Private car service Uber reacts to taxicab and limo industry’s new smartphone app

May 16, 2014

The big idea: The U.S. taxicab and limousine industry employs close to 240,000 drivers, so why can’t you find a car when you need one? One reason is limited supply: Many cities issue a fixed number of medallions along with regulating fares, practices believed to ensure minimum driver and vehicle standards as well as income for medallion owners and cities. Even if you are willing to pay more for limousine service, it usually must be prearranged and limos generally cannot be (legally) hailed on the street. But how about hailing them “virtually” with your smartphone? That’s how Uber arrived.

The scenario: Uber Technologies began as a private car service using licensed limo drivers with black town cars to cater to Silicon Valley executives. Without directly employing drivers or buying cars, Uber has created its branded car service. Its app links passengers to nearby drivers, calculating fares with its algorithms and charging the customer’s credit card directly. A receipt is e-mailed. No cash changes hands, no tipping is permitted, and passengers and drivers can rate each other. It has rapidly expanded its service to untapped markets.

Now it has launched UberX to take on lower-priced competitors (e.g. Lyft) and competes directly with taxicabs. UberX permits smaller vehicles and uses drivers who are not commercially licensed. Trade groups representing taxis have balked. They say the company lacks adequate driver screening and training, endangers customers and creates unfair competition. City governments have debated limits to the number of cars that ride-sharing companies could put on the road; Seattle decided 150 would be enough.

The resolution: Uber has said it’s a tech company — not a transportation company — and merely connects drivers and passengers much like travel Web sites link passengers and airlines. It’s reached out to users on Twitter, Facebook, YouTube and its Web site to lobby public officials on its behalf. But its fight with regulators goes on. New services like UberFamily offers cars with child seats and may help convince regulators that Uber provides a needed service cabs don’t — or even motivate taxis to add child seats.

The lesson: Uber is an example of middlemen adding real value for consumers and suppliers. Uber organizes the market for convenience and transparency for both sides. Many believe that tech-enabled disruptive business models are key to our economy’s growth. Uber’s experience is a warning that a well-considered plan for navigating business regulations should be part of a strategic plan — a value proposition is not enough to avoid the long arm of the law.

The Uber Technologies application and logo are displayed on an Apple iPhone 5s and iPad Air in this arranged photograph on March 5, 2014. Uber, a startup that lets drivers pick up passengers with their personal cars and that was valued at $3.5 billion in a funding round last year, has raised $307 million from a group of backers that include Google Ventures, Google Inc.'s investment arm, and Jeff Bezos, the founder of Amazon. Photographer: Andrew Harrer/Bloomberg (Andrew Harrer/Bloomberg)

Paul Farris, Gerry Yemen and Virginia Weiler

Farris is a business professor and Yemen a senior researcher at the University of Virginia Darden School of Business. Weiler is a marketing instructor at the University of Southern Indiana.

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