Setting the world in motion

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Strategy - Business Model - Financials - Economics

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Overview

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Key partners

We distinguish between two types of key partners, those that are crucial and
other partners. Uber’s most crucial partners are drivers, restaurants (Uber Eats),
certain technology partners, cities and a fast growing ecosystem of commercial
partnerships. In their pre-IPO business, the list of crucial partners rightly included
investors. But these are now included in the wider key partners list.

The drivers are the supply side and help deliver the value proposition to the end
customers (riders).

The list of crucial technology partners only includes those that help with unique
technologies (or at least not widely available). At this stage of the company, this
includes only partners for their new endeavours, such as autonomous vehicles
(AV). Uber has also a lot of crucial IT technology but it is mostly proprietary (i.e.
in-house build) which does not preclude that they are using common underlying
technologies (see their tech stack) which - again - are not crucial partnerships.

Here are more details:

1. Drivers: The drivers are on the supply side of Uber and they can join or
leave at a moment's notice. It is essential to have a sufficient number of
them to be able to provide the customer proposition (timely pick-up at low
cost). They bring their own cars into the value proposition for which Uber
does not have to outlay any capital costs. Without a critical mass of drivers,
the crucial indirect network effects do not kick-in which is why Uber
accelerates supply when they enter a new city. But even after the initial
onboarding of drivers, there is the ongoing issue of their employment
status, payments, entitlements, etc which we will discuss. Additionally,
there are a growing set of specialised drivers:

a. Limu, wheelchair capable cars/drivers

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 b. Uber Freight trucks, drivers

c. And a lot more

2. Restaurants: Like drivers, restaurants are essential and can join or leave at a
moment’s notice. They can multi-home using one of the many competitor
meal-delivery offers. It’s an ambivalent space due to the high commission
that Uber takes. The importance of Uber Eats was highlighted during the
covid crisis when Uber Rides basically collapsed while Eats soared
alleviating the financial fallout somewhat.

3. Technology partners: Let’s distinguish between two types of technologies.

The first are tech partners offering leading-edge, proprietary technology
that is essential to the value proposition. (Note that uniqueness is always
temporary as it will be copied at some stage if successful. It still makes it
unique if it plays an important role.) The former includes R&D areas like
autonomous vehicles because of its importance to be a first or at least early
mover in this space. The second includes technology that is relatively widely
available and/or non-essential to the uniqueness of the value proposition
(even if leading-edge), this includes things like maps, GPS, payment, Cloud
services, the elements of the tech stack, etc.

a. Crucial technology partners include those that work on autonomous

vehicles, AVs (Volvo, Toyota). Yes, many companies are working on
AVs, but it will be crucial for Uber to be among the first who can
introduce AVs to their key markets. It can have detrimental effects if
this is not the case. Many scenarios are thinkable from minor impacts
to quite major impacts. Uber is aware of this and will significantly
increase their resources and accompanying efforts to avoid severe
scenarios to materialise.

b. Uber has developed a lot of their proprietary IT. This includes

technologies, including maps, payments, etc. More under key assets
(premium version)

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 c. Other technology partners: There is a lot of technology and IT
infrastructure involved in the background of Uber’s App. Most of this
can be sourced from various providers in that space which is why we
would not call them crucial key partners. Some examples include:

i. GPS

ii. Payment

iii. Cloud services

iv. Data analytics

4. Cities / communities: What are cities and communities? It is hard to clearly

identify who this is. Firstly, there are many players involved in enabling Uber
in cities (or at least not hindering them). There are state-level legislators
affecting different types of laws that Uber is dependent on. There are
federal-level regulators for aspects of road-safety, etc. And then there are
all sorts of city-level stakeholders. Add to this that responsibilities differ by
country. Funny enough, there are even differences within a country. Uber is
facing more resistance in some cities within the US and less in others. The
barriers can come from different directions. Add the international
operations and things get even more complex. Cities / communities have
become key partners. Additionally, I have added them under the list of
stakeholders within the customer relationships. This makes sense because
in the system of cities there are some stakeholders which are essential
partners while others are wider stakeholders that also require some
engagement. Here is a comprehensive list of US cities (and a global list) that
shows local differences in legislative and regulatory requirements.

5. Commercial partners: Uber partners with a multitude of corporates and

commercial partners. These types of partnerships differ and have different
purposes, ease pick-up/drop-off, creating new channels to local markets,
increasing loyalty and more:

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 a. Loyalty program partners: e.g. collaborating with frequent flyer
program provider: here Qantas in Australia, tiered rewards program
or here Capital One in the US.

b. Uber is partnering with hundreds/thousands of malls, attraction to

become the preferred ride-share partner of the respective facility and
then ease pick-up through defined pick-up points, this includes
airports (which has been one of their biggest revenue generators),
malls, attractions (example Universal Studios in LA).

c. Many commercial partners for shared rewards and as an additional

sales channel, e.g. Starwood Hotels & Resorts, American Airlines,
Hilton Hotels, American Express, PayPal and Pepsi.

d. Partnering with product/service providers for drivers: Uber has a

range of partners that drivers can use to redeem benefits that they
accrue depending on how much they drive (and at which times).
Partners can include car products/service providers, financial service
providers, telco, etc. Here is the Australian version of the driver
rewards page which offers more details on how elaborate the system
is, i.e. which rewards tiers trigger which benefits. (Here’s the US
version which shows fewer details).

6. R&D Partners: research partners, e.g. ATG on future technologies, such as

autonomous vehicles; partners on eVTOLs (electric vertical take-off and
landing); as well as R&D partners on IT research areas, in particular, AI.

7. Investors/venture capitalists brought the initial rounds of funding to the

table. The funding helped them to develop the functionality, apps,
algorithms, their R&D, but is also used for customers acquisition costs and
other expenses. The role of investors was more important pre-IPO. They
went to the bond markets a few times after their IPO (here the current
standing with a coupon rate of 7.5%).

