Uber – Taking on The Global Taxi Industry One City at a Time

“Some things in life are bad

They can really make you mad

Other things just make you swear and curse.

When you’re chewing on life’s gristle

Don’t grumble, give a whistle

And this’ll help things turn out for the best…

And…always look on the bright side of life…

Always look on the light side of life…”

“Always look on the bright side of life”, song from the hit musical Spamalot – lyrics by Eric Idle

“Up to now, sadly, taxi-medallion owners have responded to this challenge (from Uber et al) like the record companies did in the 2000s — with bluster, outrage, and their own lobbyists and lawyers. … However, I believe the taxi industry should lay down arms in the regulation wars. They should learn the lesson of the music industry and go into the e-hail business themselves. … They should lose the obsession with requiring the ride-sharing companies to comply with every single requirement that is imposed on medallion cabs. Rather than locking horns with the ride-share companies, the taxi industry should work on joining them in allowing customers to hail their cars with apps and smartphones. Would the taxis be able to compete if given similar tools? Maybe not in terms of price, but they have other advantages… The better-trained, more experienced, and, yes, more regulated drivers make a better option for the rider choosing based on quality and safety rather than simply the lowest price.”

– Anthony Weiner, former NYC Congressman, writing in Business Insider, 04/18/14

If anyone had told me that one day I would start a blog by quoting Eric Idle of Monty Python as well as former U.S. Congressman Anthony Weiner, I would definitely have called them a liar and a scoundrel and challenged them to a duel at dawn. Let me state my reasons for including these pearls of wisdom.

First, despite understandable “Who moved my cheese?” initial reactions from organizations and individuals who inevitably feel violated by the latest tech-driven disruption, the first thing they need to do after registering their shock and outrage is to chill. Then, before breaking any furniture, divorcing their spouse, or wrecking their car (or taxi in this case), they should try to “see the bright side of life”. Does this new service spell doom for us, or might there just be a silver lining to this cloud? Customers are always the key: whenever an unfamiliar offering appears that passengers immediately take to, if you are an industry incumbent you have to quickly understand that there’s something real going on, and it might just lead to better opportunities for you. In this case, the lesson applies to licensed taxi companies and individual cab or limo drivers alike, as well as other industry participants.

Second, as Anthony Weiner states, lessons from the recent history of record industry suggest that, for the good of your business going forward, there’s a more effective way of dealing with it than to try to stifle the new new thing to death by regulation and other legalistic defense mechanisms. I’ll cite more from Weiner later in this article on potential silver linings for the for-hire car transportation industry.

On-demand mobile-app car services – or ride-sharing, the more populist term used by other disruptors like Lyft to describe a similar but not identical value proposition – have been around for a few years, starting in tech-friendly cities such as San Francisco. These services basically take advantage of four recent technological innovations: a) GPS mapping and navigation to define routing and arrange the hire, b) smartphones for travelers to arrange a ride from an agreed pickup location, c) social networks to provide a trusted venue between drivers and passengers, and d) mobile payments systems to complete the transaction. The image at the top of this post represents quite clearly three main interactions from request to completion of the trip.

Now that these services are beginning to achieve respectable market penetration, the victims or “disruptees” – cab drivers, licensed limo and taxi firms, insurers, city and municipal governments, and regulators among them – are beginning feel very threatened, some reacting with work stoppages or strikes, as well as intense pressure on regulators as well as the public to reject the newcomers. Uber’s most recent increase in valuation hit the airwaves a week or so ago, coinciding with the planned strikes of taxi drivers in London, Paris, Madrid, and other cities. Meanwhile, the tech disruptors are competing fiercely for share in this emerging market, which is going global faster than anyone imagined. At the end of this morphing value chain, travelers are taking advantage of the new transport choices they have in many cities around the world.

“We have heard numerous complaints that our safety rules are being ignored.”

– Michael Peevey, president, California Public Utilities Commission (CPUC) in a letter to Uber and other transportation network companies regarding their illicit airport runs, 06/11/14

“We have spent countless hours with airport managers and their staff to help develop requirements that are aligned with CPUC regulations and embrace the spirit of ride-sharing.”

