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 (household 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 San Francisco, 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 worldwide, 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, 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 “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 journalists; 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 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 attracting 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?
Answer The Following Questions:
1-What is meant by on-demand service model? (Give examples)
2-What is the value proposition of Uber for both customers and drivers? 3-What is the business model that Uber follows?
4-What are the social costs and conflicts associated with this new kind of on-demand service firms?