Will lower prices gain Uber support?
By Alberto Mingardi
Uber has been a phenomenal fund-raising success. The company now capitalizes more than Hertz (and not just Hertz, check this out). Now, whatever you may think of Hertz’s business model, Hertz has offices all around the globe, an impressive salesforce, a fleet of cars. Uber hasn’t; its value lies in the App and in its network of users and drivers. Its tremendous capacity to attract capital says a lot on expectations and hopes for the revolution in public transportation Uber is leading.
Marcus Wohlsen for Wired asks how that money will be spent, and has some interesting answers. The company will try to expand as quickly as possible, getting into more cities and lowering fees to become price-competitive with traditional taxi services.
Yesterday, Uber announced it was lowering UberX fares by 20 percent in New York City, claiming the cuts would make its cheapest service cheaper than a regular yellow taxi. That follows a 25 percent decrease in the San Francisco Bay Area announced last week, and a similar drop in Los Angeles UberX prices revealed earlier last month. The company says UberX drivers in California (though apparently not in New York) will still get paid their standard 80 percent portion of what the fare would have been before the discount.
Now, Uber is ready to do this at a loss: why so? For Wohlsen, Travis Kalanick is following Jeff Bezos’s footsteps:
Consider Uber’s kinship with Amazon. The comparison isn’t obvious at first, since Uber doesn’t sell goods, just a service. But their stories are similar. A startup led by a brash, charismatic CEO catches a creaky old industry unaware. It grows quickly, and its popularity explodes as its brand becomes nearly synonymous with the disruptive service it’s offering. Amazon grew–and is still growing– because it’s not afraid to lose money. Low prices and free shipping deals eat away at profitability, but they also keep customers coming back. Uber CEO Travis Kalanick has expressed admiration for Amazon founder Jeff Bezos, who is also an investor in the transportation company. And now Kalanick appears to be taking cues from the Amazon template.
Whether this strategy is really sustainable for Amazon after twenty years of existence is a question endlessly debated among shareholders. But for its current stage of development, the approach holds little but upside for Uber. Rapid expansion helps Uber both locally and globally. In cities, underselling traditional taxis gets more riders in UberX cars, striking a blow against yellow-cab competition. Popularity in one city creates covetousness in others. Demand spreads, and Uber follows (it now operates in about 140 cities in 40 countries around the world).
Particularly in Europe, we have the perception that Uber’s case will be won or lost by lawyers and lobbyists. If Uber fights exclusively on legal and regulatory ground, it may easily lose. Its opponents have a longer experience in that field.
But its genius may lie in using lower prices “to gain constituencies”, as Wohlsen suggests. If he gets it right, Uber’s may be a conscious attempt to engage consumers in a political battle: something that very rarely happens, as of course concentrated, special interests are better at the playing the political game. A friend of mine suggested that Uber’s strategy may resemble that of Italian private television channels long ago, that were actually guerrilla fighters against government monopoly before they got to a point when their services were so much in demand that legislators couldn’t but emend legislation. Using customers’ preferences as weapons in a political fight is an interesting strategy.