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 Uber’s funding rounds started in 2010 and continued to the IPO and a
minor funding round post-IPO

8. Lobbyists were more important at the earlier stages of the company in that
there was an (albeit unlikely) risk of being banned or significantly curtailed.
Lobbying work continues on a number of fronts (including the employment
status of drivers and future innovations, AVs and eVTOLS, etc). We see that
their lobby expenses in the US have started to taper.

Uber’s lobbying expenses are tapering since their IPO [source:

Opensecrets.org]

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 9. Other partners involved in the non-core value proposition or supporting
activities, some examples are:

a. Hire car partners (Uber-ready vehicles)

b. Insurances: Uber uses a combination of third-party insurance and

self-insurance, including a wholly owned captive insurance subsidiary.
This also means that they have to have insurance reserves in their
books which is based on historical data and actuary estimates (which
in exceptional cases could prove insufficient)

c. Gold, Platinum and Diamond Uber Pro driver-partners involved in an

accident while driving for Uber can access rideshare-ready
replacement vehicles (the partner is rideshare accident vehicles)

In our business model canvases for the social media platforms, I have also listed
users as key partners. For Uber, I don’t do this. The reason is that in the case of
Uber it’s more clear that they are the customer simply because they are footing
the bill.

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Key activities

Now that Uber has achieved considerable scale, there are three types of key
activities: (a) operational excellence, e.g. safety; (b) continued expansion to new
countries and cities; and (c) improve existing value propositions and develop
entirely new ones.

From a platform business model perspective, most of these activities can also be
categorised into reductions of search, transaction / post-transaction costs as well
as enhancing positive network effects while reducing negative ones.

Some examples are:

1. Remove friction (search costs) from all interactions. This includes the many
improvements around pick-up points, e.g. location accuracy, spotlight and
many other (non-technological) ways

2. Remove negative experiences (transaction costs), e.g. bad behaviours /

safety needs on both sides (rider and driver), e.g. through rating and other
measures

3. Reduce safety risks which often come with the risk of negative coverage
and can add to regulatory concerns

4. Improve the technical lead on the proprietary technologies

5. Improve the App as well as the involved processes based on user feedback

6. Keep participants engaged and stimulate ongoing participation. This can

include external stimuli, such as providing rewards, promotions,
notifications, etc.

7. Scale driver and customer side (in existing cities) to reduce idle times for
drivers and waiting times for riders. This also includes keeping both sides in
balance. One (unpopular) way of doing so is surge pricing

8. Expand and grow into more cities and countries (more on the growth
strategies in the premium resources)

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9. Continue improving the value proposition, e.g. cheaper rides for regular
commuters through Uber Pool and Express Pool

10.Develop new products: Uber Eats, Uber Freight and many other specific
value proposition related to Rides and Eats

11.Add complementary value propositions (e.g. car financing, new customer

segments, etc)

12.Develop, add to and refine the loyalty / rewards programs

13.Reduce churn on driver and rider side

14.Analyse the data to fine-tune everything

15.Find solutions to long-standing issues, driver dissatisfaction, criticism from

cities and communities

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Key resources / assets

The most important asset of the platform business model are its network effects.
It is the resource/asset that needs to be built and the nurtured. The data, the
algorithms and the capability to analyse and gain insights are essential. The latter
also grows with the size of the network.

Positive network effects can be diminished by negative customer relationships.

1. Network effects between the participants (drivers and riders) are essential
and Uber keeps on pointing this out in all investor briefings

2. Active users and drivers

3. Data assets: Captured user data and other data (external)

4. Algorithms, technologies, analytic capabilities and more

5. Skilled engineering & other staff, including local staff

6. Brand: Uber is ranking #87 on Interbrand index at an estimated brand value

of $5.7b.

7. Digital assets:

a. The user App

b. The driver App

c. The Uber Eats App (for users)

d. Uber Eats App for restaurants, Uber Eats Manager App

e. The Website: Alexa rank ~1,200th

f. The tech stack

g. And more

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8. Intellectual property, this includes patented and unpatented IP (including
open source software). Uber has invested in AI and machine learning. This
will be particularly important in the for their major R&D field of
autonomous vehicles and Uber Elevate (in particular the vertical takeoff
aircraft - Uber Air)

9. Commercial partnerships, including accepted pick-up points, joint rewards

and more. See more examples under key partners

10.Access to capital at acceptable cost (weighted average cost of capital, WACC

including bond rates and rating, etc)

11.Acquisitions: gives a great indication which capabilities the company wants

to acquire rapidly or may consider to be of (long-term) strategic value:

Company Name Date Size

Autocab Private Hire/Taxis August 06, 2020
Routematch July 16, 2020
Postmates July 06, 2020 $2.65 b
Cornershop October 11, 2019
Mighty AI June 18, 2019
Careem March 26, 2019 $3.10 b
JUMP Bikes April 04, 2018 $200 m
Ando January 22, 2018
Swipe Labs July 14, 2017
Geometric Intelligence December 05, 2016
Otto August 18, 2016 $680 m
deCarta March 03, 2015
Rasier, LLC
Uber BV, Uber International B.V., Uber International C.V., Uber NL Holdings 1 B.V.

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12.Minority shares in competitors: Didi, Grab and joint ventures: Yandex.Taxi

13.Social media accounts (see channels)

14.Leading technology assets: see the premium resources

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Value proposition

Uber is a multi-sided platform and as such it has to have a value proposition to

both sides, the riders as well as the drivers. For riders, the value propositions are
that it to “always get the ride you want”. For drivers, it’s the promise of
“opportunity” to set one’s own hours, track earnings (in real-time), ability to get
support and more.
The value propositions fall into the category of search and transaction cost savings
relative to other personal transport options.
Value proposition to riders

