It’s not that *SOFTWARE* suddenly let Uber and Lyft do things previously undreamt of so they took over the old fuddy-duddy cab business. It was a power play.
If one of the standard cab companies had wanted to operate like Uber, the city administration which licenses cabs would have shut them down immediately. Because “That isn’t how cab companies operate” and to hell with your fancy software and lineup of venture capitalists. But Uber never tried to operate as a cab company. It just merrily put up ads and flyers and signed up drivers and was happily ferrying passengers hither and yon while the established cab companies were trying to get somebody in city government to answer the damned phone and listen to a complaint. By the time the typical city bureaucracy reacts to the existence of Uber, it’s generally gotten itself established in most users’ minds as old and legitimate, and very few cities have the … anatomical features …. needed to clamp down. So Uber prevails.
We had a useful discussion of this in my high school econ class the other day. I made a point similar to the commenter’s, that Uber’s success consisted of changing taxi regulations to allow unlicensed cars and drivers to operate.
There are many other areas where one can imagine a profitable business model could be generated by getting rid of regulations that restrict would-be suppliers from entering the market. For example, suppose that you set up an Uber that connected prostitutes with customers, and it became accepted and popular, so that the authorities decided against shutting it down. Or an Uber for capable but unlicensed health care providers. Or an Uber for liquor. Or an Uber for medications, including medications not approved by the FDA.
One student looked up the market valuation of Uber and found it to be somewhere north of $50 billion. Where does that value come from? (My first thought, by the way, is investor irrationality.)
If what Uber has is a superior algorithm for dispatching cars, then taxi companies could simply hire software developers to build such an algorithm. I don’t think that is the answer. Of course, I remember that when Amazon said that it was going to branch out from books to selling everything, somebody remarked that it would have difficulty competing with Wal-mart, because it is cheaper to start with Wal-mart’s logistics system and build a web site than it is to start with Amazon’s web site and build a logistics system. It is worth thinking about how Amazon managed to overcome that apparent disadvantage, but that is a separate post.
A student pointed out that the remarkable accomplishment of Uber was convincing riders that it is safe to use. “Can you imagine what my mom would have said a few years ago if I told her that I was using my phone to find a stranger to pick me up in a car? And yet people are ok with that now.”
I think that is the real key to Uberizing an industry. Take a business where the public has come to fear unregulated service providers, and find a way to overcome that fear before the incumbents find a way to use the political system to stifle the business.
Why don’t competitors come in until Uber’s profit margin shrinks? The students think that Uber has powerful brand recognition. One way to think about this is to ask why competitors do not come in to challenge Google.
I think that the analogy between Google and Uber breaks down because consumers do not pay to use Google. To take customers from Google, you have to offer consumers something at the same price (free) that provides a better user experience. That’s tough.
To compete with Uber, what you have to offer consumers a similar user experience at a lower price. That strikes me as not so hard to do.
“Amazon said that it was going to branch out from books to selling everything, somebody remarked that it would have difficulty competing with Wal-mart, because it is cheaper to start with Wal-mart’s logistics system and build a web site than it is to start with Amazon’s web site and build a logistics system.”
With respect to e-commerce, all the expensive bricks-and-mortar locations were (and are) a millstone around Walmart’s neck. AND, probably more importantly, Amazon was building out a new business paradigm while, to succeed in e-commerce, Walmart had to make a paradigm shift, which most large organizations find next to impossible. I’ve ordered a few times with Walmart’s ‘order and pickup at the store’ service. The best I can say is that it’s not quite bad enough to be unusable. In each store, the pickup is tucked way in the back of the store nearest the loading docks, and it’s unstaffed. You hit the bell, and wait. And wait. That’s bad enough, but once we had to return something we’d ordered online. They literally had no idea how to do it — it took more than an hour and visiting two different Walmart stores to get it done.
“To compete with Uber, what you have to offer consumers a similar user experience at a lower price. That strikes me as not so hard to do.”
Isn’t Uber’s overhead fairly low and most of the cost of the ride paid to the driver? If so, that really doesn’t leave much room for a competitor to compete on price.
“One student looked up the market valuation of Uber and found it to be somewhere north of $50 billion. Where does that value come from? (My first thought, by the way, is investor irrationality.)”
I think a substantial portion of that value is contained in the small, but not miniscule chance that Uber will be worth $500+ billion in 10 or 15 years, because it has taken over a substantial share of the transportation market.
Most likely that won’t happen, but how high do you value a 10% chance to achieve that? I wouldn’t say it’s obviously irrational.
I think your student is right. Consider, Lyft, just slightly late to the party, and with big backers like GM, competes directly with Uber and offers what is, in my assessment, an indistinguishable product at competitive prices. Many Uber drivers are also Lyft contractors – one often sees both logos and both apps running on the dash when you get a ride from either service. Neither company has any kind of ‘exclusivity’ agreement.
