Uber: M&A Possibilities

In trying to think of possible mergers and acquisitions for Uber, I have to admit that I'm scratching my head a little bit. I really can't see Uber acquiring smaller ride-sharing companies like Lyft or Hailo. This is because they really have nothing to offer. The only bonus would be more drivers, but Uber has other ways of stealing drivers and most Lyft drivers are already driving for Uber in addition to Lyft.

I noticed on Uber's driver part of their website they are now helping drivers find cars and finance them, presumably just be referring them to third parties. Still I was thinking it could be interesting if they expanded this and started financing cars in house. I've paid close attention to the type of people that drive for Uber. There are definitely distinct types of people that choose to drive. In the group that are doing it for a living rather than a way to make some extra side money or keep themselves busy, there seem to be many foreigners that start driving as soon as they get here. These are different than the type of foreigners who drive for cabs. By nature, a lot of immigrants come here with very little money. The ones who become cab drivers don't make enough money to really climb out of this income level but people can make real money driving for Uber. They just need a car. So Uber offering "lease to own" sort of scenarios for these people could be a win win for both the drivers and Uber. They drive until they own the car, and then they hopefully have enough money they can explore other income earning opportunities if they don't wish to drive for Uber forever.

Uber's Strategic Alliances

In the past year and a half, Uber has really stepped it up with their strategic alliances. Some of their strategic alliances include Spotify, OpenTable, Hyatt hotels, Starwood Hotels, and United Airlines. Each of these partnerships exists for different reasons and they all benefit both companies.

Uber was clever to engage Spotify in a partnership in 2014. This partnership simply made the two apps compatible so that when a Spotify user is using Uber, they can control the music via their phone. This creates value for the customers who tend to enjoy being able to choose their own music. For Spotify, this capability makes their premium service, which must be subscribed to in order to use Spotify from a phone, more desirable.

Hyatt, Starwood, and United all have similar reasons for partnering. These wish to lump the travel experience together in order to boost all of their sales. You can call an Uber from within the Hyatt and United apps (this is really just product placement.) With Starwood though, they have partnered their loyalty program, Starwood Preferred Guest, with Uber so that Uber users can earn SPG points if they use the app while they are guests at a Starwood property. This captures market share from the "loyalty" customers who enjoy earning points that they can later redeem for free nights.

Another strategic partnership is with Times Internet, a major internet provider in India. This partnership is strictly about expanding Uber's market share in India. The deal is centered around a commercial marketing arrangement accompanied by a small investment.

Uber Can Diversify Without Much Risk

When most companies diversify, they have to be as risk averse as possible, or their core business can get tangled into their new branches organizationally and this can bring down the company as a whole. When the average business diversifies, they are doing so in order to capture economies of scale. This involves merging organizational chains so that employees can perform their same tasks, just slightly more of them. The result is less employees (less costs) than if there were two standalone businesses.

With Uber, they don't need much overlap in their businesses when the diversify. Uber is really capturing value from the Uber name as well as the concept that it promotes. I don't know this for sure, but I can't believe that the executive officers involved with the traditional Uber business have much to do with UberChopper or UberIceCream. The only real similarities are the app (which is still a different app) and the business model.

Uber is Diversifying Beyond Car Rides

Uber has plans to diversify well beyond organizing car rides.

While they still have much diversification to do within the ride sharing sector, including expanding UberX (a lower cost service), UberSUV (for larger parties), and UberExotic (only available in a few cities but boasting exotic cars such as Lamborghini's), Uber has plans to diversify into other sectors as well.

One of these is helicopter rides! Uber began organizing chopper rides via their service UberChopper for special events beginning with the college national football championship last January. They continue to operate for special events and their next one is Coachella this weekend. I'm actually going to Coachella and immediately researched how much this would cost when I read this on Uber's blog as I researched for this post! Unfortunately rides are going for $3000 so needless to say I will not be arriving in style...

Another service is UberIceCream! Uber is experimenting with supplying modern day Ice Cream "trucks" with customers via their app. This is only in select cities but apparently it has been a huge success. This makes sense to me because it always seemed like Ice Cream Truck drivers waste a lot of time driving around trying to find business.

Uber is very innovative when it comes to diversifying and they will continue to push the envelope looking for new ideas and new businesses that they can use their same app format to make profitable.

Uber: Not Suited for Vertical Integration

When it comes to vertical integration, Uber is definitely one of the companies that would NOT do well if they implemented this strategy. Normally, companies can capture added value by expanding their operations to include more of their supply chain. Whether this means expanding up the chain or down it, vertical integration can capture value because it puts the supply chain more in the firm's control and they also capture the margins in this part of the chain.