1. Custom ride: the “exact ride” that the user needs (i.e. pick-up and drop-off
point without transit on either side)
2. On-demand from the App, no need to schedule a pre-order (though
possible). Uber aims to provide reliable rides in that people don’t have to
plan trips ahead of time
3. The App gives you estimated pick-up, duration and ETA of the ride
4. Affordability: typically lower prices than a comparable taxi ride (exception:
surge pricing); an estimated fare is provided prior to the ride
5. Ease and convenience: removing friction from all interactions to the extent
possible, e.g.
a. Fast pick-ups (often 3-5 mins) and tracking the driver arriving
b. Choice in terms of vehicle type (economy, premium, etc)
c. No need to tell the driver the destination or route
d. Cashless transactions (exceptions exist)
6. Rating system that allows for feedback
7. Safety: rider sees the driver’s name, license plate number, photo, rating
before entering the car; sharing of trip with friends/family prior, if desired;
real-time tracking during the ride; emergency button and reporting function

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© Murat Uenlue | DigitalBizModels.com
Value proposition to drivers (Uber Rides & Eats)

Some of the value propositions for the drivers (supply side) are:

1. Income generation and low idle times due to the large amount of active
riders

2. Flexible and predictable work hours as well as self-determined shift

durations (at least in theory - the actual incentive system can lead to other
behaviours)

3. Tracking one’s earnings (in real-time) and ability generate immediate

earnings and ability to get paid out frequently (esp in the US)

4. 24/7 support: ability to contact Uber anytime, e.g. in the case of issues with
a rider as well as providing a rider rating

5. No boss (other than algorithms, I guess)

6. The driver app that helps with navigation, alerts, planning, earnings, etc

7. Ease of joining: requirements to join can be met by most driver car-owners

(mainly: identification, background check, vehicle inspection, 4-door car)

8. No upfront investment in joining (pre-existing car or ability to source

through a vehicle marketplace for those who want to ride but have no car

9. Ability to earn above average in peak demand (the driver app shows surge
areas) - often weekend nights

10.Driver rewards program: progressive rewards based on work hours, etc

11.Ability to get customers (passengers) at no cost to the driver

12.Insurance coverage through Uber during the ride (drivers still need to show
they are insured at other times)

13.Lesser skills required than taxi drivers (i.e. no need to know most of the
streets of the city as you can “let the app lead the way”) but sometimes
that is also obvious to the rider

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Motivation for driving

Though a bit old, the message probably still holds true: A 2014 survey among 601
Uber drivers shows the main motivation for their choice to be an Uber driver
[source: Uber newsroom, here is the full survey pdf]

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Surge / dynamic pricing

A special mention should go to Uber’s surge pricing. When demand outstrips

supply by a lot, surge (or dynamic) pricing kicks in. This can increase the fare to
multiples of the “normal” price.

But it aims to balance demand and supply. It will direct more drivers to the
high-demand areas and suppress demand from those who are not willing to pay
the higher price and seek alternatives.

Uber has refined this method over the years and is aiming to become more
predictive. It does send SMSs to drivers ahead of predicted demand surges who
can achieve higher pay rates (as well as rewards).

This is on top of showing surge areas in real-time on the driver app. It will direct
those drivers willing to accept the incentives to the right areas and bring on
additional drivers who are willing to work flexible hours (typically not very
attractive hours - weekend nights and big events).

Those willing to pay the price to reduce waiting times will see it as a value
proposition. Those that are unprepared and not willing to pay will not like this
method. It has the capability to align supply and demand in the long run and help
reduce the surge rates.

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 Uber Business Model on A Page (B-MAP)

We have used the Biz Model Canvas

for many years. But we have
realised that it’s been developed for
any sort of company (esp traditional
ones). It is simply not well tailored
to describe digital business models.

That is why we developed the

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Customer segments

As a multi-sided platform business, Uber will benefit from segmenting both sides:
the riders as well as the drivers. Depending on the purpose, Uber likely uses
classic market segmentation as well as micro segmentation.

Segmentation data can be used for various purposes, including targeting users
with more specific/personalised offers, stimulating more frequent use, developing
new products, etc.

Traditional segmentation methods

Let’s look at some ideas how Uber might apply traditional segmentation methods
to their customers (riders) and their drivers.

Rider segmentation (note: I am using this source for the rider segmentation. It
appears credible due to the detail provided, however, I have not been able to
verify the sources it uses. Thus, while the below is not implausible it may not be
what Uber uses. But it gives us an idea):

- Geographic:
- Home location, destinations and frequent destinations, user location
tracking
- Urban / rural
- Demographic:
- Age / age range
- Gender
- Life-cycle: Bachelor, newly wed, empty/full nest, solitary, etc
- Occupation: student, employee, professional, retired, handicapped
- Behavioural:
- Loyalty: switchers, soft/hard loyals
- Benefits sought: cost efficiency, sense of achievement, convenience
- Personality: Easy going, determined, ambitious
- User status: Non-user, potential user, first-time user, regular user
- Psychographic:

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 - Social class: Struggler, mainstreamer, explorer, reformer, aspirer,
succeeder, resigned

Actual demographic customer segments

A Gallup survey has shown interesting and to some extent surprising actual
demographic usage segments: “Use has been most common among younger,
wealthier and more urban Americans, but uncommon among seniors and rural
residents.”

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Driver segmentation: Here are some categories that drivers could be segmented
in. Again, the details of what Uber would use for which purpose remain
confidential internal data. Here some plausible examples:

- Demographic: age, socio-economic status, family status, residency status /

visa type

- Geographic: by city, suburb

- Geo-demographic: see above example

- Behavioural: preferred work hours & patterns

- Occupation: whether or not the driver has a(nother) occupation and what
type of occupation and education

- Pro level: full-time driver with previous driving occupation or other

- Offering: UberX, Uber Pool, Uber Black, etc; part-time vs full-time

(>30h/week), etc

- Check here how a consultancy segmented Uber drivers [pdf] (but note that
Uber does not have all data listed therein)

Rest assured that Uber uses far more than the above traditional macro segments.
And that’s what we are going to look at next.

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Other

Here are some specific examples of data analyses that give us an insight of what
type of data Uber has and what it could be used for.

Here's an example of geo-demographic segmentation of Uber drivers in London.

Uber uses this insight for public relations (though critics could use it for exactly the
opposite interpretation) but it can also be well used for targeting prospective
drivers [source: Uber, retrieved 2018, link no longer active].

