Uber’s chief advisor in a conversation with Chicago Booth professor Guy Rolnik: “We’re called a disruptive company—I think it’s more accurate to call us an additive company.”
In the 1990s, Harvard Business School professor Clayton Christensen coined the term “disruptive innovation,” describing a process in which a smaller company or service is able to move from the low-end of a market—or create a new market entirely, turning non-consumers into new consumers—to challenge and eventually displace established incumbents. In recent years, perhaps no other company has been hailed as disruptive as Uber, the ride-sharing app that began in 2009 as a premium car service in San Francisco and evolved into a market-changing multinational giant.
With operations in 70 countries and over 400 cities, Uber’s rapid growth—it has raised more than $11 billion from investors since it was founded, most recently from Saudi Arabia—has turned it into the poster child for the sharing economy. There is no doubt that Uber is immensely successful, but is it disruptive? In 2015, Christensen himself seemed to answer in the negative: “Uber’s financial and strategic achievements do not qualify the company as genuinely disruptive—although the company is almost always described that way,” he wrote in an article co-written with Michael E. Raynor and Rory McDonald for the Harvard Business Review. “A disruptive innovation, by definition, starts from one of those two footholds [low-end or new market]. But Uber did not originate in either one,” they added.
Uber’s success has been nothing short of remarkable. Within seven short years, the company has managed to become a cultural icon and a leading global brand, with a $66 billion valuation. Attempting to explain its success, Christensen, Raynor, and McDonald arrived at the following explanation: “We believe that the regulated nature of the taxi business is a large part of the answer.” The vigorous regulation of the taxi business, they explained, limited market entry and prevented taxi companies from innovating, thereby allowing Uber a situation in which it was able to “offer better quality” that the competition “will find it hard to respond [to].”
Like most other “sharing economy” apps, Uber has faced enormous regulatory challenges in recent years, chiefly related to it being a tech company exempt from many of the regulations that traditional taxi services are subjected to, and the classification of its drivers as independent contractors instead of employees. In France and in Sweden, it was forced to shut down its popular UberPOP service, the European equivalent of Uber X, following judicial and legislative challenges. Its regulatory struggles were also marked by protests around the world, largely by local taxi drivers, from London to Jakarta. Last month, Uber and its biggest competitor, Lyft, suspended their operations in Austin, Texas after voters reaffirmed stricter rules on the ride-sharing firms. Most recently, Uber and Lyft warned that a proposed regulation that would enforce stricter licensing requirements on Uber drivers might cause them to leave Chicago.
In the unlikely event that Uber was to leave Chicago, the economic effect would be significant, as the company currently has over 30,000 drivers in the city, who rely on it for at least part of their income.
During a recent fireside chat with Chicago Booth professor Guy Rolnik (one of the editors of this blog) at the Stigler Center, Uber’s chief advisor and board member, David Plouffe, explained the company’s effect on Chicago’s economy. “The economic effect, I think, is pretty profound. In Chicago Uber has over 30,000 drivers—even in a big city that’s a lot—and 66 percent of those drive less than 10 hours a week. The vast majority of our drivers in Chicago, like most of the US, are augmenting income. 42 percent of our riders actually come from the South Side and West Side, which were transportation deserts. A long-term Harvard study recently found that in the US, the number one cause for keeping people trapped in poverty wasn’t crime rates or elementary school scores, but the cost and inaccessibility of transportation. People are using this to get to school, to get to a work, get to a job interview, get to the airport, get to public transportation, or small businesses like retail establishments and restaurants.”
Plouffe is best known as a political strategist and the architect of Barack Obama’s transformative presidential campaign in 2008 and his successful reelection campaign in 2012. Plouffe continued to advise Obama after he became president, and was appointed Senior Advisor to the President in 2011. In 2009, following Obama’s first victory, he wrote the New York Times best seller The Audacity to Win: The Inside Story and Lessons of Barack Obama’s Historic Victory. He joined Uber in 2014 as a senior vice president of policy and strategy, and is currently the company’s Chief Advisor and a member of the board.
