Saturday, November 2, 2013

Uber vs. the cab industry

I'm writing during the lunch break at the annual Tech conference held at the Harvard Business School. (with the the oddly 90s relic name Cyberposium...note to conference may be time to tweak the name?) and just attended the mid-day keynote given by Travis Kalanick, CEO of Uber, the on-demand car service that started in San Francisco a few years ago. It's now in 53 cities in 21 countries and has a valuation over $3 billion. I'm less interested in the story of how this is a crazily successful startup making a bunch of people wealthy beyond beyond belief, and possibly reason, and more interested in how the company has worked around the embedded industry structures of transportation systems, and has done so with great agility, despite myriad legal and regulatory challenges. By offering an improved experience for riders, even though it was at a higher cost, Uber was able to demonstrate, and to do so unbelievably quickly, that the market was hungry for the solution. They had to circumvent the established system, and the challenges aren't over yet, but they have not just hockey stick growth but more like vertical skyscraper growth (okay maybe more like Leaning Tower of Pisa growth) to support their case. Riders are happy, drivers are happy, there's nothing being given away for free, and the monopoly that is the cab industry in many cities is shaking in its boots. Interesting to look at this in the context of how differently it is playing out from, e.g, technology innovation in the entertainment industry, and in particular in the music industry, where the upheavals started with the introduction of peer-to-peer technologies in 1999 and continue today, with many unhappy interested parties.

The idea for Uber came when a couple of guys got frustrated trying to get a cab in Paris, which was a frustration they knew well from trying to get a cab in San Francisco, trying to get a cab in New York, and by the way have you tried to get a cab in Boston? Don't get me started. Anyway, we all pretty much know the drill. You have somewhere to go, you don't have a whole bunch of time, and a projectile arm extension in the middle of a big city is your ammo. You will be passed by several times, you may get rained on in the process, but usually you eventually get picked up. The car probably smells a bit off and the driver is probably listening to a radio station you're not interested in while talking on his headset phone to a buddy from Chechnya. 20 minutes later you're fumbling for cash, trying to figure out the tip, and the stranger that picked you up wants to wrap up the transaction asap and get going with the next fare. There's very little about the experience that does not suck.

Travis Kalanick wanted to come up with something that created simplicity around getting from Point A to Point B, and to make it an elegant solution. He came up with Uber, the company that would become "everyone's private driver", on demand. And you wouldn't get that cab described above. You'd get things like a town car, a late model sedan, a Mercedes SUV.

Here, in point form (for the purposes of brevity & speed) is the story of Uber:

- Uber has been designed to  'feel like magic': you see the car on the map in the app, your credit card is on file,you make no payment in the car, you review the driver, the driver reviews you

- The plan was not to take over the world; it was to solve a problem for Travis and 100 of his friends

- What ended up happening: those 100 friends told their friends, who told their friends, and within months the company was growing at a rate of 16% per month

- Early on people said to Travis: "You're nuts"; "This will only work in San Francisco"

- What ended up happening: every market that Uber entered after San Francisco had an even steeper growth curve

Data from Uber showing traffic patterns in San Francisco
- Uber's maps know roads that Google Maps don't

- Heat maps show where demand is going to be in 20 minutes, Uber can adjust the supply of cars accordingly. Drivers are independent businesspeople, with single cars or fleets of cars.

- "Surge pricing" - when demand outstrips supply, prices go up; Uber's system then puts more cars on the road. Hotels can't do this....they can't just add more rooms.

- Uber drivers have been able to build out million dollar businesses. If a driver has 6 cars they're generally grossing over $1 million annually.

- In NYC there were 13,250 taxis in 1949. There are 13,250 taxis in NYC today.  The taxi medallion/license costs $1.1 million.

- Cab drivers pay $125 to essentially 'rent' the car for a 12 hour shift. That's $90k/year of revenue from one car for the cab company, a $45k out of pocket expenditure for the driver.

- Washington DC: Charged Uber with improper fare violation for charging for time & distance and not being a cab. DC created the "Uber Amendment" which stated that Uber would have to charge 5x as much as a cab. Uber emailed its user base in DC and 18 hours later: 104 million social media impressions, and the amendment was rescinded.

- Uber has introduced a lower-priced ride-sharing service, Uber X, with prices that are approximately 1/3 lower than regular Uber cars, to compete with ride-sharing and car-sharing startups.

- In San Francisco: Average Uber driver grosses $117K/year and nets $71k, Average Uber X driver: grosses $111k/year, nets $77k/year.

What does the future hold for rebel CEO Travis Kalanick? Sure, there will be more lawsuits, the wrath of the cab and limo industries, copycat companies looking to steal bits of the business, but as he said in his keynote today it's all about outcompeting with focus, operational efficiency, and speed. He just needs to watch out for another guy named Travis.


Holiday season 2013 updates: Uber proves it's more than just a better cab company by teaming up with Home Depot for home delivery of Christmas trees, and does so with Uber's trademark flair.

And you may also want to look at this article from the Daily Beast defending Uber's practice of 'surge pricing' during bad weather.