What’s more, it could be used to form a hypothesis. It could go from “In London,
nearly a third of driver-partners live in areas where unemployment rates are

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highest” to something like “In large cities, an ‘overproportional’ share of
driver-partners come from areas where unemployment rates are the highest”. It
can then be verified for other cities and be used for various purposes.

Take the example of getting new drivers on board. So when Uber sends out the
local start-up / scout teams that try to get drivers on board, they can use such
insights for digital (i.e. digital ads targeting of respective suburb profiles) as well as
direct the local teams to the right neighborhoods.

Another example for micro-segmentation is the Austin case study [2015]. It lets
Uber conclude that “… people are relying on Uber to connect them to other
modes of transportation.” Here, Uber tracks trips by proximity to train stations to
conclude that “nearly 60% of trips are one-way, meaning people are relying on
Uber to connect them to other modes of transportation.” Again, an interesting
insight that can be used for various purposes.

It can be used for behavioural segmentation in that location and/or to form a

broader hypothesis that could be verified, refined and applied to many similar
cities and situations.

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Among other purposes, it could be used for predictive routing of idle drivers in
order to have an advantage over taxis who do not possess this info (some
experienced drivers may have noticed certain patterns or developed a gut feeling
but may not wish to share in order to benefit themselves from it).

As you can see, there are different types of benefits that segmentation / analysis
of data can provide to Uber and other platform business models.

Note, how this is different to what you have seen above in the intro, i.e.
traditional segmentation approaches. It shows how savvy innovators can use
competitor’s habit of sticking with what’s known to gain an advantage.

Uber Movement

Uber has created the Uber Movement portal which anyone can use to retrieve
local movement data. It is a tool for cities to get insights into traffic data. Playing
around with it, you can get some ideas of their data (here the Movements blog).
This is particularly targeted towards stakeholders in the context of cities.

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Customer relationships

There are important layers of relationships that Uber needs to foster. Some of the
most important include their relationships to (1) the riders; (2) the drivers; (3)
cities / communities and the broader stakeholder environment around them; and
(4) legislators / regulators.

Uber had turbulent years leading up to the IPO. It ultimately led to the resignation
of ex-CEO (and Co-founder) Travis Kalanick followed by an attempt to make good
on their driver relationships. The list of customer relationship issues is long as
well. All this has led to significant amounts of negative coverage and regulatory
intervention, i.e. restrictions or bans.

The list of restrictions and bans is from late 2017. But the current status in many
cities is still far from clear. Regulatory bans and limitations are fought in court in
which case jurisdiction comes into play with its own (long) timelines. In other
cases, the legislator gets involved which is where things move even slower.

As a consequence, there are quite a few cities where Uber’s status is in limbo. You
would have heard of the years-long back-and-forth in London. But it is only one of
“battlegrounds”.

The new CEO Dara Khosrowshahi (not so new anymore), put a great emphasis on
rebuilding the various relationships. But the road is thorny. Just as of this writing,
the responsible Californian judge granted a preliminary injunction “forcing Uber
and Lyft to reclassify its drivers as employees” with the order going into effect in
10 days (here the official complaint, pdf). Uber stated it will need to stop
operations if the ruling goes into effect. If previous legal proceedings are an
indicator, this whole process will continue for a few more years. So, don’t hold
your breath on any “final” determination soon.

Note that I am interpreting the category “customer relationships” in a wider sense

as “stakeholder relationships”.

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(1) Relationship to riders

1. Manage safety risks

2. Manage bad behaviours (on both sides drivers and passenger) and improve
rules continuously

3. Deal with customer issues in an appropriate manner and timeliness (see

“Channels” for more details)

4. Transparent pricing, e.g. criticism on surge pricing by riders and decreasing

hourly income by drivers

5. Transparency around privacy (a number of repeat coverage over the years

on insufficient data privacy, reports of security breach cover-ups)

6. Portray the desired company image through social and other media

These are relevant to some extent also for drivers.

(2) Relationship to drivers

The relationships to the driver will be mainly defined by what the platform does
for them. But it’s not clear cut because of the different types of drivers. Casual
drivers with another main job will care about the hourly wage more than anything
else. Full-time drivers who use their car predominantly to drive for Uber will look
at the wider package of pay and entitlements. The employment status (“partner”
vs “employee”) matters for a subset of drivers.

Opportunities and initiatives to improve their relationships are:

1. The platform’s ability to generate income (tipping is now available after the
previous CEO was strictly against it)

2. Acceptable hourly wages (an Uber-contracted survey concludes that Uber

drivers earn at least as much as taxi drivers, see below for a differing
determination by the FTC that concludes only 10% of drivers actually
achieve Uber-touted wages). Hourly wages remain a difficult to determine

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 topic. The cost base for those who use their car predominantly for being a
rider should be considered to be a very different one to those who use their
only sometimes for Uber. A 2018 study (here the actual summary paper,
pdf) that came to damning conclusions but was immediately slammed by
the CEO and rebutted by Uber’s Chief Economist. I will say more on this
later.

3. Acceptable working conditions and hours. This can pertain to the number of
hours that drivers need to work before they start becoming profitable (the
concept of contribution margin can be applied well on the drivers’ cost base
which means that they need to drive well beyond a break-even point to
generate profits).

4. Manage issues (accidents, damages or issues affecting earnings). A survey

commissioned by an Australian transport union comes to several
conclusions, including lack of support in cases of bad rider behaviours, such
as harassment among others.

5. Work entitlements, such as sick leave, retirement savings, etc.

6. Support in the on-boarding process where required. The recent Californian

case states as one of the issues the fact that drivers are “hired by the App”.

7. Uber is working on a trial program for enabling affordable private insurance

(medical, injury, disability, life).

8. One of the bigger concerns from Uber’s perspective is the risk of

unionisation.

(3) Cities / communities and the broader stakeholder environment around them

Uber has faced massive public and political backlash that has put pressure on local
regulators/legislators to look more closely at Uber’s business practices. They are
being criticised (among others) for how they treat their own drivers and their
impact on taxi jobs.