– Uber statement, 06/11/14

“There’s room for everyone, but you have to obey the law. Uber isn’t properly regulated. It’s a slippery slope. Quality of life will go down if these services are allowed to operate.”

– Mario Dalmedo, London cabbie in mass protest by cab-drivers in London, 06/11/14

“I’m glad that more taxi apps have arrived. In the end, everyone knows (that) taxis overcharge you.”

– Chris Fox, customer in London, 06/11/14

“Uber cabs are stealing our clients. We are regulated to death, while they circumvent the law.”

– Jose Losada, taxi driver in Paris, 06/11/14

“In Paris, the number of taxis hasn’t changed since the 1950s. The strikes are an attempt to desperately fight against competition in the market.”

– Pierre-Dimitri Gore-Coty, Uber’s regional GM, EMEA, 06/11/14

As these statements illustrate, opinions are heated. The licensed limo and taxi firms allege that the playing field is not level, given the taxes levied on their services, the high insurance premiums they have to pay, and the regulations they are obliged to follow. While government regulators are caught in the middle trying to figure out how to deal with this new phenomenon, industry experts are studying the phenomenon, while investors are licking their lips – especially those who have invested early in these new mobile apps. This phenomenon contains a typical mix of advocates, adversaries, and observers that one expects to see whenever an industry’s inefficiencies are attacked by aggressive new technology-enabled players. It happened in print, music, and other media sectors, and it’s still happening in all areas of retail. Meanwhile, Uber is charging full-steam ahead with its international expansion plans into new countries and cities. It is clearly the early leader and stands a good chance of becoming the de facto standard among the various vendors of mobile-app ride-sharing businesses. Other startups, including Lyft, Hailo, Sidecar, Summon and Wingz, are also competing to get their share of business.

My first objective is to help readers to validate the rationale behind Uber’s growth and exploding valuation – or decide that it is overblown and won’t survive more heated competition or government regulation. Secondly, I want to suggest how each participant can best navigate their way through the course of this industry disruption, until a remodeled, hopefully more functional and attractive industry emerges out the other side.

Based on what we know today about Uber and the taxi and car service industry, it can be instructive to think through which of the descriptions below best describes Uber’s value proposition and strategy.

1. A faddish smartphone app that will lose some of its luster once things settle down and we all see that it is just one new entrant in an increasingly saturated car-service category,

2. A real-time marketplace for limos and taxis – possibly a new kind of dynamically managed transportation network for ferrying passengers back and forth in urban and even suburban environments,

3. Much more than a marketplace for limos and taxis – who knows, a transportation logistics management company that will disrupt the multi-billion dollar businesses of Fedex, UPS, Hertz, Ford, GM, Amtrak, United Airlines, and others.

Determining which of the above options is most accurate will go some way to understand whether or not the $18bn valuation has any tethering in reality. My initial take is that Travis Kalanick, the company’s CEO, together with his colleagues and investors, are thinking bigger than just how to make the global taxi system more efficient, though this itself would be no mean feat. True, Uber may have started life five years ago as a risky mobile-app startup aiming basically to disrupt the inefficient taxi and limo services that exist in many cities. Five years on, in mid-2014, Uber seems to be going in a more ambitious direction. I cannot see the combination of private and corporate VCs, private equity firms, and investment banks investing a round of $1.2bn. merely in a global expansion of the Uber car service beyond the 35+ countries in which it already operates. The barriers to competition are not so great that one can’t imagine other attractive players emerging strongly in different countries or even cities where they have greater familiarity with local governments or connections in the local market. And what about the possibility of City Hall or the Yellow Cab company adopting similar technologies to compete against Uber and the other startups?

Today, Uber is definitely looking strong, making a lot of the right moves to build a major franchise. Already, experts and observers are speculating that the company plans to become a much bigger force in the larger transportation industry which includes logistics management companies like Fedex and UPS, and auto makers like Ford, GM, and Toyota – all of whom stand to lose unless they adapt their strategies and offerings. Uber is already engaged in package delivery in New York City, and even more intriguing, it is starting to influence how urban dwellers look upon car ownership – in essence, inducing them to question whether they need a car at all.