This all sounds good except when its applied to Uber's business model. Uber actually makes more money by LIMITING the part of the supply chain they control. In fact, they occupy a very small space - the only part they control is the deal making between a driver and a rider. By definition they cannot expand down the chain because they are already positioned right above the end user. If they were to move up the chain, this would mean having employees instead of contractors and possibly even owning the cars that are driven. This is what a cab company does. We've already discussed in previous posts why this isn't as profitable as Uber's business model because of the high overhead. So vertical integration is profitable for some companies, but certainly not for Uber.

Uber Cooperation

Uber is not officially cooperating with any of its competitors. It has always had a very competitive attitude towards Lyft and Hailo and Uber has done everything possible to remain superior to these competitors. But if there's one way that Uber has cooperated with its competitors, even if unintentionally, it's been in it's effort to invade new markets and squash cab monopolies. Uber and Lyft have generally tried to infiltrate the same markets, at least domestically as Uber has a clear market dominance internationally. When they enter a new market, they are competing with each other but at the same time they are cooperating because they are squeezing out the cab monopolies together. By providing multiple alternatives to taking cabs, both of which are better in just about every way, they are pushing out the cabs completely. Even though this collaborative effort has not been intentional, it has helped both Uber and Lyft. They have made each other stronger by pushing cabs out of the picture.

Uncertainty Surrounding Uber's Recent Vehicle Requirement Changes

It seems that Uber can't stop slashing prices! They recently slashed prices (again) by 20% immediately after changing their vehicle requirements for their drivers. Since its inception, Uber required that its drivers use vehicles less than 10 years old. The thought here was that this would attract a more upscale driver base which would be another reason Uber was superior to cabs. But Uber recently eased up on this requirement and changed it to a 15 year maximum for vehicle age. As Uber could have predicted this attracted a massive wave of new drivers that were previously unable to drive yet were eager to become driving contractors. This increase in driver supply has allowed Uber to decrease its prices again. Meanwhile many of the drivers with nicer, newer cars are fed up and quitting driving. But there is a large unknown here. How will the customer base respond to the changing demographic of Uber drivers? Will they ignore the change in the quality of drivers and their prospective cars and instead focus on the extremely low prices? Or will they shift to other ride sharing services like Lyft which has not lowered its vehicle age requirement? Uncertainties like this can make or break a business. While Uber has put a lot of faith in the thought that their riders care more about prices, there is still some uncertainty to this and they could pay the price if they are wrong.

Uber's Product Differentiation

As a whole, Uber's product is not very different from the alternative (taxi cabs.) The end result is the same which is getting its customers from point A to B, but Uber does make this experience as different as possible and it is this that is the progressive part about Uber that makes its customers choose it over cabs. Even though an Uber customer could accomplish the same feat by hailing a cab, the Uber experience is different for a number of reasons. First the hailing process is much simpler. No waiving at cabs driving by. No haggling over prices. Just opening an app and clicking a button. Second, while the quality of vehicles that Uber drivers can use has decreased from a maximum of 10 years old to a maximum of 15 years old, these vehicles are still by in large nicer than the taxi cab alternative. The clientele that drives for Uber is higher class than taxi cabs and this makes riders feel more comfortable. Finally, the price is a differentiating factor. As has been discussed previously, Uber saves big time when it comes to overhead and they pass this on to their customers as savings which helps to differentiate their service from taxis.

Uber as a Cost Leader

Uber has absolutely chosen a cost leadership strategy. Uber's competitors have extremely high capital compared to their own company. All of the taxi companies have a high amount of overhead associated with their businesses. They own all of the cars that are driven by the drivers. What allows Uber to keep fares so much cheaper than cab fares is the fact that they do not have this overhead. Uber drivers own their own cars. Uber also has much less overhead in terms of employees. There exist only a relative few employees within Uber's business operations. These are a handful of drivers that respond to emails when there are issues regarding a ride, lost/found items, and vetting out new drivers. There isn't even a phone number riders OR employees can call to speak to anyone. A separate strategic plan makes business decisions regarding promotions and entering new markets. This is about IT as far as employees go. Currently, Uber also pays none of the city taxes and fees that cab companies must pay, although this could eventually change if the local governments can figure out a way to force Uber to pay these. Because of all of these factors, Uber is superior when it comes to cost structure. They pass on some of these savings to the drivers to entice them to drive, to the riders to entice them to ride, and the result is a profitable, quickly growing business.