Uber Faces Scalability Hurdles

The advancements in mobile and internet technology have helped the growth of some innovative service companies. One such start-up is San Francisco–based Uber, which offers a solution for car transportation and logistics using mobile technology.

Uber’s Offerings

Uber prides itself in being a technology company that has been able to evolve “the way the world moves.” Using Uber’s mobile apps, consumers can connect with drivers to travel across cities in taxis, sedans, or SUVs. Since it was founded in 2009 by Travis Kalanick and Garrett Camp, Uber’s services have expanded and are now available in more than 50 cities worldwide, including the international markets of Singapore, Taipei, and Seoul.

Commuters can access Uber through a text message, the web or an iOS, BlackBerry, or Android app to request a ride. Based on a customer’s request, Uber’s software alerts drivers, one of whom arrives to pick up the commuter. Meanwhile, the commuter can track the time of the arrival of their ride and make payments to the driver through their mobile phone. For drivers, Uber helps them earn more revenues as they are able to cash in on their downtime.

Recently, Uber has experimented with offering other similar services, such as Uber Ice Cream, which routes ice-cream trucks on order. But the company has not committed to any new service for now. Uber does not employ its own taxis, drivers, or fleet. Instead, it has managers in local markets who negotiate with car companies and drivers to work with Uber.

Uber’s Financials

Uber earns revenues by charging a transaction fee that is built into the cost of the ride. Uber’s biggest criticism hails from their surge pricing system, which changes the price for rides based on demand. Thus, rides on New Year’s Eve may be much more expensive than rides on the same route on a different day. Taxi associations and the general public may not appreciate such price variances, but Uber is not complaining. The company’s financials are not known, but market reports suggest that they are healthy. Revenues are expected to be more than $125 million this year, growing 18% month over month. Unlike other internet start-ups, Uber is also believed to be profitable.

Uber has been venture funded and has raised $307 million from founders, private investors and VCs, including First Round Capital, Lowercase Capital, Founder Collective, Benchmark, Innovation Endeavors, Menlo Ventures, Jeff Bezos, Goldman Sachs, CrunchFund, TPG Growth and Google Ventures. This includes the latest round of funding, which was held in August 2013 and helped Uber raised $258 million from TPG Growth, Benchmark, and Google Ventures. The funding valued them at close to $4 billion.

For now, Uber is not planning on an IPO. Instead, it is focused on growth and plans to expand to as many as 500 cities globally, especially in Latin America, Europe, and Asia.

According to an Ibis World report, the worldwide taxi and limousine market is estimated to be worth $10 billion this year, reporting growth of 0.8% annually over the period 2008 through 2013. Uber has managed to deliver an attractive business model within the industry. But even with the innovation it has implemented, its valuation does appear to be quite a stretch.

Uber’s Worries

The biggest advantage of Uber lies in its ability, with a mobile app, to arrange for rides for commuters in areas and times when it may not be so easy to get a traditional cab ride. But this “e-hailing” feature has become a double-edged sword. While commuters love the reliability offered by Uber, taxi groups are not particularly happy. In New York City, which is among the biggest taxi markets in the world, using smartphones to hail cabs has been kept out of bounds by several political and regulatory conditions. It is only recently that certain features of the apps have been allowed on a pilot basis for hailing taxis. Initial reports haven’t been very positive in the city, where most commuters still think that hailing a cab directly from the street works faster.

Entering into other markets has also not been very easy. For instance, in the Miami–Dade County market, regulations require that unless a customer is hailing a taxi, a car service or limo ride needs to be booked at least an hour in advance and must cost a minimum of $80.

International markets haven’t been kind, either. Reports suggest that lawmakers in Paris are evaluating a rule that may require a longer wait for passengers ordering rides through mobile apps than those hailing from the street.

Much of Uber’s valuation is predicated upon its ability to scale. If regulatory hurdles obstruct that scalability, the company has a problem ahead.