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Here are a few example how Uber manages these discussions:

1. Uber Movement, a new platform for sharing data with city planning
stakeholders, such as transportation planners, elected officials, academics,
non-profits *

2. Referring to an FTC report, 1984 that shows the wasteful economic

implications of the taxi medallion system

3. A more recent FTC report, 2015 pointing out positive effects of Uber on
existing taxi value proposition

4. A Chicago case study showing positive effects of Uber

5. An Austin case study of the positive effects on the local transport system
(Uber had left Austin due to high regulatory hurdles and returned after
these were reduced)

6. Negative coverage on greyball which may have been used to deceive

regulators

7. Uber lost its licence to operate in London (this went back and forth several
times and is still ongoing as of 2020), collected over 500,000 petitions from
users, appealed in court and with the case still in limbo, continues operating

8. And importantly (in the US) via lobbying (see key partners)

* ”We introduced Uber Movement in January 2017, a resource that uses our data
to help urban planners, local leaders, and civic communities make informed
decisions about their cities [...] As we replace personal vehicle ownership and
usage one use case at a time, we believe we will enable cities to transform parking
lots into better-utilized spaces.”

© Murat Uenlue | DigitalBizModels.com

(4) The wider public

The image in the wider public is also important. It can affect demand as well as
the opinion of the legislators. One of the prevailing items is the status of the
workers which can drive significant changes to Uber’s business model.

Uber drives their public relations by portraying a positive image. They are stating
positive contributions to the communities:

1. Valuable contributions during the Covid crisis, e.g. free rides for health care
workers, free meals via Uber Eats to first responders, support to local
restaurants, moving supplies with Uber Freight

2. Many examples of community support

3. Pointing out positive impact on the environment, e.g. reducing emissions

through UberPool(ing)

4. Making communities safer, e.g. through reducing driving under the

influence

5. How Uber puts pressure on regulators through their communication

campaigns [pdf]

6. Manage the platform’s image across the media and other relevant channels

© Murat Uenlue | DigitalBizModels.com

Channels

Channels for the initial awareness and customer acquisition can be:

1. Word of mouth is often said to be a strong driver, it may follow the typical
innovation adoption curve starting with early adopters

2. Free media coverage based on the novelty factor. Whenever Uber enters a
new country or city, it can be sure of tonnes of free coverage. And even
negative coverage seems to not be stopping users from joining

3. Campaigns: free vouchers when Uber enters a new city (e.g. handed out at
public transport stations or simply through discounts in the App)

4. Social media and virality

a. Youtube - 400k

b. Twitter - 1m followers

c. Facebook - 22m likes

d. LinkedIn - 1.6m followers

e. Pinterest - 450k viewer/month

5. Digital ad campaigns through Google Ads and social media

6. App stores (iOS, Android) – through high ratings, ads and being featured

7. Partnerships: the various partnerships with malls, hotels, attractions, airline

loyalty programs, etc are also channels to acquire new customers and to
stimulate consumption of existing customers

8. Customer acquisition: more detail in the financial / economics section. One

of the most pertinent points. Uber has an extensive (and expensive) referral
program on both sides of its platform: rider and drivers. Referral bonuses
for drivers are far more costly (on a per person basis) than rider acquisition
bonuses. More later

© Murat Uenlue | DigitalBizModels.com

Channels for the daily transactions:

1. Most transactions are managed through the app, including ordering but
also all other aspects, including help, issues, etc

2. Their webpage allow for sign-up and address the biggest obstacles to
joining (the process of joining, how it works, any safety concerns and the
collaboration with cities/communities – see above)

3. Uber’s help pages

4. Uber uses emails & notifications to engage, stimulate participation;

reinvigorate/recover (special offers, reminders, etc)

5. One of the best visible customer relations channel is Uber’s Facebook page
(22m+ likes) with an almost instant response to most direct queries,
remarkable (check for yourself)

6. Tiered customer support channels (via Zendesk)

- Automate customer support for high-volume, low severity issues (e.g.

forgotten items) to be rapid

- Multi-tiered customer support (ability to contact a human) for more

severe issues

7. Salesforce as their CRM software

© Murat Uenlue | DigitalBizModels.com

 Digital Business Models: 11 Verticals of Disruption

Digital Tech Vertical Examples covered

Asset & Service Sharing Uber, Airbnb, Lime, WeWork
Social & Communication Facebook/Meta
Search & Vertical Search Google, Zillow, AirDNA, Rome2rio
eCommerce Amazon, Etsy, Wayfair
Content & Media Netflix, YouTube, Spotify, Apple News+
Online Travel &, Dining Booking.com, Expedia, TripAdvisor, Yelp
Software-as-a-Service Slack, ClickUp, MS Teams
HW / SW tech platforms Apple, Microsoft Google
Fintech Paypal, Afterpay, Kiva, LendingClub
Digital Health Tech Doximity, Conversa, Ro
Education Technology Udemy, Coursera, Moodle, StudentVIP

⇒ Learn more here

© Murat Uenlue | DigitalBizModels.com

Cost structure

For many online platforms, the biggest cost element are customer acquisition
costs (CAC). Up to the release of the IPO document, this was also assumed to be
the case for Uber.

However, one rather interesting point that was revealed in the IPO document and
subsequent annual report, was the significant cost of revenue. These reports
indicate that the biggest elements of it are insurance and payment costs. Cost of
revenue was higher than marketing and sales since 2014. It still is possible that
cost of customer acquisition is the single biggest driver given that both buckets
(cost of revenue and sales and marketing) include many sub-items. But it might
not be the case.

Network effects are frequently said to be the most important competitive

advantage of the platform business model. This is why some experts believe this
will lead to a winner-take-all in the ride-hailing market. It seems to be assumed
that there will not be a lot of segmentation other than the location (at a country
level).

This is the reason why there have been customer acquisition “wars” among the
early movers to certain markets. Uber has fought a long bitter war with Didi in
China to win on the biggest market in the world. The weapon of choice were
customer acquisition “subsidies” (on both sides the drivers and the passengers).

