associated with this new kind of e-commerce.

Uber has been accused by attorney generals in several states of misclassifying its drivers

as contractors as opposed to employees, thereby denying the drivers the benefits of

employee status, such as minimum wages, social security, workers’ compensation, and

health insurance. In June 2015, the California Labor Commission ruled that an Uber

driver was, in fact, an employee under the direct, detailed supervision and control of

Uber management, notwithstanding Uber’s claims that it merely provides a “platform.”

However, the ruling applied only to that individual driver, and Uber is appealing the

decision. Uber has also been the target of numerous lawsuits filed on behalf of its drivers,

accusing the company of mistreatment, lack of due process, underpayment, and violation

of state employment laws.

Uber has been accused of violating public transportation laws and regulations

throughout the United States and the world; abusing the personal information it has

collected on users of the service; seeking to use personal information to intimidate jour-nalists; failing to protect public safety by refusing to do adequate criminal, medical, and

financial background checks on its drivers; taking clandestine actions against its chief

SOURCES:

“One Way to Fix Uber:

Think Twice Before Using It,” by

Farhad Manjoo,

New York Times

,

June 14, 2017; “How Uber’s

Funding and Valuation Stack Up

Against Competitors Like Didi and

Lyft,” by Rani Molla and Johana

Bhuivan, Recode.net, May 25,

2017; “Here’s How Much Uber

Made in 2016,” by Reuters,

Fortune.com, April 14, 2017;

“Here’s All the Shady Stuff Uber’s

Been Accused of So Far,” by Joe

McGauley, Thrillist.com, March 7,

2017; “Uber’s Leaked Finances

Show the Company Might be Able

to Turn a Profit,” by Jim Edwards,

BusinessInsider.com, February 27,

2017; “Uber’s Value to Riders Is

Clear. To Investors, It May Prove

More Elusive,” by Richard Beales,

New York Times

, December 22,

2016; “Travis Kalanick Says Uber

Has 40 Million Monthly Active

Riders,” by Matthew Lynley,

Techcrunch.com, October 19, 2016;

“Even Uber Couldn’t Bridge the

China Divide,” by Farhad Manjoo,

EC14_CH01.indd 5

11/20/2017 10:50:31 AM

6

CHAPTER 1

The Revolution Is Just Beginning

competitor Lyft in order to disrupt its business; and being tone-deaf to the complaints

of its own drivers against the firm’s efforts to reduce driver fees. Uber has been banned

in several European cities.

Critics also fear the long-term impact of on-demand service firms, because of their

potential for creating a society of part-time, low-paid, temp work, displacing traditionally

full-time, secure jobs—the so-called “uberization” of work. As one critic put it, Uber is

not the Uber for rides so much as it is the Uber for low-paid jobs. Uber responds to this

fear by claiming that it is lowering the cost of transportation, making better use of spare

human and financial resources, expanding the demand for ride services, and expanding

opportunities for car drivers, whose pay is about the same as other taxi drivers.

In 2017, Uber has been hit by a series of continuing controversies and scandals,

creating a public relations nightmare for the company and culminating in the resignation

of a number of board members, senior executives, and finally its co-founder and CEO,

Travis Kalanick. It has been charged with corporate mismanagement and misconduct

(including using a secret program known as Greyball to track and evade regulators and

other law enforcement officials), workplace discrimination and sexual harassment, and

violation of the privacy of its customers using its mobile app to track the location of those

customers at all times, even when the app was not in use.

But despite the controversy surrounding it, Uber continues to have no trouble at-

tracting drivers, customers, and additional investors. This fact has led critics to encourage

customers to send Uber a message that its behavior is unacceptable by using competitors

such as Lyft. However, the likelihood of this actually happening is questionable. Uber

has already become entrenched into the everyday life of millions of people around the

globe. Can it evolve past the win-at-all-costs ethos that has powered its success, but also

its misdeeds?

