Why Travis Kalanick is going to be a Transportation Rockefeller

{Ed. note: I’ve been a big fan of Uber since I attended their Boston launch dinner where they shared a lot of the behind the scenes of their operations. Since then, when I ride in Ubers, I can’t help but strike a conversation with the drivers. This has helped me learn the inner workings of their market in addition to the press we’ve all seen.}

I’ve always believed you can learn a great deal from studying the past. While times may change, innovation cycles and the way society handles disruption is often very similar (I highly recommend The Master Switch if this concept interests you). While the oil industry may be very different than the urban transportation market, I think there are a number of parallels between legendary leader of Standard Oil, John D. Rockefeller, and Uber’s CEO, Travis Kalanick. Knowing this, we can make some very interesting predictions on what the future holds for Uber.

The Legendary Mr. Rockefeller

John D. Rockefeller was one of the most successful entrepreneurs of his generation. Thanks to his rapid dominance of the oil industry, he was a multi-millionaire in 1870 when the average worker was making just $2-$3 per day and amassed a net worth of over $1.5 billion by the time he retired decades later. He accomplished this through repeated innovation and reinvention of his core business as well as expansion to control as much of the market and his supply chain as possible.

There was also a dark side. Rockefeller had a habit of clashing with the press and fighting with regulators over his aggressive business practices.  He crushed his competition through these practices, often giving them the choice to be acquired at a profit or ruthlessly run into the ground. He would often brazenly share his financials with them showing just how strong a war chest he would have against them. After acquisition, he would turn newly acquired business owners into spies and pawns for the benefit of Standard Oil.

You can criticize such tactics, but not the results of Rockefeller’s efforts. In order to create such a monopoly, he had to have a ruthless side. If he was not aggressive with competition and regulators, his growth would not have been as rapid. Travis appears to have a similar approach to business which is a big part of why I believe Uber has such strong potential for a new monopoly.

Uber: A modern, emerging monopoly

With Uber close to a new $361 Million+ financing round at a stunning $3.7 Billion valuation, Travis Kalanick has the funds necessary to dominate the transportation market in cities around the world and at a stunning pricing (less than 5% of his company for that $150Mn). Per their website, they’re approaching 40 cities now with over $125 million in revenue expected this year. With 5 in shh! early launch mode, that means that each city is already generating an average of $4 million in revenue annually.

Taking a quick look at world population figures for major cities, it appears there are 450 cities with at least 1 million people living there (and thus could be good markets for Uber). Doing simple, back of napkin math, that equates to over $1.8 billion in potential annual revenue.  Some of those cities may not be suited for Uber (see Vancouver), but looking at how Uber continues to grow even in its home city of San Francisco 4 years later,  it’s not unreasonable to believe that city revenue average may be 2-3 times as high in years to come.

Crushing the competition

2 key competitors stand between Uber and Rockefeller-like industry domination: ride sharing apps and taxi cabs. Both are at a distinct disadvantage to Uber.

Ride Sharing Apps

The main ride sharing apps in play are Lyft and Sidecar. To date, Lyft has raised $75 million and operates in 5 US cities, while Sidecar is in 6 cities, but only has raised $10 million. Rumor has it, the latter has struggled to raise their next round of funding to keep up in this transportation arms race.

To combat this competition, Uber is doing a few brilliant things:

  1. UberX exists in every city that Lyft or Sidecar is in (LA, Boston, SF, Seattle, Chicago, DC) by following the Burger King strategy:

    Uber has said that it will consider offering ride-sharing services in markets in which it operates if a competitor has launched and is operating for 30 days without any direct enforcement against it. It’ll consider that “tacit approval.” – TechCrunch 4/12/2013

  2. Uber is aggressively advertising to recruit away their drivers:

    Anti-Lyft ad on a bus in San Francisco              (credit Om Malik)

  3. Uber does not discourage drivers from using UberX and another ride sharing app. I’ve noticed some drivers having multiple phones in their cars, one for each service. This is a huge advantage for Uber that has had a multi-year head start on figuring out logistics and optimization for drivers and riders. In the end, drivers just want as little idle time as possible to maximize money they make, which means Uber has a chance to make them feel Uber is all they need.
  4. Uber cut their prices on UberX to be price competitive with ride sharing as well as go head to head with Taxi prices (more on this in a moment).

