What Uber Should Do With the Money

Harvard Business Review

By now, you’ve likely heard of Uber’s staggering US$1.2 billion funding round that values the business at US$ 18.2 billion. One can debate the merits of the valuation, but whatever your opinion, the folks at Uber will have a ton of resources to fund their next strategic move. So to us the interesting question is what Uber should do with the money and, perhaps more importantly, what it shouldn’t.

Let’s look at some of the options. Ones that Uber should probably look at include:

Value proposition: Uber’s 20-25% commission is high by most standards. The fact that incumbent taxi medallion owners and black car booking agents had even more usurious rates helped Uber get away with this pricing model. This is not going to last. Uber’s next competitors will be other apps (perhaps one that might be baked into a mobile operating system or a mapping product) and these will be far more serious competitors than the old ones. Further, Uber’s product by its very nature has limited sticking power; it will need to continually upgrade its experience and charge lower commissions if it wants to retain its dominant position in the US and elsewhere.

International markets: Uber is the big daddy of ride-hailing platforms in the US, but its dominance is far from global. In many international markets it faces strong competitors. Rocket Internet-funded EasyTaxi is prominent in many markets in Asia and South America; GrabTaxi is building market share far faster in Singapore; China has its own homegrown players.  Intermediation platforms like Uber are natural monopolies, which means getting to scale early on is critical. Given that Uber already lags behind in many international markets, it will take substantial resources to get up to speed in these markets.

Culturally sensitive local teams: Uber must acknowledge that it is not just a technology company, it is a real-world intermediary in a decades-old industry. As with previous disruptions of existing industries there will be winners and losers. This has important political consequences and handling these requires a culturally sensitive, country-specific strategy. For instance, the arguments around market efficiency that Uber makes work far better in Germany and the US than in France, where customers value equality and fairness over efficiency. Uber must use some of its resources to build culturally sensitive and locally empowered teams that can effectively create country-specific strategies, rather than simply bringing its aggressive playbook to new markets.

There are also some talked-about options that Uber should probably not explore:

An on-demand courier service: One of the most talked-about avenues for Uber is to use its instant on-demand platform to match supply and demand for transporting products as well as people. Our research into the economics of such peer-to-peer transport systems indicates that while the model is great for achieving very quick delivery times, it is also a poor use of transport infrastructure and makes little sense for all but the most time-sensitive deliveries.

Self-driving cars: The technology is definitely impressive, and some have called for Uber to invest in this trendy new area. While the experience of a self-driving car feels futuristic and magical, they don’t make business sense in an era of decreasing real wages for semi-skilled labor (like drivers). Further, Uber has the DNA of a business model innovator, not that of a technology company, which means this move is unlikely to work.

We have been Uber users and fans from the very early days. We see it as a game-changing transportation innovator in the tradition of Henry Ford, whose business model (standardization, mass production, welfare capitalism) made the automobile accessible to ordinary people.   The next few years will reveal whether Uber will realize this potential.

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