In recent years, Uber’s frequent disputes with regulators and competitors have taken a toll on its image, as the company was embroiled in a number of scandals over its aggressive tactics in regards to smaller rivals and its massive lobbying efforts. In 2014, Lyft claimed Uber employees ordered and then cancelled thousands of Lyft rides, thereby hurting its driver availability. CNN Money reported that Uber told some of its New York drivers that it was against city regulations to work for both Uber and Lyft, a claim that was later denied by the NYC’s Taxi and Limousine Commission.
Also in 2014, The Verge was able to obtain internal emails that revealed the extent of Uber’s attempts to poach drivers from Lyft and other ride-sharing apps. These tactics have been described by The New York Times’ Neil Irwin as having “an element of spycraft about them, with methods and protocols that could appear in a John le Carré novel.” Later that year, Uber’s senior vice president of business, Emil Michael, suggested that Uber hire a team of researchers and journalists that would dig up dirt on the personal lives of reporters who wrote negative stories about Uber. Michael later apologized for his remarks, which Uber co-founder and CEO Travis Kalanick called “a departure from our values and ideals.”
As its legal and regulatory problems expanded, Uber has also developed what The Washington Post called “a vast lobbying network.” In 2014, The Washington Post reported that Uber hired at least 161 lobbyists in 50 US cities and states in the two years before then. In the first quarter of 2016, the company spent $320,000 lobbying the federal government, according to the website opensecrets.org.
Aside from its lobbying efforts, Uber has also been very effective in mobilizing its significant customer base, urging users to sign petitions and pressure lawmakers on its behalf. “Uber’s approach is brash and, so far, highly effective: It launches in local markets regardless of existing laws or regulations. It aims to build a large customer base as quickly as possible. When challenged, Uber rallies its users to pressure government officials, while unleashing its well-connected lobbyists to influence lawmakers,” wrote The Washington Post in 2014. (The Washington Post also reported that the taxi industry has donated $3,500 to state legislators for every dollar that Uber, Lyft, and smaller competitors have given).
Some of Uber’s challenges had to do with the designation of its drivers as independent contractors, which allows it to keep its costs low. On that front, it seems the company has made some progress: recently, the company settled two class-action lawsuits in Massachusetts and California and was allowed to continue treating its drivers in both states as independent contractors. In Seattle the City Council approved a bill in December that allows drivers for ride-sharing apps in the city to form unions. In May, Uber allowed its 35,000 New York drivers to form a guild. But the company still faces classification lawsuits in other states, as well as an antitrust case that alleges Uber CEO Kalanick engaged in “price-fixing” with the company’s drivers.
During the Stigler Center event, which took place before the company left Austin, Plouffe spoke about Uber’s regulatory problems in Europe, the company’s relationship with regulators, the so-called “gig economy,” and what he described as a misunderstanding of Uber’s service. “The truth is, we’re called a disruptive company—I think it’s more accurate to call us an additive company,” he said.
Regarding the company’s previous tense relationships with regulators, Plouffe said the atmosphere has remarkably changed in the last two years. “At the end of the day, I think we’ve learned. Some of that is old Uber. Most of the conversations I have with government in the US today are not about regulation, but about how can we help with job training? How can we help with some of your transportation challenges? We are on the federal government’s site in India as an example of entrepreneurial opportunity.”
Nevertheless, he said, “there’s no doubt that when you’re in conversation with government, there’s going to be some tension. When the discussion two years ago was really about old taxi regulation [versus] new technology-based services, there’s a collision. Now the debate in the US has evolved. Most people understand it’s not a really satisfying debate, and they’re fashioning new regulations. At the end of the day I think we’ve learned.”
Plouffe continued to elaborate on the company’s present and future challenges, its strong domestic competitors in emerging markets like China and India, and Uber’s unique brand of user activism. The following interview has been edited and condensed for clarity.
Guy Rolnik: Professor Clayton Christensen of Harvard Business School, who sort of invented the term disruptive technology, said that disruptive companies are the ones that are going to what he called non-consumers, bringing new consumers to the market. You can look at the drivers or the riders as the new consumers, but where would they come from, the people who are coming into the labor market [through Uber], in Chicago and the [rest of] the US? Are these really people who are struggling in the labor market?
