Uber innovation: say goodbye to bricks and mortar taxi service

My colleague Josh Gans recently turned me on to UBER, a smartphone-based taxi service. I used it for the first time yesterday to get to the Toronto Airport. I’ll be surprised if this technology doesn’t eventually kill the taxi business as we know it. 

From the user’s perspective, you simply download an app and sign up for the service online. When you want a cab, you open the app. It shows you all the Uber vehicles around you on a google map. It tells you how many minutes it will take for one to get to you (in my case 8). You hit a button and, if you are so inclined, you can watch your car approaching on the map. A few minutes later, viola!, you receive a message telling you your cab has arrived. Our car was a spotless black limo-style sedan. The transaction is handled through your account with them via your credit card. No money changes hands with the driver (tip is included) and a detailed receipt is immediately emailed to you (great for expense reports). The cost in our case was identical to the standard fare + tip.

As far as I’m concerned, the experience dominated that of the status quo by a significant margin. It got me to thinking about the business model. As an investor, I would always be wary of any business 3 computer science grads from MIT could replicate in a basement. I can’t imagine there is anything in the Uber technology that creates a meaningful entry barrier. Moreover, unlike a Facebook type business, there don’t seem to be any network externalities working to the advantage of the first-mover. 

On the other hand, there are non-technology features of the business that are central to its success and, perhaps, not so easy to replicate. The most obvious is setting up a base of independent drivers. I was chatting with our driver and learned that substantial resources are devoted to vetting drivers and, once they are on board, regularly checking up on them to make sure the standard of service (car cleanliness and so on) remain high. That requires some infrastructure and know-how. 

Then, there are the reputation effects. Strong reputation is going to be a substantial benefit on the supply side – i.e., recruiting and maintaining good drivers. Plus, for the first time, a supplier of taxi services can build up not just a national but international retail brand. That’s a big deal. Apparently, Uber does not have to contend with local medallion laws — the cars are not marked and cannot be hailed from the street. This will help them a lot in expanding their business.

Still, the service only works for people with smartphones — a big limit to growth, at least for now. Also, it is hard to imagine that one or two competitors won’t take a run at them, especially if (as I suspect) this business really takes off. When that happens, who is going to appropriate the value? What is scarce in this situation? There appears to be no shortage of taxi drivers, though being able to find and maintain top-quality ones should confer some advantage. Also, my intuition is that the market will support two or three such businesses, not tens or hundreds. So, oligopoly prices under constrained capacity, at least for the high-end, high-quality version of the service, are likely to obtain.

Yet, the arrival of competition will surely send some additional value the consumer’s way in the form of lower prices. And this is not exactly a high-margin business to begin with. Therefore, at some point in the future, expect to see an established Uber lobbying local governments to regulate its segment of the business — waxing poetic on why it is in the public’s interest for cities to issue them some form of competition-inhibiting, medallion-like licenses of their own.

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9 Comments on “Uber innovation: say goodbye to bricks and mortar taxi service”

  1. stevepostrel says:

    Another interesting question is whether the limos are required to be exclusive to Uber or will continue to be so in the future. If their utilization rate is low enough on a given service, they might want to belong to multiple networks, much like doctors who belong to multiple managed care networks. But here you also have some economies of density, where it’s more efficient for one firm to have all the clients in a given geographical zone (much like newspaper delivery or garbage pickup). My gut feeling is that we’re eventually looking at one to five players per metro area, but it would be interesting if that turned out to be way low.

  2. Ivan Z. says:

    Experience is better, but this is because it’s novel and geeky. After this wears out, I don’t see this technology changing much in taxi business and my bet is that one of the first competitor’s business model will be to sell this as a service to existing taxi companies.

  3. davidburkus says:

    There may be some higher barriers to entry though. While they typically don’t need a medallion because they aren’t hailed from the street, Uber has come under fire from established taxi and limo companies looking to change laws to block them out. While Uber appears ready and willing to fight these battles, it does make the opportunity less attractive for other potential competitors.

  4. YSK says:

    Absolutely standard stuff that ComfortDelgro has been providing in Singapore for many years. Can’t see small firms being able to compete against a large player who has scale benefits.

  5. Taxi to JFK says:

    Any Car rental service should be designed keeping the customer’s taste in mind where they get the best in Class standards of service and impeccable quality.As time and money are the two high factors for travelers, every car hire company should be concerned about this. The aim should always be making business travel simple, hassle free and cost effective. Today’s competitive business environment puts a premium on value and high quality service delivered at a reasonable price.

  6. Sheen S Levine says:

    In some circles, Uber has been hailed as the next big thing. But as Prof. Ryall rightly points out, the technology can’t set the company apart, because the technology can easily be replicated. Even more, as YSK noted, this technology has been standard in various locales outside North America. In Singapore, taxis can be summoned just with a text message. This feature expands the service to any mobile phone user, smart phone user or not. In strategy parlance, Uber may have created value, but it will not necessarily capture the value it created.

    A source of competitive advantage in this industry may come from new ways to analyze data. And there’s Big Data coming: New York Taxi and Limousine Commission has published detailed GPS data for the city taxi fleet. It led to a nifty app that predicts the likelihood you’ll successfully hail a taxi at a given moment in a given location. It also led to an empirical confirmation of what every New Yorker knows: there’re no taxis at 5:00 PM.

    CabSense

    https://www.sensenetworks.com/products/macrosense-technology-platform/cabsense/

    Where Do All the Cabs Go in the Late Afternoon?

    http://www.nytimes.com/2011/01/12/nyregion/12taxi.html?_r=1

  7. David Furubotten says:

    i always do some business travel at least once a week from time to time. i always do some air travel.-

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