Taxis

The taxi owners are the ones that fight Uber the most. There was actually a protest earlier this week in SF because of it. They protest, because they’re being disrupted. But you have to ask yourself what’s really being disrupted?

In conversations with drivers who have quit their cabs to become UberX drivers, I learned the following:

  • Cab drivers pay anywhere from $120 to $150 each day to drive their cabs. That’s over $30,000 per year if you worked it like a full time job.
  • It’s not unusual to work a 12 hour shift and not make your whole fee back in fares.
  • Cab companies force you to work brutal shifts at hours like 4am to 4pm.
  • Cab companies will not help you in any way if you have problems during your shift.
  • Cab companies can take months to pay you for credit card transactions (Now you know why drivers often break the credit card readers).
  • Dispatchers rarely will give you a rider and may provide incorrect information.

Now contrast that with Uber:

  • Uber takes 20% of each ride. Drivers are profitable from the first ride of the day.
  • Uber provides drivers with heat map data of the best places to locate themselves to get ride requests.
  • Uber’s mobile app sends you riders to pick up. No more searching for people flagging them down on busy roads.
  • Uber pays drivers weekly.
  • Uber takes care of their drivers (a driver had a passenger using a stolen credit card. Uber called them, had them stop driving the person around and still paid him for all the driving he had done).
  • Uber lets drivers make their own hours.
  • Uber handles all payments. No more carrying cash or dealing with credit card readers.

Is it any wonder that a former taxi dispatcher I recently had for a driver told me that for the first time, cab companies are needing to advertise they need drivers? He also mentioned that he knows some SF Taxi lots have as many as 30-40 cars a day now that aren’t getting taken out. Five years ago, that would have been absolutely unheard of. Today, it represents the beginning of the end for the cab industry.

So to crush the Taxi side of their competition, Uber is doing the following:

  1. Dramatically improving the work experience for taxi drivers (see above). This steals the employees right out from under the cab companies.
  2. Going to price war via UberX and specifically marketing that it’s “10% lower than Taxi prices.”
  3. Maintaining high standards for drivers. You’re fired at Uber if you drop below a 4.7 Star rating. This means that as Uber steals the best drivers from the cab companies, an increasing percentage of remaining cab drivers will be the smelly, violent, rude nightmare cab rides. This will not help their reputation or market share.
  4. Entering new markets as a Trojan Horse. Today, only 10 of the 40 markets Uber operates in have UberX. They first come in as a higher priced option of black cars, which have stronger legal standing and can be sold as less of a direct threat to cabs. Once established with a strong base of users, Uber can launch UberX. When cabs complain, there’s a strong user base to be rallied as public support for Uber (Travis’s go-to tactic) and pent up demand to be satisfied and taken away from cabs.

More than a one-trick pony

Rockefeller made his money initially simply drilling for oil and then soon thereafter refining it.  However, he soon realized he could make more money by building his own oil pipelines (thus no longer needing the costly railroad tycoons) and finding new uses for his oil (at one time gasoline was a waste product, then he met an early inventor of the first cars). Looking at Uber, you can see that same potential being realized.

Uber has already expanded their service offerings in various cities with the most diverse being in Paris:

Uber Paris Vehicle Options

Uber Paris Vehicle Options

As Travis recently said, “If we don’t give the consumer choice, the consumer is going to go elsewhere.”

At the same time, the pitch that Uber has for their long term dream is already leading to interesting experiments:

“We like to think of Uber as the cross between lifestyle and logistics, where lifestyle is what you want and logistics is how you get it there,” – Travis Kalanick

You can see this logistics play not just in how they deliver a car to a rider in an average of 3 minutes or less but in their experiments to deliver ice cream in 30 cities and BBQ in Austin. And as much as you may think they’re a publicity stunt, they were charging $30 in San Francisco for 4 basic ice cream truck items, so they definitely were profitable (what else would you expect from such a pure capitalist?). A brand with strong loyalty and a premium reputation stands to have great margins on everything they do.

So what’s in Uber’s future?

We’ve seen many monopolies before in our American economy, but never has anyone consolidated the transportation market like Uber is on its way to doing. Today, cab companies are generally owned on a city by city basis that puts them on a level playing field with their state and city governments. When Uber is finished putting the cabs out of business, they will suddenly have power in every major city they control. A city government against a multi-national, extremely profitable corporation may prove to be an unfair fight.