David Plouffe: Every month it’s more resembling the city as a whole. Where is our growth in the driver population in the last few months? Middle income people, women, retirees, stay at home parents.
There’s a myth out there that Uber’s and Lyft’s and even AirBnB’s opponents say these are people who are forced into doing this. There’s no doubt we’re a great bridge. If you lose your job but still have a car payment, if you get your hours cut, if you get a bill that you’re not expecting, you can drive on our platform until
you figure out what’s next. But a lot of people use this aspirationally too. This is how they go on vacations, pay for holidays, upgrade their TV or computer.
In the very beginning the people who chose to drive on the Uber platform tended to be people who had a professional driving history, but almost all the drivers we have in a city like Chicago are not professional drivers. We have a lot of entrepreneurs who are building businesses who use us, artists, teachers who do this, a lot of government workers who do this, a lot of relators who do this. It’s really diverse.
Most transportation regulations around the world had two perverse effects: they severely limited the amount people who can make money doing something all of us can do, drive. Secondly, we were forcing people into car ownership, because there wasn’t the supply in most places to reliably know you can always get around.
GR: Is Uber more of a regulation play than a technology company? From the outside, it looks like the following: you come into the market, you get the community and the customers excited, and then you start lobbying to make sure that you can operate in the market without the regulations that taxi companies have. And later, when it comes to other issues like labor, you still continue to lobby. Lobbying and regulation seem to be a big issue for Uber.
DP: Firstly, we are firmly a tech company, but we do get embroiled in regulatory discussions. The truth is, in most parts of the world the regulations were not black and white as they related to us. In some places they were, and we were prevented from operating, but for the most part they were grayer.
Generally, taxi regulations should be liberalized. Those regulations have been on the books for decades. When you have someone doing this 4-8 hours a week, they should not go through a four month licensing process. We want to take on as much of the burden of regulation as possible as a company, so the drivers don’t have to put up money or time.
We believe regulations have a purpose, but we’re a tech company not a taxi company; very different model. Here in the US, for the most part, the debate has kind of moved beyond the core regulatory discussion to next-generation issues around labor and other issues—that’s true of most of the world, I think most of world has decided that ride-sharing is here to stay, and more people understand there are some public benefits to that—and what is the best way to handle that.
Most of our opposition used to come from the insurance industry, now we are completely in alignment with the insurance industry, but it’s still the taxi industry. I get it, when you had a monopoly that was a pretty good thing, you want to go back to that. The truth is, most of ridership doesn’t come from taxis. I work for Uber, I get Uber credits, and I used taxis three times since I’ve been to Chicago. We don’t do street hails, we pay more for [rides to the] airport, we don’t have cab rents. There are still some advantages that taxis have.
They are still trying to suggest that basically Uber and Lyft should be treated as taxi companies. For the most part, cities have resisted. Others, like San Antonio, Texas, that passed very onerous regulations, or Broward County, Florida—which was a big market for us and Lyft— we pulled out of those.
What we do doesn’t work if it’s a huge barrier to entry for part-time drivers —you basically just have an app-based taxi company. You won’t get the kind of coverage you get on the south and west side here in Chicago. We have over 30 thousand drivers [in Chicago], but at any given time we’ve only got about 4000 drivers on the road. So when you have part-time drivers, you need to have a lot of them to meet the demand.
GR: Some monopolies have to share their rents with their labor. What happened to the average wage of taxi drivers in cities where Uber has a high market share?
DP: We don’t have access to the wage data, but we know that in some places medallion and license prices have dropped. Here in Chicago, 50 percent of the medallions are owned by Gene Freidman, a taxi oligarch from New York. This is not mom and pop, these are investments. Medallion prices have taken a hit, although most of those appreciate and there’s a big secondary market for it. In the US, for the most part, this debate has been more complicated— [people understand] it’s an investment, it goes up and it goes down. Outside of the US, I think there’s a little bit more sensitivity to that.