And yet, for whatever these estimates are worth, Uber is reported to be worth about 20-30 times more than Lyft. And while the whole concept seems pretty easy and cheap to copy and one could expect lots of competitors, that’s not what we see. Uber really does have an order of magnitude more goodwill and instant-association power, to the point where it is practically a verb in most urban areas. Lyft doesn’t have that cachet. The analogy to search engines is apt. Google is also a verb, but no one ever says they are going to Bing anything. I don’t think that google is as superior of a service to Bing in a way that justifies the disparity in market share either, but that’s how it seems to work; being #1 is self-reinforcing with some brands.
As for why cities don’t really go after Uber, I think people seem to forget that American-style government (at all hierarchical levels) is often too decentralized and compartmentalized into jurisdictional turf and functional lanes to really produce internally aligned interests among various agents who must cooperate to enforce the law.
Remember, government employees are transportation consumers too, and they hated the cab monopoly regime too. They don’t have the authority to do anything to change the law or the system, but they have the ‘Sir Humphrey Appleby’ authority that all bureaucrats have always shared, which is the death by a thousand cuts of passive resistance.
I happen to be friends with someone with some intimate insight into the matter – a lawyer for the District who has some knowledge of anti-Uber actions and who also happily Ubers all the time. When the Taxicab Commission wants some action against Uber pursued vigorously and needs to request assistance since it lacks fully-autonomous authorities, practically no one has any motivation to put their hearts into it. Quite the contrary. The same goes for a lot of places.
Notice the situation is different in some European countries fighting harder against Uber, which have a much more centralized approach and where tight control of all kinds of labor-intensive sectors and deference to trade unions is a core feature of their economic systems.
Formal law often gives authorities powers that they cannot, as a practical matter of social reality, actually exercise. It just so happened in the case of Uber that there was a thing in every major city like the taxi commission regime that was almost universally disliked by the very bureaucrats who would be called upon to punish emerging and clearly superior alternatives. It’s a kind of “shadow taxicab commission repeal caucus”.
That’s probably the trick for future enterprises like Uber which are trying to arbitrage the rents created by some legal licensing regime. Find things to do that the prosecutors won’t prosecute, because they really dislike the status quo and really need and love your service.
Indeed, if there is any hope long-term for our system of government not going completely off the rails with accelerating ideological insanity, it is the fact that bureaucrats will tend to naturally – and even in the absence of any communication and coordination – do their part to resist reforms that will harm their own welfare, by making them too costly and time-consuming to enforce, whatever the black letter law may say about it.
“As for why cities don’t really go after Uber,..”
Here in my leftish city of Ann Arbor, the local government really did want to protect their taxi-cartel buddies and shut down ride-sharing services. They sent a cease and desist order to Uber and Lyft. Which both ignored for long enough (it didn’t take long) to become so popular with citizens that city-council but didn’t dare to persist, and they quietly folded their tents and gave up.
Ann Arbor is no DC / NYC / SF / Chicago.
I’ve been to UMich (well, the law school). My impression is that Ann Arbor is a fairly typical low-density medium-sized midwest college town where 99% of work commuting (i.e. by government employees) is done via personally owned vehicles and there are plenty of parking structures, lots, and spaces. The major airport is far away, and people mostly rent cars or take shuttles, not taxis. Public transit is there, but pales in comparison to automobile utilization. From what I observed, taxi service is mostly something young people use on weekend evenings to get to and from the bars.
This is like a perfect storm for enforcement against Uber. (1) Lefter than average bureaucrats, (2) That barely use local taxi services and so have little personal stake in the matter, (3) Taxi operators that absolutely depend on peak demand times to make their money for the week, and (4) Peak times being a perfect opportunity for some part-time, cash-strapped college student to use his free time and otherwise idle vehicle and pick up some extra bucks over the weekend if he’s not going out that night, because his opportunity cost is so low.
That’s a life-or-death kind of fight for a taxi-cab company. Indeed, I suspect that part of what happened is that at least some of the marginally-competitive traditional licensed operators simply went out of business as a result of the disruption.
It is interesting that this disruption, the public outcry, and the costs and delays in prosecution, was sufficient to encourage Ann Arbor to drop the whole effort. But I think that wouldn’t be enough in the big cities without the additional contributing factor of unmotivated prosecutors with personal interests that would be adversely affected by a successful trial outcome.
It’s an industry with a big network effect. If you are a new driver, you want to go with the currently big network. If you are a new rider, you want to go with the currently big network.
A new entrant will need to make a really big improvement before they can really penetrate. Once it happens, though, it will tend to snowball, and happen in a hurry.
“could simply hire software developers to build such an algorithm”
Surely it’s not this simple. If you just try to hire some developers, you get mediocre software. The world is full of mediocre software. To get really good software you have to hire the best programmers, give them an equity stake, and make them think they are changing the world.