Uber’s cost element are (ordered in the highest percent of revenue, 2019):

1. Cost of revenue (51% of revenue, 2019): including “insurance expenses,

credit card processing fees, hosting and co-located data center expenses,
mobile device and service expenses.” This cost item went up from 50% in
2018. This would be concerning because it is a direct cost and was coming
down over the recent years (in terms of % of revenue) as one should
expect. However, the 2019 10-K indicates that the increased inefficiency
was caused by the new business areas.

2. Sales and marketing (33% of revenue): “advertising expenses, expenses

related to consumer acquisition and retention, including consumer
© Murat Uenlue | DigitalBizModels.com
 discounts, promotions, refunds, and credits, Driver referrals, and allocated
overhead” (and post-IPO it also includes stock-based compensation to sales
and marketing employees)

3. Research & Development (soared up to 34% of revenue in 2019): slightly

higher than sales and marketing (but it was far lower for most of the
previous reporting periods). It was largely driven by stock-based
compensation for engineering employees, hence likely to go back to
previous levels of around 15% over time. R&D costs “consist primarily of
compensation expenses for engineering, product development, and design
employees, including stock-based compensation, expenses associated with
ongoing improvements to, and maintenance of, our platform offerings, and
ATG and Other Technology Programs development expenses, as well as
allocated overhead.”

4. General & Admin (23% of revenue in 2019): “General and administrative

expenses consist primarily of compensation expenses, including stock-based
compensation, for executive management and administrative employees,
[...] also include legal settlements.”

5. Depreciation and Amortization (3% of revenue, 2019): It’s this low because
most assets (the cars) are owned by the drivers. Once autonomous vehicles
come into play this will likely change (though there could be different
ownership models). “all depreciation and amortization expenses associated
with our property and equipment and acquired intangible assets[ …], and
dockless e-bikes [...]”

6. And other costs, including interest expense. Recent bond coupon rates
were 7.5% which would be higher without the support of the Fed in the
wake of Covid.

These are cost line items from an accounting perspective. We will look (in the
premium resources) at the unit economics behind it which - I will argue - is far
more interesting for innovators.

© Murat Uenlue | DigitalBizModels.com

© Murat Uenlue | DigitalBizModels.com
Revenue model

Since Uber had its IPO, we have publicly available revenue data. We see strong
revenue growth rates. They are tapering but Uber has also launched a number of
new business segments which may be able to achieve high growth rates. The two
biggest ones are Uber Eats and Uber Freight.

Then, there are the autonomous vehicle endeavours that will change everything
(but I will argue in unpredictable ways).

© Murat Uenlue | DigitalBizModels.com

The details behind the revenue model

Uber charges a 25% service fee on all rides (Uber Eats is different). An interesting
question is how a ride plus a transaction fee is still cheaper than a traditional taxi
ride?

Uber’s business model would not work if their rides were not considerably
cheaper than a taxi ride such that even with the addition of the Uber commission
it still remains noticeably cheaper than the comparable taxi ride.

The answer is that the cost structures are very different. Add to that the
differences by country and even on a state, city/municipality level.

There have been many attempts to compare the cost base like the one I have
linked to above. It is not easy to harmonise cost bases across different driver
types. As mentioned, there are casual drivers and permanent full-time drivers.

The drivers’ cost base is in Uber’s revenue section because it’s not Uber’s cost
base. The drivers’ cost base determines how much of the gross booking value
Uber can convert into net adjusted revenue (the gap between gross booking and
net adjusted revenue or “take rate”).

I think the best way to look at this is on a qualitative basis rather than a
quantitative basis.

Qualitative comparison of the driver cost base compared to taxis

- Utilising existing assets (depreciation / lease costs):

- Most commonly, drivers utilise their own, pre-existing cars

- With this, Uber spends no capital costs on these assets, has no

associated cost of capital (or WACC) and no ongoing
depreciation charges

- For the driver, it is an opportunity to get some contribution

towards what normally would be an asset parked for 95% of its

© Murat Uenlue | DigitalBizModels.com

 time. And they still have the personal utility that they bought
the car for

- Drivers who may have bought a more expensive car for the
purpose of driving for Uber would expect to have at least some
coverage of the incremental capital costs (principal) and the
cost of capital (interest). Though I am not sure if many track
this kind of stuff

- Drivers will expect coverage of incremental operating and

maintenance/servicing cost

- There is another benefit for Uber cars in that they most likely
achieve higher utilisation than taxis due to Uber’s technology.
Driving around until one picks up a customer is simply not as
efficient. Having a taxi-central is slightly better but will certainly
not close the gap. Add to this, that Uber provides incentives to
drivers to adjust supply and demand (and they are working on
doing this preemptively)

- Ultimately, Uber (and their customers) profit from higher

utilisation of an existing asset in this case

- It is different if a driver buys or leases a car for the purpose of

working for Uber

- Uber offers to help prospective drivers to get a car

- For a while, they were running their own car leasing business.
But this was shut down when it turned out to be far more
expensive than they thought (WSJ reports this to have been
18x more expensive). Some will say that this is telling but I will
not further comment on it

- Uber also got fined by the FTC in 2017 in the context of

financing a car for the purposes of generating income which
was inflated: “The FTC alleges that Uber claimed on its website

© Murat Uenlue | DigitalBizModels.com

 that UberX drivers’ annual median income was more than
$90,000 in New York and over $74,000 in San Francisco. The
FTC alleges, however, that drivers’ annual median income was
actually $61,000 in New York and $53,000 in San Francisco.”