That said, you can’t ignore the possibility that the hype surrounding Uber, Lyft and others is excessive. It’s a known fact that investors keep valuations down for as long as possible when an offering is in the “pre-chasm” (early market) stage because they perceive a high degree of product, market, or people risk. This ensures that they do their best to limit the funds that they are willing to bet on the company succeeding. However, as soon as the new business has passed a clear tipping point and crossed the chasm in terms of (a) adoption by significant numbers of pragmatist customers and (b) competitive separation against other players, the same hard-nosed VCs quickly turn into a gaggle of cheerleaders. In this, they are usually egged on by merchant bankers jumping on the bandwagon, anxious to drive valuations upwards. Funding rounds can quickly explode in anticipation of dramatic growth especially when an exit strategy via IPO or acquisition at an even higher market cap looks like becoming a reality. In recent times companies such as Facebook, DropBox, and Airbnb have all experienced hyper-valuations that have surprised most observers. Notwithstanding the doubts we feel when we see sky-rocketing valuations, they do sometimes have an actual basis in reality – a future reality that knowledgeable investors can see in the form of a much bigger vision for the emerging business.

It may actually turn out that many of the current crop of car-service competitors get bought out by established companies, as they seek to co-opt the repressed demand that Uber and company are tapping into and thus remain relevant. But one way or the other, what’s going on today in this sector looks certain to produce a somewhat transformed urban transportation industry, most likely for the better. And although it is early to predict winners and losers, Uber appears to have a strong chance of achieving strong platform power, much as eBay achieved it with its auction platform a decade ago, and as it appears to be doing with Paypal, the payments platform it acquired several years ago. Consider that to become truly powerful – in essence a new industry standard – a platform must display these three characteristics:

1. Achieve dominance in a significant target market segment – In Uber’s case, this would be limo and taxi services in selected major cities nationally and in, say, a dozen major countries. This is not to say that Uber should restrain its growth into as many countries and cities as feasible, just that their sweetspot is likely to be a smaller subset of major cities/countries whose “reference” value is superior to that of less notable centers.

2. Make a market for existing and new businesses to flourish – For Uber, this already means creating new job opportunities as well as more lucrative livelihoods for (more) drivers. Uber should also look for ways to enable taxi and limo firms to become part of the Uber network. After all, Uber has no intention of owning or managing fleets of cars or employing drivers but it needs them in order to provide its services. In the future it can include working with government authorities to usher in a more modern urban transportation infrastructure.

3. Leverage network effects – As with fax machines in the past or users of Facebook today, more users of the service attracts more users in a self-reinforcing virtuous cycle, and drivers increasingly choose to work for the company that has more customers. More choice and availability for existing passengers influences them to keep re-using the service, and this also attracts new passengers who respond to their influence as positive references, and so on. Growth in these circumstances can be exponential.

Although we are still relatively early in the formation of this new market, Uber cannot yet claim victory in terms of sustained market dominance. However, it has conquered enormous mindshare as the most professional service. Furthermore, by all accounts, Uber appears to be way ahead of its closest competitors in terms of actual revenue and revenue growth, with an estimated 2013 net revenue of around $200m, growing at an impressive 10% every month. My rough assessment of Uber in the above three criteria is that the company has a good chance of being able to check all these boxes. That said, these are still very early days, and there’s plenty of scope for errors, or for other companies to make smarter moves and assume the lead. Furthermore, in order to attain the degree of power that one associates with, say, Amazon in retail (maturing, more conclusive) or public cloud (emerging, not yet so conclusive), my guess is that Uber will need to keep strengthening its differentiation, probably assuring availability of cars at all hours, shaving seconds off of pickup times, as well as continually refining its customer service experience, both in-car and pre/post each ride. In this way, Uber can hope to obtain superior passenger engagement (each passenger wanting to keep using Uber) and enlistment (each passenger referring friends and family to Uber). One area it will need to watch is its monetization engine – how long will Uber be able to charge 20% to drivers for every ride? It seems likely that this highly profitable commission rate will come under intense pressure, forcing Uber to achieve cost efficiencies in order to maintain margins and profitability.

