Why Uber Teamed Up With Starbucks, Open Table, and United Airlines

Uber just opened up its software platform to 11 big partners. Will this sweeping partnership deal a death blow to taxi companies?

Aug 31, 2014 at 10:17AM

Uber recently opened up its software platform to other companies, allowing them to integrate requests for Uber drivers into their own mobile apps. That offer quickly attracted nearly a dozen partners, including Starbucks, OpenTable, United Airlines (NYSE:UAL), TripAdvisor, and Hyatt Hotels and Resorts.

This means that a user making a reservation with OpenTable could also book a ride with Uber to get to the restaurant. Passengers on United Airlines could book Uber vehicles, along with their tickets, to pick them up from the airport. A Hyatt guest could book a room and get an Uber ride from the airport to the hotel.


Source: Uber.

While it's unclear if Uber is paying all these partners for ride referrals, The Wall Street Journal reported that Uber previously paid travel websites like TripAdvisor for referrals. Uber is also encouraging developers to create apps which refer users to the service through an affiliate program which pays developers $5 for each new rider.

Let's take a deeper look at how these new partnerships can help Uber become even more ubiquitous.

How Uber makes money
Uber doesn't own any vehicles. It only provides a free app which connects users to drivers, a navigation and fare calculation system, and a payment system. When passengers use the service, they pay Uber, not the driver, and the the company takes a 20% cut of the fare. Any driver who passes the company's background check can sign up as a driver.

That system is elegantly simple compared to taxi companies, which require the purchase of taxi medallions, which can cost over $1 million each in New York City. Taxi drivers in popular areas aren't always known for taking the shortest route, and often request large tips (20% to 30% in New York City).

With Uber, both the driver and passenger are provided with the same GPS-enabled map, and no tips are required. Since Uber's low-end UberX service dropped its price 20% in July, the service is now cheaper than a New York City taxi. According to a leaked receipt from last December, Uber paid its drivers $1.1 billion in 2013, which would translate to annual revenue of $220 million.


Source: Wikimedia Commons.

Meanwhile, taxi companies have struggled on mobile devices because the industry is fragmented. VeriFone's (NYSE:PAY) Way2Ride, which launched last October, is the closest thing the taxi industry has to Uber -- it is accepted in over 11,000 NYC area taxis, and has slowly expanded to other areas like Philadelphia.

The problem with Way2Ride, however, is that it requires the cooperation of additional taxi companies before it can expand, which means it can't grow as rapidly and freely as Uber.

Expand and conquer
By opening up its API to third-party apps, Uber is executing a play right out of Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) playbook -- to become a ubiquitous service as quickly as possible. That's not surprising, considering Google invested $258 million in the company last August and added Uber integration to Google Maps in May.

To understand how much bigger Uber could get through these partnerships, we should start with a base figure of 860,000 monthly active users -- a figure which Gawker estimated based on the company's leaked financials.

Let's take a look at OpenTable, which Priceline (NASDAQ:PCLN) acquired for $2.6 billion in June. OpenTable claims that it seats over 15 million diners per month at 31,000 restaurants. If just 6% of those diners use Uber the next time they book a table, it would double Uber's monthly active users.

Speaking to TechCrunch, Uber SVP of business Emil Michael believes that the 11 Uber-integrated launch apps have already been downloaded by at least 200 million users. Those apps could all complement each other -- the United Airlines app would lead to Hyatt's app, which could lead to Tempo's smart calendar app for booking meetings. Uber would be the common thread that runs through all of these apps.

Considering how much bigger these partnerships could make Uber, it's not unreasonable to assume that the company's annual revenue could eventually rise five-fold and hit $1 billion.

But let's not get Uber excited yet...
While the API deal was a great move for Uber, it's not completely risk-free.

Uber has faced accountability issues with the past, with cases of sexual assault, kidnapping, and a hit-and-run involving its drivers. Uber has promised to tighten up background checks and training, but unchecked growth with the aid of so many apps could result in a higher number of incidents which could tarnish the company's reputation. The overall quality of drivers could suffer as well.

Uber is available in 170 cities and 44 countries, but some areas are openly hostile to the service. Berlin has banned the service, and London cab drivers have protested against it. If Uber's growth suddenly explodes across the world, it could quickly become a much larger target for regulators.

A Foolish final word
If Uber doesn't have a contingency plan in place to deal with these growing pains, it could leave the door open competitors like Lyft to capitalize from its mistakes. Despite these risks, Uber is clearly ready to shift its growth into high gear, making it one of the hottest private tech companies to follow.

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Leo Sun owns shares of Starbucks. The Motley Fool recommends Google (A shares), Google (C shares), Hyatt Hotels, Priceline Group, Starbucks, and TripAdvisor. The Motley Fool owns shares of Google (A shares), Google (C shares), Priceline Group, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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