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Ride service Uber, brash darling of Silicon Valley, stalks new markets

Transportation app Uber is seen on the iPhone of limousine driver Shuki Zanna, 49, in Beverly Hills, California, December 19, 2013. REUTERS/
Transportation app Uber is seen on the iPhone of limousine driver Shuki Zanna, 49, in Beverly Hills, California, December 19, 2013. REUTERS/

By Sarah McBride

SAN FRANCISCO (Reuters) - Uber Chief Executive Travis Kalanick knows the value of a good controversy.

After his upstart company, which lets people summon rides at the touch of a smartphone button, provoked a flurry of social media outrage in December over pricing policies that can result in exorbitant fares, Kalanick addressed prospective New Year's Eve customers.

"If you absolutely need a ride between 1 and 3 a.m., Uber will be very reliable," Kalanick said in a YouTube video. "But it will be a pricey ride, and you just have to accept that." The company's pricing policies can sometimes result in fares that are eight times higher than usual.

Like the message or not, plenty of people heard it - and fewer complaints emerged about Uber's New Year's Eve rates.

Kalanick has taken a similarly tough tack with regulators, local officials, taxi-company foes and emerging competitors as he moves to build Uber into a global force.

But it will take a lot more than a popular smartphone app, a loyal Silicon Valley following and a knack for turning free-market ideology into publicity to fulfill Kalanick's vision of a "lifestyle and logistics" company that delivers far more than rides.

Uber has entered more than 60 markets, ranging from its hometown of San Francisco to Berlin to Tokyo. Leaked financials in December indicate that the company, which began connecting passengers with drivers of vehicles for hire about 3-1/2 years ago, is generating $200 million a year in revenue beyond what it pays to drivers.

Investors, led by Google Inc's Google Ventures, have given Uber around $400 million and valued it at $3.5 billion. With a service that stitches together the buzziest categories in entrepreneurship - among them mapping, smartphones, and local services - Uber is widely seen as one of the hottest properties in Silicon Valley.

Yet Uber still faces daunting regulatory hurdles that have left it shut out of major markets such as Miami. Lawsuits, many from taxi companies, are piling up. Competitors such as Hailo, Sidecar and Lyft are coming on strong. And aside from publicity stunts involving delivery of kittens, ice cream and Christmas trees, Uber has yet to provide anything beyond rides.

Delivery "can become an extremely complex thing," said Kerry Rice, a digital media analyst at Needham. "It's about the scheduling and the software and the ability to manage a fleet."

Delivery is currently a hot topic among Internet retailers, with companies like eBay Inc, Amazon.com Inc, and Google all experimenting with same-day shipping. But it has proven a graveyard in the past for dot-com companies, such as Webvan and Kosmo, which had dreams of challenging the global delivery leaders.

Uber declined to comment on its plans.

RABID FANS

When Uber started offering its service in 2010, it was a way to connect riders with town car drivers who had extra time between scheduled gigs. The riders sign up via an app, with a portion of their fare going to Uber and a portion to the drivers, who are independent contractors.

It developed a loyal following in the first cities where it launched - including San Francisco, New York, Boston, Seattle and Washington, D.C. - in part because Uber served up rides in areas with a dearth of taxis. The rides, in black town cars, offered more pizzazz and comfort than a taxi, but without the advance-booking that limo services typically require.

Uber also proved masterful at harnessing publicity tied to one-time events. In Boston, for example, it offered free rides along a subway line that was shut down for repairs.

The company has adroitly tapped in to social media to rally fans, who attend mixers, lobby politicians, sign Facebook petitions and speak up at local hearings that affecting Uber.

In 2012, the Washington D.C. city council was weighing a measure that would make Uber sedans cost five times the price of cabs - until Uber fans bombarded council members with emails and tweets. The council then passed an amendment allowing Uber to do business, generating even more publicity.

But there have been plenty of regulatory setbacks too. In some cities, such as Miami; Austin, Texas; and Vancouver, British Columbia, local regulations keep Uber out, typically by requiring minimum fares or minimum wait periods between the time a customer requests a ride and the time that customer steps in to the car.

In other areas where Uber already operates, lobbying by the taxi industry has resulted in efforts to change the law to shut down app-based ride services. In Seattle, the city council is considering limiting such services to 100 part-time drivers a week and requiring special licenses.

Uber chalked up some regulatory wins during 2013, including in Dallas and Denver. But the company does not do business in one quarter of the 20 largest cities in the United States.

The taxi industry is also fighting Uber in court. In Chicago, local cab companies have filed a federal lawsuit alleging various illegal practices by Uber, including misleading marketing and unfair competition. Boston cabbies have filed a similar case. Uber declined to comment.

Separately, a group of California Uber drivers is seeking class status for a lawsuit alleging they get stiffed on tips and business expenses such as gasoline.

"The allegations made against our company are entirely without merit and we will defend ourselves vigorously," an Uber spokesman said. "Our technology platform has allowed thousands of drivers to generate an independent wage and build their own small businesses."

Uber recently won a state court victory in Massachusetts, where the city of Cambridge unsuccessfully sued to try to overturn a state agency's ruling that Uber could operate while federal officials evaluate the company's technology. No precedent-setting federal cases have been decided yet.

California provides Uber's surest footing in regulatory terms: the state's Public Utilities Commission gave app-based ride companies a green light in September. But in October, Uber, seeking to avoid CPUC oversight entirely, filed a petition for rehearing, arguing the body does not have jurisdiction over technology companies.

THAT RIDE IS HOW MUCH?

Meanwhile, Uber is going toe to toe with competitors such as Sidecar, which allows ordinary people to provide paid rides in their own cars. Uber has launched UberX, a lower-priced service that uses mid-range cars rather than the black town cars on which it built its reputation.

"Travis (Kalanick) is not ceding ground at any price point," said Bill Gurley, a partner at venture-capital firm Benchmark who has backed Uber since early 2011.

Gurley and others are betting there are enough people willing to pay a premium - even a very large one - for a reliable ride, or eventually for delivery services. One of Uber's innovations is so-called surge pricing, under which rates go up at times of high demand or low supply of cars.

During a recent snowstorm in New York, some Uber users tweeted photos of notices from the company that their fare would be as much as 8.5 times normal. At Sidecar, by comparison, surge pricing is also used, but it is capped at three times the normal rates, a spokeswoman said.

Kalanick defends surge pricing as both a matter of free-market principle and as the best way to assure that people can get a ride when they really need one.

"You'll always be notified in BIG, BOLD print if surge pricing is in effect," the company wrote in a December 30 blog post, linking to the video of Kalanick explaining the policy.

Many customers still perceive surge pricing as price gouging, and the policy will not endear the company to regulators. Yet even critics sometimes appear to sustain a love-hate relationship with Uber and its combative CEO.

"You can try to rationalize it, but it won't change the ill feelings most of us have toward your service," a Los Angeles customer calling herself Pasta Versaucy tweeted to Kalanick on Wednesday, in reference to high New Year's Eve rates.

A little while later, she sent out another tweet. "Hypothetically speaking: can I order an @Uber to charter a burger to my house? Because I totally would."

Kalanick, who had engaged in some New Year's Twitter banter with her and other critics, let the question go unanswered.

(Editing by Jonathan Weber and Matthew Lewis)

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