- Uber still facilitates rentals through a marketplace (here

example Sydney)

- These drivers have the “benefit” of real-time costing (all costs

are variable). They are likely to calculate their net hourly wage
quite differently

- On a cost basis comparison, note that many independent taxi

drivers also have to finance their own vehicle plus pay (for)
license costs (see below) that Uber drivers don’t incur (NYC
Uber vehicles now have a TLC fee imposed as well)

- Depreciation costs (and resale value / terminal value in accounting

terms) are closely linked to the above and also complicated

- In summary, in case 1 (using pre-existing cars in addition to personal

utility), Uber drivers have a cost advantage over traditional taxi
drivers/private chauffeurs. In case 2 (lease to drive), they have a
comparable cost base (though there is some subjectivity involved in
terms of personal utility of the vehicle in times not used for earning
money). Essentially, we can assume lower input costs for Uber on this
aspect on aggregate

- Operational & maintenance costs:

- Both taxis and Uber drivers have much of the same costs, such as
petrol, insurance, servicing, cleaning, tyres, general wear and tear,
phone. It seems in some countries, taxi drivers have higher insurance
costs due to regulation

© Murat Uenlue | DigitalBizModels.com

 - One could argue that these costs are lower on a revenue generation
basis because Uber vehicles will be better utilised (hence don't drive
around empty, yet consuming fuel and generating wear & tear)

- Let’s still assume that, by and large, these input costs are quite similar
for Uber and taxis

- License fees:

- In some (or maybe even in many?) countries, there are license fees
for operating taxis which go to the government/municipality

- In New York City and Chicago, you will find so-called taxi medallions
(TLC). Here in Australia, there are the so-called taxi plates

- In whichever form they come, some of these schemes are very

expensive. In Chicago and Australia in the vicinity of $300,000
(lifetime but they can be sold on). In New York City, the medallions
were traded for over $1,000,000 at some stage in 2013. Moreover,
they are being traded on respective marketplaces, thus subject to
speculation and price volatility

- Here in Australia, the taxi plates cost around $300,000. A productivity

commission established by the government has found that these
schemes offer no benefit to the consumer. The drivers have to work
them off for decades to come. In the Australian case, this equated to
an average of $2.37 (inflation-adjusted) for the consumer for an 8km
trip. This alone is a saving that a regular passenger would notice
immediately

- The story of taxi medallions is jumbled and saddening for the average
taxi driver. For all the bad reporting about Uber, it is remarkable how
little attention is placed on the fundamental flaws of the medallion
system. Here is a 2018 article stating how the medallion price has
crashed from some $1.3m to $160k. Here is a May 2020 article that
suggests all existing NYC medallions to be revalued at $250k

© Murat Uenlue | DigitalBizModels.com

 - In the US, the Fair Trading Commission (FTC) also saw little
justification for the medallion scheme (FTC report, 1984)

- These are high fees that add no value to the customer (nor to the
driver). Uber is free of these artificial barriers to entry that limit
supply and drive prices higher. As mentioned, NYC has introduced a
TLC fee for for-hire Uber vehicles

- Nothing has changed (in Australia) in the 18 years since the

productivity report delivered these clear findings

- Nothing has changed in the US in the 35 years since the FTC findings.
Worse yet, the number of medallions in New York City today is lower
than it was in 1937 when the medallions were introduced and this
despite increasing population and mobility needs and traffic

- Barry Ritholtz (a regular Bloomberg investor-columnist) explains

“How the TLC & Medallion Owners Created Uber“ (note, it’s an
opinion piece)

- Employee entitlements:

- Uber engages drivers as contractors. Thus, they do not accrue

annual/sick leave, nor do they contribute to social security, pensions
or other entitlement

- There are some savings here compared to taxi companies. But there
are vast differences between countries what taxi drivers are entitled
to

- This is obviously one of the most contentious aspects of the Uber

business model. But it is not black and white as it is often portrayed.
Neither is this discussion is not limited to Uber. I have covered this in
more detail here. In any case, Uber is trialling affordable sickness,
injury, life insurance partnerships for their drivers

- I believe that casual drivers will be more interested in maximising

short-term cash flow because they see driving for Uber as temporary.

© Murat Uenlue | DigitalBizModels.com

 Permanent full-time drivers may have a different view. One 2017
article states that only 4% of drivers remain on the platform after one
year. I am not sure if this number is correct. I have also read that this
number is at 20% (more later)

- Certainly, some cost savings here for Uber but it’s not clear how much

- Taxes:

- There are some interesting points here

- Most interestingly, it seems in many countries Uber drivers can claim

mileage (i.e. tax deductions for business-related kilometres), here: US
and here Australia

- This can tip the comparison considerably. Let’s do a high-level

calculation. Let’s say one can travel at 20m/h (yes, miles) in city traffic
(this should be an ok estimate for many cities). Now, let’s say the
driver is utilised 75% of the time. This makes 15m per hour. The
standard IRS mileage deduction is $0.52c/m. This calculates to $7.8
per hour. Now, let’s assume the driver net wage per hour is $18/h
(this is at the high-end - remember some say it’s closer to $10/h).
Even at the high end ($18/h), some 43% of net income comes from
tax deductions (I’m sure you can calculate this percentage for the
case of $10/h). I.e. taxpayers foot a considerable amount of this

- One can see that this is contentious. Sure, taxis get the same tax
break. But taxis companies are fully based in the country that they
get the tax break in. Thus, the money stays in the local economy
(country level view). The criticism will be that a taxpayer in, say
Australia, will indirectly pay corporations overseas (the more tax
subsidies there are, the less Uber needs to give the driver). Uber will
say that the consumer will benefit in terms of lower costs for the ride.
It will remain contentious until a productivity commission looks into
this

© Murat Uenlue | DigitalBizModels.com

 - Both Uber drivers and taxis pay GST and some other taxes

- From a cost base perspective, taxis and Uber drivers appear to be on

a similar footing with the big caveat of mileage needing a more
detailed analysis

- Economies of scale:

- One of the potentially most interesting cost savings comes from

Uber’s ability to achieve better prices for their drivers’ input costs.

- fuel (here the Australian example),

- maintenance,

- insurance,

- phone and

- many other things

- Uber staggers the benefits depending on the activity of the drivers.

Those that drive more, can achieve more savings. There are discount
levels from bronze to platinum.

- Note that some of the 3rd party discounts are also available to the
provider’s retail base, e.g. their loyalty members. In some cases, the
Uber-obtained discount may be higher or the driver can join the
program without membership fees or incurring other expenses to get
the discounts. It is definitely an economic benefit for drivers and a
strengthening of Uber’s business model in that scale can lead to
lower unit cost.

