The On-Demand Service Economy Driver

If you were asked to pick iconic examples of e-commerce in the two decades since it began in 1995, it is likely that companies such as Amazon, Google, Apple, and Facebook would be high on your list. But over the last few years, a new breed of e-commerce company has muscled its way to the forefront. Uber and other firms with similar business models, such as Taxify (a ride service similar to Uber’s), Airbnb (rooms for rent), Deliveroo (food delivery), and ZipJet (laundry service), are the pioneers of an on-demand service e-commerce business model that has swept up billions of investment dollars and disrupted major industries, from transporta- tion 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. Its Uber Rides segment offers consumers a way to get from Point A to Point B, ranging from UberX, which uses compact sedans and is the least expensive, to Uber Black, which provides higher- priced town car service. Its Uber Eats segment focuses on food delivery services. Its Uber Freight segment offers long-haul trucking services. Uber, headquartered in San Francisco, was founded in 2009 by Travis Kalanick and Garrett Camp, and has grown explosively since then to over 900 major cities and thousands of smaller ones in 69 countries. In 2019, Uber had 3.9 million drivers worldwide and over 110 million monthly active riders who made 6.9 billion trips during the year. In 2019, those riders spent $65 billion on the Uber platform, generating $14.1 billion in revenue for Uber, but it still lost a whopping $8.5 billion (although $4.6 billion of that loss was due to stock- based compensation expense). Uber’s strategy in the past has been to expand as fast as possible while foregoing short-term profits in the hope of long-term returns. Despite the fact that, as of yet, it has not been able to operate at a profit, Uber offers a compelling value proposition for both customers and drivers. Customers can sign up for free, request a 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. No need to stand on a street corner frantically waving, competing with others, or waiting endlessly for an available cab to drive by, without knowing when that might happen. 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 a poster child for “digital disruption.” It is easy to see why Uber has ignited a firestorm of opposition from existing taxi services around the world. If you’ve paid $1 mil- lion for a license to drive a taxi in New York City, what is it worth now that Uber has arrived? Answer: less than $200,000. Taxi drivers in London typically spend years learning thousands of streets and landmarks before they are able to pass the tests necessary to obtain a license to drive a black cab there. Even governments find Uber to be a disruptive threat. Govern- ments 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 automo- bile 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 25% commission on 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 provides a platform for, and takes a cut of, all transactions. 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 significantly reduces that uncertainty. Uber’s business model is also 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.