Jul 06 2017

The Taxi Trap

Why taxis should have won, but only ended up speeding toward their demise.

The founding of Uber 8 years ago holds the essential key to understanding why taxi companies should have not only survived the 'sharing economy' but been at the front and center of capitalizing on it. After all, taxis are one of the original on-demand, shared services. In hindsight, when Travis Kalanick and Garrett Camp couldn't find a taxi on a cold Paris evening, the screaming need wasn't for inventing a new kind of taxi system: rather, it was for a better way of getting one than standing in the street waving their arms.

Let's consider two scenarios:

First, let's consider building an entirely new transportation network from scratch. We'll seek billions of dollars of investment for business assets, plus billions more from our "employees" in personal assets like cars. We'll need to build an entire logistical and technology infrastructure — oh, and don't forget the app! — and after all that we'll still need to get licenses and overcome unknown existing barriers across hundreds of regions to operating a successful ride sharing company. That's a lot of work and resources, so the company won't make any (and will lose virtually all) money for at least a decade. Phew.

Then let's consider building a full-feature, universal ride-hailing app that directly taps into a huge network of existing business assets that serve this precise purpose, already is fully licensed and has rights everywhere, and has none of the local political barriers to entry.

Which scenario quickly and sustainably fills the market's need? Billions to start from scratch? Or listen and adapt?

It's the app dummy!

In the rear-view mirror, one of those solutions seems not just reasonable, but obvious. But as a look around today proves, no one saw it as the way to go. Because they didn't want to.

Why? Well, for one thing, cab companies preferred no change and hoped to continue using their traditional local monopoly to keep consumers away from transportation alternatives. On the other hand, the money (investors) love to chase disruption — and they were heading the other way. Uh-oh.

The riders / shoppers / app-using consumers didn't really care. Hailing taxis from an iPhone and getting real-time updates, reviews, and especially clean vehicles on-demand was the promise of the future, which was suddenly available now. Didn't taxi companies understand this?

Nope. Taxi companies were super-slow to respond. Rather than taking an honest accounting of their customers' changing preferences, they stuck with a business-as-usual model, preferring to continue quibbling with other local cabbies and leaning on their political buddies instead of banding together (adapting) to fight what would soon be an existential threat.

A huge miscalculation

Obviously, the entire cab industry wasn't blind to the evolution of consumer behavior. They saw the apps and surely noticed that their riders were using phones. They simply miscalculated. They assumed that barriers to entry — like city franchises or their taxi medallions or state laws — would ultimately protect them from competition as it always had. And they assumed that the taxi-riding consumer couldn't possibly want to topple the decades of exclusivity that they had built.

They were entirely wrong, but that's not remotely why they were being beaten.

Let's go back to investors loving disruption and stories of creative destruction. While occasionally a Ford Motor Company replaces the horse drawn buggy business, in reality most change occurs far more incrementally. But most speculative investors aren't investing in a strategy that will yield substantial gains 20 years from now. They're betting on stocks that they suspect other investors will be interested in buying from them at a substantial premium in a matter of months.

And this can be somewhat self-fulfilling. As money chased Uber and Uber's bank accounts swelled, overcoming all of those local problems seemed to be the least of their worries. After all, now a small ride-sharing app developer with relatively few assets — given its market capitalization — had billions of dollars to find workarounds to any problem it was presented. Its only worry was sustaining the hype needed to keep the funds flowing in.

Disrupt the disrupter

It's not that those cabbies would have been guaranteed to win if they'd been willing to band together and collaborate on a taxi-hailing / driver review platform. But it would have been far less likely that investors would have been so enthusiastic about pumping billions into a less-likely-to-disrupt-anyone carpool company and tolerate a decade of losses. And if investors weren't as enthusiastic, the carpool company wouldn't have had billions of the dollars they needed to overcome an increasingly stronger, collaborating opponent. The house of cards collapses.

So, while the old adage still holds true and it's important to listen to your customers, it's much more important to not allow your competitor to be better at serving your customers — while serving your head up on a platter to investors. In other words, the best way to not be disrupted is to be the best disrupter.

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