Travis may seem like a white knight for disrupting the awful cab system, but he may turn out to be a different kind of ruthless monster when he’s the one in full control based on what we’ve already seen from him and what Rockefeller did as he captured 90% of the oil market.

Based on this, here’s what I predict the future holds:

1) New taxes and regulations

In the end, no city, state or national government ever found a new industry they didn’t feel the need to write new laws and regulations for and to tax. I know Travis will fight this tooth and nail and it will likely use up some of the good will that the company has due to their great brand, customer service and flawless app performance. I expect the new CPUC regulations announced are just the beginning.

At the least, every city will be looking to replace any lost revenue they used to receive from Taxis. Should these regulations and taxes be enacted, I expect Uber will pass along any costs that are incurred from them and try to leverage their user base to complain about them to politicians as they’ve done many times before.

2) Uber will acquire or crush Sidecar in the next 12 months

Just like Rockefeller used to go to lesser competitors and show them his full power and offer them the option of join or die, I expect Uber to do this with Sidecar. Conveniently, they both will have Google as investors now, which should help facilitate a deal and signals an unlikeliness that Google will put more money into Sidecar. They would be wise to take such an offer as Rockefeller made many of his former competitors rich as Standard Oil shares skyrocketed in value. Those that didn’t take Rockefeller’s offer were driven to bankruptcy.

3) Violence will emerge between cab companies and Uber

I’ve heard a few stories about slashed tires and intimidated drivers in SF and LA. Given that many of the cab companies are run by individuals with alleged mob ties, it’s not unreasonable to believe that as they keep losing drivers and fees, they may turn to more than political pressure and legal routes to fight Uber. If this happens, I expect Travis will be extremely public about it and use his favorite weapon, the media and his loyal customer base, to decry such actions. The question is if any will come after Uber the company, not the drivers (let’s hope I’m wrong here). I’d have good security at the Uber offices if I were Travis.

4) New revenue models will emerge from Uber

On the positive side, I expect Uber to continue to do experiments like the Ice Cream trucks. I could see more food delivery, perhaps Santa suits for Santacon or a partnership with stores to pick up and deliver something you order. They could also go deeper on the corporate services side beyond their current employee perks system launched in February.

On the negative side, I expect that if Uber does reach full monopoly they’ll take advantage of it in their pricing not unlike their holiday surge pricing. The fact that they have so many passionate advocates for a premium brand will only help them in both cases; the margins will be great on future forays into other types of logistics or delivery, and any mistakes will have room for forgiveness (like surge pricing during natural disasters).

5) An acquisition bidding war between Amazon and Google

With the latest valuation being estimated at over $3.7 Billion, there are very very few companies that can still pay out a price to justify acquiring Uber. Google and Amazon both have good reason to be interested and have the financial standing to potentially do it:

  • Amazon: Just like Uber takes pride in its logistics efforts, Amazon does the same in shipping items around the world from their sophisticated warehouses. As they push for same day delivery, a service like Uber and it’s underlying technology would be invaluable. Jeff Bezos is listed as part of the Series B financing, which further demonstrates the potential interest level.
  • Google: Google has invested heavily in Google Maps both with their impressive redesign for iOS this year and the major acquisition of Waze, the real time traffic tool. Add to this their ongoing investment in self-driving cars and suddenly you can see a world where Google provides self-driving cars for the Uber service in the future. Google’s alleged investment in this round shows their deep interest in Uber and willingness to pay at a high valuation.

In the end though, Travis, with his love of Ayn Rand, does not strike me as someone who would want to sell to anyone at any price. Both Amazon and Google make potential excellent future partners and his unique vision for the world and approach to doing business seems best suited for the driver’s seat.

Rockefeller not only didn’t sell until he wanted to retire and focus on philanthropy, he vigorously fought the anti-trust efforts to break up his oil company (which could one day strike Uber if they truly dominate transportation). That sounds like just the path I’d expect someone as bold as Travis to follow.

As an entrepreneur and heavy Uber user, I’m excited to watch all of this play out. Given Travis’s brazen attitude and flair for theatrics, I expect this to be very entertaining ride for us all.

What do you expect the future holds for Uber and Travis?

Thanks to Hiten Shah and Ryan Durkin for reviewing this post.