The wild card in every industry disruption is regulation. Usually regulation comes into existence for understandable reasons, whether to reduce safety and other risks, assure customers of minimum service quality, and to provide the coffers of city and municipal governments with needed tax revenues in return for services and parking/other privileges granted to taxi owners. Passengers should be able to rely on taxi drivers being fully insured against all accident risks. As regards quality, London cabbies undergo rigorous training to learn practically every street and route in the city before they are allowed to carry paying passengers. In cities like London and New York less well regulated services already exist in the form of other car services, many of them without adequate insurance or service quality. And especially in some Latin American and (Eastern) European countries taxi services can be downright shady, or even dangerous, providing services such as Uber with considerable opportunities to operate as the (only) trusted taxi service. Virtually everywhere approved taxi services pay 10% or more in taxes, airport fees, and other charges, and drivers pay taxi firms for every ride as well as paying tips to hotel concierges in return for preferential treatment. However, over time regulations can become more rigid and bureaucratic than they are justified or productive. Alongside regulatory bodies, insurance companies are often among the most resistant to change although if they give it due thought they are usually able to identify new revenue opportunities by selling insurance to the new service providers.

At the end of the day, the best ally that disruptors have to help overcome the sway of regulators is the customer. If customers value the new service sufficiently, they will find a way to use it even if it’s not (yet) strictly legal, as is obviously happening with Uber and its unauthorized airport runs. Eventually, accidents happen that cause new regulations to come into effect.

As for the second objective of this post, how should each constituency play the hand that it has been dealt? Here are some thoughts:

Disruptees:

Licensed taxi and limo firms: Curb any tendency to deny or resist what’s happening, and stop over-reacting to the appearance of these new competitors. Apart from representing progress, even if you don’t like it, they are here. Embrace the new reality, look for the “bright side” of opportunity. Consider developing your own on-demand mobile app for hailing cabs or reserving rides, which should be much more cost-efficient than your existing control center apart from providing you with GPS data to help dynamically allocate your cabs to new rides. Alternative, find a way to co-exist with Uber, or even partner with it, possibly sharing drivers and commissions.

Employee cab and limo drivers: Try out the new service as a passenger to see what the secret is, and what you can emulate in your work. Consider moonlighting or switching to become a freelance driver. Sign up with two or three of the new services to find out which one best works for you, and vice-versa. Added income and flexibility are two of the advantages cited as pluses of working for Uber or other services. Over time, the gap may close, but for now Uber needs to grow and thus needs more drivers, which spells opportunity.

Public transit companies: On-demand car and ride-sharing services should generally supplement public transit by serving more flexible routes. However, where public transit companies fail to provide acceptable services they may lose passengers to these newer services. In which case, the lesson is to improve your services to passengers, whether it means ensuring cleaner buses, being more punctual, or even increasing service on under-served routes.

Auto makers and rental companies : Undoubtedly there exists a growing risk that efficient, economic, and responsive on-demand car services will cause some city dwellers to opt not to own cars or even rent them, thus reducing car sales and rentals. Whether or not this impact become significant is hard to call at this early stage. Auto makers should therefore monitor what’s motivating passengers to choose car services over car ownership, and review the value proposition for city dwellers to actually own a car. Secondly, they should identify how to substitute any lost direct-to-owner sales by selling or leasing vehicles to car service fleets. Newer companies such as Zipcar also need to think through the impact on their business as well as how to respond to this challenge. That said, as things stand, I perceive an inevitable erosion in the urban part of their business, as opposed to the value of renting a car to go out of town for the afternoon or evening.

Insurance companies: Uber is a reality; it’s important to adjust your underwriting algorithms, policy terms, and premium rates to incorporate sufficient insurance for all potential incidents and accidents, and sell policies to the new service providers. New types of risk need new types of coverage – opportunity!

Regulators: Get with the program; instead of fighting Uber or trying to cramp its growth, understand the force represented by customer preference, and find ways to enable Uber to become a legal participant in the industry, perhaps by revising some of the existing licensing and insurance terms and conditions if, as is quite likely, some of them are out of date or don’t apply to Uber’s service.