New York Times

, August 1, 2016;

“Uber Sells China Operations to

Didi Chuxing,” by Alyssa Abkowitz

and Rick Carew,

Wall Street

Journal

, August 1, 2016; “Why

Uber Keeps Raising Billions,” by

Andrew Ross Sorkin,

New York

Times

, June 20, 2016; “Uber Points

to Profits in All Developed

Markets,” by Leslie Hook, FT.com,

June 16, 2016; “An Uber Shake-

down,”

Wall Street Journal

, April

24, 2016; “Uber Settlement Takes

Customers for a Ride,” by Rob

Berger,

Forbes

, April 22, 2016;

“Leaked: Uber’s Financials Show

Huge Growth, Even Bigger Losses,”

by Brian Solomon,

Forbes

, January

12, 2016; “Twisting Words to

Make ‘Sharing’ Apps Seem

Selfless,” by Natasha Singer,

New

York Times,

August 9, 2015; “Uber

Dealt Setback on Labor Rules,” by

Lauren Weber,

Wall Street Journal

,

June 18, 2015; “The $50 Billion

Question: Can Uber Deliver?,” by

Douglas Macmillan,

Wall Street

Journal,

June 15, 2015; “How

Everyone Misjudges the Sharing

Economy,” by Christopher Mims,

Wall Street Journal,

May 25, 2015;

“The On-Demand Economy Is

Reshaping Companies and

Careers,”

The Economist,

January

4, 2015; “The On-Demand

Economy: Workers on Tap,”

The

Economist,

January 3, 2015.

EC14_CH01.indd 6

11/20/2017 10:50:32 AM

The First Thirty Seconds: Why You Should Study E-commerce

7

I

n 1994, e-commerce as we now know it did not exist. In 2017, just 23 years later,

around 184 million American consumers are expected to spend about $695 billion,

and businesses around $6.3 trillion, purchasing goods, services, and digital content

via a desktop computer or mobile device. A similar story has occurred throughout the

world. And in this short period of time, e-commerce has been reinvented not just once,

but twice.

The early years of e-commerce, during the late 1990s, were a period of business vision,

inspiration, and experimentation. It soon became apparent, however, that establishing

a successful business model based on those visions would not be easy. There followed a

period of retrenchment and reevaluation, which led to the stock market crash of 2000–

2001, with the value of e-commerce, telecommunications, and other technology stocks

plummeting. After the bubble burst, many people were quick to write off e-commerce.

But they were wrong. The surviving firms refined and honed their business models, and

the technology became more powerful and less expensive, ultimately leading to business

firms that actually produced profits. Between 2002–2008, retail e-commerce grew at more

than 25% per year.

Today, we are in the middle of yet another transition. Social networks such as Facebook,

Twitter, YouTube, Pinterest, Instagram, and Snapchat, which enable users to distribute

their own content (such as videos, music, photos, personal information, commentary,

blogs, and more), have rocketed to prominence. Never before in the history of media have

such large audiences been aggregated and made so accessible. At the same time, mobile

devices, such as smartphones and tablet computers, and mobile apps have supplanted the

traditional desktop/laptop platform and web browser as the most common method for

consumers to access the Internet. Facilitated by technologies such as cloud computing,

cellular networks, and Wi-Fi, mobile devices have become advertising, shopping, reading,

and media viewing machines, and in the process, are transforming consumer behavior yet

again. Mobile, social, and local have become driving forces in e-commerce. The mobile

platform infrastructure has also given birth to yet another e-commerce innovation: on-

demand services that are local and personal. From hailing a taxi, to shopping, to washing

your clothes, these new businesses are creating a marketspace where owners of resources

such as cars, spare bedrooms, and spare time can find a market of eager consumers looking

to buy a service in a few minutes using their smartphones. Uber, profiled in the opening

case, is a leading example of these new on-demand service firms that are disrupting

traditional business models.

1.1

THE FIRST THIRTY SECONDS: WHY YOU SHOULD STUD