Driving hard

TRAVIS KALANICK, Uber’s hard-nosed chief executive, seems to relish taking on regulators and rivals. “I realise I can come across as a somewhat fierce advocate for Uber,” Mr Kalanick recently quipped at a celebration for the taxi-hailing company’s fifth birthday. “I also realise some people have used a different ‘a’-word to describe me.” Mr Kalanick’s brashness has helped Uber become the most valuable American company of its generation. If it succeeds in raising a further $1.5 billion from investors, as reports indicate, its implied valuation will soar to a staggering $50 billion. That is higher than 80% of the firms in the S&P 500 index, many of which are decades old. Uber’s value has grown faster than those of Facebook and Twitter in their early years (see chart).

Uber now operates in 311 cities in 58 countries, providing more than 1m rides each day. Consumers like Uber, and rival services like Lyft in America, Didi Kuaidi in China and GrabTaxi in South-East Asia, because they are cheaper than conventional taxis, clean and reliable. Uber’s freelance drivers (who typically pay it around 20% of their fares) enjoy flexible working hours and are spared the formalities of qualifying as a conventional cabbie.

But Uber should also be admired by strategists in other industries. It is a case study in how to construct a “platform”, a Silicon Valley buzzword for a digital service on top of which other businesses can be built. As it arrives in a city, it launches a vigorous recruiting programme for drivers, offering them incentives to sign up. Its fares are “dynamic”—they undercut conventional taxis most of the time, but go up when it rains, or when there is some other reason why demand for rides is high.

This encourages more of its drivers onto the roads when they are most needed. This in turn means that customers can always get a car quickly, even if it sometimes costs a bit more. This encourages them to keep using Uber, in turn providing lots of work for its drivers. It soon becomes difficult for any rival to match the liquidity of Uber’s market in rides. And once lots of people are using it for that purpose, the company can use the same app, the same computer systems and the same drivers to offer those customers a range of other services.

Taxis are to Uber, therefore, what search-related advertising is to Google: the killer app that generates lots of revenue and brings the firm to everyone’s attention, after which it can broaden its horizons and enter other businesses. Both firms have grand ambitions. Google’s mission is to organise all the world’s information; Uber’s is to offer “transportation as reliable as running water, everywhere for everyone”. And perhaps “everything”: it has begun experimenting with local delivery services, with the aim of becoming as disruptive in logistics as it has been in the taxi business.

Last month Toronto became the fifth city where the firm’s lunch-delivery service, UberEATS (pictured), is available. It is also running in Chicago, Los Angeles, New York and Barcelona. New Yorkers can call up a cycle-courier service on their Uber apps; and in Washington, DC, they can use it to order household supplies for rapid delivery. The company is reported to be in talks to set up same-day delivery for various retailers in America, from Hugo Boss to Cohen’s Fashion Optical.

In some cities there are already a number of smaller firms that offer rapid dispatch via an app: for instance, Instacart delivers groceries, Postmates brings hot meals and Shyp collects parcels. None has anything like the scale and reach of Uber, and thus all must fear it eating their lunch. “FedEx and Hertz combined”, is how Max Levchin, a founder of PayPal and an investor in Uber, describes the future of the firm, referring to two giants of logistics and car rentals respectively.

It seems unlikely that even in the long term Uber would want to go into long-haul shipping, but there is huge scope for consolidating the fragmented and inefficient business of making deliveries in large conurbations. Postal services and logistics firms could outsource their last-mile deliveries to Uber. But privately at least, they must also fear losing business to it.

In March Fred Smith, the boss of FedEx, dismissed the threat of Uber, pointing out the complexity of his firm’s business and the high barriers to entry. However, Uber has an advantage that most delivery and shipping firms lack: it does not have to bear the cost of maintaining its own fleet of vehicles, since its drivers supply their own.

Logistics companies have invested heavily in algorithms that help them route deliveries efficiently; but as Uber’s traffic grows, and as it spreads to more places, it will gather a wealth of data that will let it catch up with them. It is also reportedly looking to buy HERE, a mapping application owned by Nokia, which could improve its routing algorithms and reduce its reliance on Google for maps.

As with Google, Uber’s data collection will make it ever better at understanding its customers: for example, when a discount voucher might entice them to use the service again. As with Apple, Uber keeps its users’ credit cards on file for seamless payment, which also makes it easy to sell new services to them.

Taking on the likes of FedEx and UPS is not the immediate priority. In line with its platform strategy, Uber’s main goal is achieving scale. As a private company, it does not report its revenues, but analysts reckon that it will receive between $2 billion and $4 billion in commission from drivers this year. Since it does not own the cars or employ the drivers, but simply takes a cut of each fare, Uber is thought to be generating significant free cash flow within 18 months of launching in each new city. Nevertheless, it is continuing to raise money from investors to fuel its global expansion and to intimidate rivals such as Lyft, which is Uber’s main domestic competitor but is valued at a mere $2.5 billion.

Over time, Uber hopes to become so popular and ubiquitous that many city dwellers give up their cars and all the costs and hassles of parking, maintenance, insurance and the like. In several cities Uber is trying to entice people to use its carpooling service instead of public transport and is subsidising the cost of it, to entice drivers to join. Currently, San Franciscans can use UberPool to go anywhere in the city for a mere $7. Like Google, it is taking an interest in driverless cars, hoping one day to be able to dispense with drivers and offer its services even more cheaply.

Uber’s valuation is extremely high for such a young company, and there is a long way to fall if the firm skids. The success of its core business is not certain. Later this year courts in California will consider whether the drivers who work for Uber and Lyft (and other on-demand companies) are in fact freelancers or should be categorised as employees, which would have significant implications for their firms’ lean cost structure. Investors may be underestimating that risk.

Rivals with deep-pocketed backers could yet stop Uber dominating the world’s streets. In China it has a partnership with Baidu, an internet firm, but its local rival, Didi Kuaidi, is backed by two online giants, Alibaba and Tencent. The Chinese taxi-app firm has announced its own plan to spend 1 billion yuan ($160m) on incentives for drivers and passengers to use the service.

From New Delhi to East Hampton, Uber and its competitors are squaring up to regulators, which have banned them. Some governments are concerned about whether Uber properly protects passengers by doing background checks on drivers and requiring insurance; others are sympathetic to local taxi monopolies. Uber is betting that its popularity among both passengers and drivers will overcome such objections—indeed, this week Uber drivers in Delhi protested over a crackdown against the service. It cannot be taken for granted that rules on carrying passengers will be relaxed all over the world. Objects, however, might be a different story.