Disruptors:

Uber: Act like a market leader, bringing together the industry participants to agree on standards of professionalism for drivers, including training and certification. Avoid adversarial behavior toward disruptees while you are having fun disrupting an entire industry. You are the newcomers whereas these people and organizations have been making their living here for decades. Acknowledge the opportunity before you: Fragmented, inefficient industries depend on orchestrators, not dictators, to help them get through disruption. Dictating terms doesn’t work at this stage, though later on you might be permitted to operate as more of a concentrator for the revised industry. It’s crucial to find way to make a market for more than just drivers – how about taxi and limo firms, whether existing or new ones? Partner with regulators as far as is feasible. Educate drivers and companies in the benefits you bring to the industry. Keep building out your larger vision of the business, but also stick to your knitting, and keep refining your offer because barriers to entry are not so great that you will lack serious competitors. Above all, resist the nerd’s tendency to display scorn for the businesses on which you are wreaking havoc. Acts of strategic generosity will be rewarded with a more secure future for the company than if you make enemies left, right and center.

Uber’s competitors: Do as suggested above for Uber, but in addition, think carefully about which market segment you should target, to establish your own sweetspot. Instead of embarking on a race to the bottom by continuously discounting commissions, identify market segments where your offer is better suited than Uber’s. You won’t have a chance of establishing yourselves as a reference provider if you can’t establish your own identify in passengers’ minds. If Uber fails to make a market for drivers or even taxi/limo companies, take the initiative away from them.

Investors: You are part of the disruption process too. Advise your wards on how to maximize the opportunity without upsetting all their “victims” in the process. Pulling off industry transformations is hard work that requires empathy and thoughtfulness. For everyone’s long-term benefit, avoid further hyping the company’s valuation. Instead, try tempering expectations for the company’s continued growth and competitiveness. This will lift some pressure from your portfolio company and allow them the time and space in which to build a sustainable business.

And now for some of Anthony Weiner’s provocative ideas regarding how incumbent entities including city governments can best adjust to the new reality of mobile-app powered car and ride-sharing services, taking advantage to develop a local city-sponsored service. Uber and others like it may have the advantage of being able to operate on a national or global basis, but as Weiner argues there may be great benefits to having locally managed services too:

“Leave the ride-shares largely alone. Maybe insist on some insurance minimum and some baseline requirements of the drivers and cars, but let them be. Don’t treat them like full-fledged taxis like most medallion owners are clamoring for. If these startups want to continue to subsidize fares or experiment with pricing models, more power to them. … But here’s the Steve Jobs part. Cities should be the ones that create the taxi world’s version of iTunes. Municipal governments can create and require a single city branded medallion taxi e-hail app. Since the tracking technology is already a part of most big-city cab fleets, and most cities already require credit-card readers, the technological backbone is already in the cars for cities to get into the ride-share business. Taxis are essentially extensions of the mass transit in a city, so why shouldn’t they create easy ways to access, track, and pay for that infrastructure?”

“It also would be a boon to the city as it would let them collect travel data and help improve access to service in neighborhoods that have been under-served by encouraging drivers to make more far-flung trips. They could find return fares from places with less busy street traffic. Of course, an app could also be an excellent revenue source for a city that wants to sell advertising or use the tracking data and rider smartphone feedback to improve enforcement. The ride-share companies benefit here too. Not only do they get to keep their cars on the road but they could bid for the contracts to build and run the apps for the cities that have them. Of course, most important, consumers win because they get to hail the entire universe of cabs from both medallion and startup fleets right on their phones.”

So there you have it – there’s more life than death in this disruptive situation. The only participants who should be worried are those companies and drivers who really don’t want to better themselves or their services. As things stand today, Uber shows signs of becoming a gorilla, provided that Kalanick and his management team, supported by their board and investors, (a) show the smarts and patience required to stick to their strategy and not get ahead of themselves, and (b) remain cognizant of what’s required to establish a powerful marketplace platform for on-demand urban transportation (and possibly logistics management too). Who knows, the latest valuation ascribed to the company may in fact look like a bargain within a couple of years.

Read more of Anthony Weiner’s Business Insider article:

http://www.businessinsider.com/anthony-weiner-on-uber-and-the-taxi-industry-2014-4