At the end of the day, 10-15 percent of our rides—depending on the city—come from the taxi market, so there’s some competition. But if I was advising the taxi companies, [my advice] would be this: something big is happening out there. Over the next 5-7 years you’re going to see a huge number of people leaving their cars at home. We estimate here in the US, 50 percent of our trips are one-way. They’re using us for a part of their journey, they’re not using us for the rest. So anybody that’s in the business of moving people around has an opportunity for that, and you’re already starting to see improvement in the taxi service. This is important: when you have a monopoly you never innovate.
And don’t forget taxi drivers now can also drive in our platform. Before, they had one choice: pay 150 the medallion owner, work a set schedule, unlike us, go to work 10-12 hours a day. Now you can drive for Uber, Lyft, Amazon Prime now, Instacart. It’s not exclusive. Whoever’s got a job for them at the moment they accept it.
I don’t think the taxi industry is going to go away [but] they’ve got to continue to innovate. There are many cases where it’s easier to get a taxi than it is an Uber or Lyft, and they have to figure out how to maximize that advantage.
GR: Where are you currently allowed to operate? How do you deal with regulation in the US and Europe?
DP: We’re in 70 countries now. As it turns out, the notion that you press a button and get a ride or press a button and get work works everywhere, no matter the country or the continent or even the size of the city. We’re operating everywhere, the question is in what fashion.
I would say in US, in Mexico, some parts of Latin America, a few Canadian cities, Australia, the UK, some Eastern European countries, and Africa we are able to offer the service we want to offer. Where we’ve had the biggest issues is Southern Europe. In France we actually have a great business, got over ten thousand drivers. What we had there was called UberPop, which was the equivalent of the American Uber X, and we had to temporarily shut that down and have thousands and thousands of people lose their livelihood. That’s what we’re fighting for, to liberalize that market.
In Europe I think the issues are that the taxi unions are very strong, and the notion of somebody having a job and then going out for 5 hours and
making money on the side is not as easily digested there as it is in other parts of the world. But we’re making progress. The European Commission is looking at this very intensively.
Part of it is politics, there’s no question about that, but the model works everywhere. Our biggest cities now are not in the US, they’re in China. Mexico City has been one of our fastest growing cities over the last six months. We’re growing very strongly throughout India.
For the most part, our conversation with regulators are not should Uber exist or not, but what’s the right way to do it. There are now all sorts of examples around the world of regulatory solutions – this is not complicated. What’s really complicated is the politics of it. The taxi industry will tell elected officials ‘you’re making a choice between ride-sharing and taxis’. That’s not what you’re doing. You’re largely enabling a new market, and yes, there’s going to be some competition for taxis.
GR: You mentioned India and China. Some analysts believe that it will be very difficult for you to win these markets because there are strong local competitors that are maybe more politically connected than you.
DP: In India we’re gaining very quickly. We’re the market leader in a bunch of cities. Ola is a strong business. A lot of drivers drive for both Uber and Ola. India is going very, very well. And the government is not going be able to say ‘we’re cool with what Ola does, but not with what Uber does.”
In China we have a competitor called Didi Kuaidi. Again, many drivers drive for both. That’s a place where we are investing a lot. Even though we’re the number 2 place, Uber’s biggest cities are in China—seven of our top cities are in China. Even though we’re number 2, it’s a heck of a business, with a lot of potential. What you’re seeing in China is an emission[s] crisis, a congestion crisis, and need for more money. I think the government understands that ride-sharing plays an important role in it. I don’t think you’re going to see a situation where a domestic competitor is favored.
GR: In the US, Uber is clearly the market leader and is closely associated with the terminology of the “sharing economy.” We know digital platforms like Uber tend to be in industries that are winner-take-all. How can you call yourself a sharing economy company, when at the end of the day we know that those markets tend to monopolize and that at the end of the day you’ll be controlling the market?
DP: Call it sharing economy, call it on-demand economy, what our growth comes from is people using their own personal vehicle and leveraging that to make additional money. When you look at Uber Pool—one person using their personal car to offer rides to multiple people going in the same direction—if that’s not sharing, I don’t know what is.