You can see how complex the matter is. It’s not about solving this for Uber. The
message is that as an innovator you should be aware of these kinds of
considerations.

I also wanted to raise this, because I have seen ridiculously simple “unit cost”
calculations for Uber on “serious” business management portals.

© Murat Uenlue | DigitalBizModels.com

An important insight is that revenue is not just the sum of transaction fees. The
question will always be if a platform can create enough cumulative value for its
participants so that it can capture value for itself.

© Murat Uenlue | DigitalBizModels.com

 Uber & Airbnb Business Models

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Strategy: Five forces analysis

Uber uses the platform business model and leverages positive indirect network
effects between the supply side (drivers) and the demand side (riders).

As the number of participants grows in a city, the benefits improve for both sides
and for the company (professor Damodaran sees strong local network effects
contributing triple as much to market share prospects than no network effects,
see valuation excel ‘Input’ sheet, column ‘E’, cell ‘E16”).

Drivers have less idle time and thus higher hourly wage (or can work fewer hours
for the same take-home pay). Customers have shorter waiting times. Uber’s input
costs are lower as it utilises already purchased assets, pays no license costs and
doesn’t pay employee entitlements.

Five forces analysis

Let’s assess Uber’s business model within its industry setting. I am using professor
Michael Porter’s Five Forces framework:

Supply side (drivers):

- Input costs: are low by comparison. I have shown the reasons for this in the
revenue section above

- Bargaining power of supply side: is weak at this stage as there is no

unionisation, something that Uber is closely monitoring. I have not yet seen
elasticity data for the supply side, i.e. how much higher would hourly rates
need to be to attract X number of new drivers? A concept by professor Judy
Chevalier called “reservation wage” could be a good starting point

- Switching costs for the supply side are low. Some drivers are multi-homing
by driving for Uber and Lyft (or other ride-hailing companies) at different
times. But given hourly wages are similar (and there is no reported shortage
of drivers), there is no bargaining power gain for drivers

© Murat Uenlue | DigitalBizModels.com

 - Value proposition for supply side: compelling. Due to the indirect network
effects and the scale that Uber has reached in some cities, they can offer
low idle times which leads to comparable per hour wages as taxi drivers but
in less absolute time on the street. This may also increase switching costs
for drivers if Uber takes a larger market share

- Barriers to entry for the supply side: It is easy to join Uber and other
ride-hailing companies as a driver. But the lower switching costs make it
easier for new drivers to join (no multi-year apprenticeship, certificates, etc)
effectively reducing the bargaining power of the supply side and –
interestingly – increasing the value proposition for new joiners at the same
time

Buyers (=demand side / riders):

- Pricing: lower than traditional taxis due to the considerations that I have
explained in the revenues section above

- Bargaining power of the customers: reasonably high at this stage as there is

existing ride-hailing competition, alternate means of transports and taxis.
Beyond a certain market share, Uber may have a better pricing position
(and in any case, they may decide to grow through complementary
offerings)

- Switching barriers for the demand side: are low. Similar to the drivers,
customers are multi-homing. But this may change if the industry ends up
becoming a winner-takes-(almost)-all. Due to the indirect network effects,
waiting times would increase for competing platforms

- Value proposition for riders: are compelling. Lower transaction and search
costs, shorter waiting times and lower trip costs (or shorter trip times and
convenience compared to public transport)

New entrants:

- Barriers to entry:

© Murat Uenlue | DigitalBizModels.com

 - On the surface, they are low. Anyone can program an app. But will
you be able to scale it up?

- New entrants need to get to critical mass. This is often costly in terms
of acquiring the supply side and the demand side

- Uber has spent billions in customer acquisition. Customer acquisition

costs are very high as seen in the battle with Didi. Will investors be
willing to fork out capital for a new entrant to fight an already
established brand like Uber?

- Will a new entrant be able to get to critical mass on the driver side to
provide a comparable value proposition (low waiting times)?

- The most likely scenario here is not that another global Uber emerges
but rather several local competitors (Ola in India, Didi has managed
to fend Uber off in China, Lyft is now concentrating its resources to
the US). A lot of locally-focused entrants may dilute Uber’s strength
(i.e. financial resources) enough to capture enough market share in
those regions

- Could new entrants come from unexpected areas? Maybe Apple, Microsoft,
Ford, Toyota, Volkswagen or other companies that already have huge
customer bases and brands that can mobilise them at low marginal costs?
Possible, but Uber is moving into many adjacent/complementary areas,
such as package delivery, meal delivery that may lead to better asset
utilisation which other players may not want (or be able) to enter

- Economies of scale:

- Can Uber scale up in a way that they have lower unit costs which
would make it very hard for new entrants? The answer is likely yes

- Can this help Uber increase their lead? Same drivers could work for
Uber Eats or other conceivable ideas (the Uber of X)

© Murat Uenlue | DigitalBizModels.com

 - If they are able to negotiate better terms for operational,
maintenance and servicing for their drivers, this is something that can
bring unit cost further down (by driving down the driver cost base)

- Some economies of scale will pertain even with driverless cars

- Brand equity: while tarnished occasionally, it is still a major asset and in the
long term

Substitutes:

- Car-sharing companies such as Zipcar and many others with different

business models for sharing assets

- Self-driving cars: many people debate what self-driving cars will mean for
the entire transport industry. I am not going to join this speculation. As you
certainly know, Uber is investing a lot in self-driving technology themselves

- Better public transport: moving at the pace of a glacier in most cities which
is why more innovation is required

- More people working from home: it is hard to assess if mobility

requirements will reduce due to technological penetration but worth
keeping an eye on. Well, after covid this has become an interesting point
with arguments on both sides. It may lead to more work from home but it
will also impact public transport for a considerable period of time. Uber has
reported that they see an uptick in demand, though comparison - I would
assume - is difficult

This is still all high-level strategy based on general strategy methods. In our
premium resources we are looking into what tangible strategy means.

© Murat Uenlue | DigitalBizModels.com

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