Why wouldn’t the taxi drivers form their own company/cartel? Just put a sign on the taxi that says “Download our app” and then pay a fee to a software firm, like any normal business. Giving 25% of revenues to a software firm is not sustainable when the employees can very easily organize and cut Uber out of the equation.
This is an important question for understanding the situation.
I believe it’s just too big a change to the corporate DNA of the taxi industry. They have reached a local maximum doing things they way they do, and such a change would be massive for them.
I suspect they’ll do it in the long run, but they are behind the curve. Moreover, anyone using the Taxi App (TM) is going to insist on competitive rates with Uber, which will be much lower than the rents taxi drivers are used to receiving.
What if somebody offered a free taxi app supported by advertizing. I mean the app itself is nothing special, when Lyft goes bankrupt somebody can buy the software for pennie. I don’t see how Uber competes with free. Uber is doomed because it’s too profitable, it’s too easy to offer something cheaper. The real difficulty in any two sided market is aggregating both sides, but in taxis it’s just not that hard to aggregate the taxi drivers, as Uber itself has demonstrated. And once the taxi drivers have moved to a new platform, the customers will quickly follow.
There is a sizable difference between the power of a minor industry such as cab driving and that of those with real clout such as medicine or law. While there may be some innovations in the latter, they won’t be allowed to disturb the power structure.
TL;DR – Uber is about network effects of cell phones, not about a radical software stack. Amazon is a logistics and delivery play, not a retail play. Vast numbers of people don’t understand computers or networks at all, and thus cannot conceive of what to do with them.
First, people who say “Uber’s not about software” are failing to grok the nature of the distributed information transmission ecosystem. Uber is mostly about distributed high function personal computers customers carry on their persons. That is, smartphones. And literal network effects, as in wireless networks that offer blanket coverage to the relevent markets. The actual software isn’t THAT hard. The wirelessly geographically distributed telematic infrastructure is hard. Now that’s here, lots of interesting things will easily be built on top of it.
Second, a pretty clear side-story to PSST can be summed up as “people are not all the same”. Truth be known most any taxi driver and most any taxi operator doesn’t have the first clue about how software, smartphones, startup-funding, or any market other than the one they live in, works. At all. Hence they can no more conceive a step past Uber than I can conceive some radical new surgical instrument.
Third, if I were in charge of a huge investment pool tasked with competing with amazon, I wouldn’t buy walmart or target, I’d buy UPS or Fedex. Order on-line and pick up will-call is ONLY useful for “pick it up in 60 minutes before the same-day-delivery truck can possibly get here.” Amazon is about lower-total-hassle – time, leaving home/work environment, reliability, timeliness, etc.. And again, the software isn’t *that* hard (though issues of scale matter) – amazon is a logistics company, not a software company per say. (AWS – and Azure and rackspace etc. – are all mostly about scale and logistics, not radical new software.)
Disclosure – I was/am a software person, so what I think of as “not THAT hard” might seem utterly impossible to others. Just like most surgery seems impossible to me but is clearly “routinely done” to surgeons…
I think it is interesting that Uber’s drivers have a lot more college degrees than traditional taxi drivers. There’s something about an educated workforce that gets technology. It’s also going to provide the customer with a somewhat different experience than a taxi.
In all the comments no one seems to notice that “Uber” (as a business) is about providing facilities for individual relationships. Amazon is similar (some distinctions).
The underlying relationship is between the driver and the rider. The Uber system provides the facility for establishing the relationship (a service to both parties), in a format satisfactory to each.
In Taxi service, Administrators (usually politically directed) determine the relationships of one the parties (drivers & owners) with any other parties. That is intrusive intermediation, a major stagnating force exercised by an entity NOT a party to the relationship. The same can be applied to bakeries, bars, hair-braiding, amusement venues, clubs, restaurants AND elementary & secondary school facilities.
Consider how much politically determined required intermediation there is in daily life, and you won’t wonder at its effects in the economy.
In connection with my prior post consider how Charter Schools dilute (but not quite remove) the required politically directed intermediation between learning seekers (parents for children) and providers.
Just stop and think (after some research or reading) what has been inserted into the courses of individual human relationships since my birth in 1924.
“Uber’s success consisted of changing taxi regulations to allow unlicensed cars and drivers to operate.”
Yes, I think of Uber as a private sector solution to the public sector problem of concentrated benefits and dispersed costs. These public choice factors gave rise to and made difficult to eliminate the taxi medallion cartels through political processes (electing political leaders to change the regulations). Uber solved that problem by introducing a service that looked just enough different from a taxi service to provide a plausible justification for saying that the taxi regulations should not apply to them.
Megan McArdle wrote a column about new “Uber for X” ventures [http://www.bloombergview.com/articles/2016-03-29/even-uber-can-t-live-up-to-the-expectations-it-set]. When one chooses X thinking that Uber is about technology, those ventures don’t seem to be working out. The right X’s are, as Arnold says, areas where regulation has created rents.