We’re going to have healthy competition from companies like Ola and Didi Kuaidi, and Lyft in the US. People are going to try many different options, and that keeps us on our toes.
For people who are doing this, it’s about supplemental income. If it’s not enough money they’re not going to do it, if they don’t feel safe they’re not going to do it, and if the tech is not a good experience they’re not going to do it. At the end of the day they vote with their behavior. If [the schedule] is just flexible but the income is not great, they’re obviously not going to do it.
Our goal is, if you turn on the app, to have you utilized 75-90 percent of the time. Our goal is to have to basically have you on a perpetual trip, so you’re more fully utilized.
I think there’s going to be competition in this space. Our competition is competitors like Lyft in the US, and its personal car use. If you’re going to the movies or you’re going to meet friends for dinner or you’re going to the airport, instead of driving we’d like you to use an Uber car. That’s where our growth is going to come from.
GR: Still, if you are part of the “sharing economy,” why are you fighting tooth and nail with your drivers in California who want to unionize?
DP: We’re not fighting tooth and nail. I spend a lot of time talking with our drivers, [and] the debate about classification is not a conversation I’ve had more than two-three times. What they’re focused on is: is the app working? Is the payment system working? Is it busy enough?
Our drivers like the flexibility. What’s most important is that they control the schedule. If you’re an employer, you set the schedule. I’ve been an employee many times in my life, and am currently now, and I work when I’m told to work. So a lot of people would lose the opportunity.
Let’s talk about the taxi industry: 95 percent of taxi drivers in the United States, and all of the taxi drivers in Chicago, are independent contractors, so it’s not like this is a different model. But those people don’t use their own car, they pay fairly usurious rates every day, they have no schedule flexibility. We’re very confident in the business model, from the classification aspect.
There are very interesting debates about what if ten years from now you have higher percentages of people working in the so-called “gig economy” than now. There’s an important paper out recently from Alan Krueger and some of his colleagues that states that first of all, the number of people in the gig economy is much smaller than people realize. Most of them are not app-based. It’s realtors and construction, and emergency room doctors and financial planners.
If ten years from now more and more people are getting their money from a collection of so-called gigs, then we’re going have to look at the way we do benefits in this country, no question about it. It’s an interesting question for policy makers, but right now, our driver population think the model works, they want control of time, control of their money. If they become employees, obviously they’ll lose all that.
I talked to an elected official that said ‘the problem is that everyone out there is Ubering and Lyfting and Task Rabitting and Instacarting and AirBnb-ing.’ That person doesn’t exist. It doesn’t exist. What we see in our research is, the people who drive for the Uber platform, the only other thing they’re doing is maybe driving for Lyft. They have a core of what we consider a traditional job.
GR: Going back to what you said about the labor market, what kind of labor market are we going to have ten years from now? And how does Uber fit into the model of the labor market you want to see?
DP: I think we all wish that sometime in the next deca
de most of what we consider traditional jobs will start having wage increases of 4-6 percent a year. I have never talked to an economist who said they think that’s the case. My suspicion is that ten years from now, there’s not going to be a vast shift of people working in the gig or on-demand economy. Most people are still going to have what we consider traditional jobs, but [we’ll] still have the situation we have today, with many people dissatisfied with the income from their traditional job. Platforms like ours are something people can use on their own terms to add to that. I think that’s where we come in.
The trajectory is that every month in the US, the number of hours driven per month by our drivers drops, because more people are coming on, not doing even 25 hours a week, just doing it a few. We have a remarkably high number of drivers in the US that are only doing 2-3 trips a month, we don’t even count them in our active driver number. Our suspicion and our hope is that in 2-3 years, here in Chicago, pretty much anybody that turns on a car or phone will decide ‘I want to see if I can pick somebody up on my way to work, or a social event, make a little money and give somebody a ride in the process.’
I don’t think this is a choice between this model and the old model. In the US and many countries, we are increasingly an augmentation to traditional work. I think our model is, basically, we are going to help people who are engaged in what we consider traditional employment have more economic security. If this was a government program, there would be parades thrown.