What taxi industry outsiders don’t get about VC-funded taxi apps

By Krista Caldwell , written on November 14, 2012

From The News Desk

On Thursday, transportation regulators from across North America will meet in DC to decide how to adapt taxi regulations to new technology. This year they were thrown into the spotlight for their resistance to Uber, a San Francisco-based startup that operates a limo service without a license. Regulators’ efforts to shut down the "rogue app" attracted major media attention, most of which accused regulators of being against innovation and technology.

Despite multiple cease-and-desist orders and legal attacks -- just today San Francisco taxi drivers filed a class-action lawsuit against Uber -- closely scrutinized regulators have by and large bent the rules to keep Uber's limo service up and running. It still operates in all ten-plus cities where it launched. Surfing in on Uber’s wake, other VC funded tech companies are banking on more ‘pro-innovation’ allowances from taxi regulators.

The difference: these companies are messing with taxis, not limos…and they aren’t doing anything useful.

As someone who spends her time with both the taxi industry and the tech industry, it scares me that the companies plan to extract so much money when drivers are already marginalized.

Peer-to-peer taxi apps like Hailo, GetTaxi, MyTaxi, and Uber Taxi connect passengers directly to individual drivers using smartphone apps. I watched Hailo come to market in Toronto, so I’ll use it as an example. For the most part, Hailo looks like any other fleet. (It has a phone number, a downtown office, recruits on-site, and advertises locally.) But when you look at what Hailo does differently, it’s hard to find a single innovation that is good.

The biggest difference between Hailo and established fleets is that Hailo employs drivers who already drive for other dispatch companies, piggy-backing on their competitors’ infrastructure and confusing passengers.

In Toronto, when a passenger requests a Hailo ride, a driver from Beck Taxi or Co-op Taxi often services the trip. As a result, the public wrongly assumes that the dispatch companies have partnered with Hailo, not that Beck Taxi and Co-op Taxi drivers work for Hailo on the side. Passengers who don’t know who they’re doing business with don’t know who to call when there are problems with service.

Hailo’s mixed bag of drivers also confuses long-established brand loyalties. Taxi companies invest in driver screening, quality control, worker’s compensation programs, 24 hour customer service, and marketing. Hailo profits from its competitors’ infrastructure and brands for free by employing their drivers.

Also, Hailo’s per-ride dispatch fees are just another hand in drivers’ pockets. Most drivers are independent contractors who rent their cars (and/or medallions) from an owner (sometimes through an agent) who, in-turn, pays a dispatch company a fixed monthly fee for dispatch services.

Hailo’s 15 percent dispatch fee adds a new cost to drivers on top of what drivers already pay owners for use of the car (inclusive of dispatch services)…costs that will remain whether the driver is with Beck Taxi, Co-op Taxi, or no dispatch services at all.

Outsiders argue that Hailo can limit the number of drivers it brings on board. This would give its drivers enough fares to leave their dispatch company altogether, stop paying monthly dispatch fees (appx. $400/month +/- $250), and rely exclusively on Hailo fares. But their argument is flawed:

  • Even if drivers leave dispatch to use Hailo full time, they won’t save money. Drivers, owners, and dispatch operators agree that drivers could only expect to save a maximum of ~$200/month on their fees to owners if they left dispatch. The owners would keep the lion’s share of the surplus.
  • Hailo has no interest in changing its business model.
So why are drivers using these apps? Given that Hailo is competitive with drivers’ dispatch service and costs them extra money, why do they use it?

Is it about the passenger apps? Not really. Technology is already transforming the taxi industry from within. Toronto’s Beck Taxi launched its app nearly six months ago. Dozens of tech companies either promote taxi apps that operate alongside existing infrastructure (see TaxiMagic or Cabulous) or make it affordable for fleets to launch their own apps for passengers with all the features Hailo has (see Fleetbit, MTData, or GoFastCab).

Drivers use the apps because Hailo lets drivers jump the queue for rides and screen out the least profitable customers, increasing their share of profitable fares at the expense of other drivers.

Hailo rides would otherwise be requested or assigned through another company’s app or call center and dispatch system. So why would a driver at a company like Beck (which distributes more than half of the dispatched rides in Toronto) choose to take a ride through Hailo and give up an extra 15 percent?

Drivers are willing to give up 15 percent of their fare to jump the queue ahead of other drivers at their company. Since most Beck drivers don’t use Hailo, a driver may be one of 1,700 Beck drivers on the road, but also one of only 200 Hailo drivers, thus giving that driver a greater chance of receiving the ride if it goes through Hailo than if the same ride goes through Beck’s fair queue.

(No wonder Beck Taxi is upset that Hailo aggressively solicits its drivers.)

One of the reasons taxis are so tightly regulated is that they provide an essential public service; everyone deserves equal access. Hailo only serves customers with credit cards and a smartphones, who also happen to be the most profitable passengers (because they generally tip better, take longer trips, and travel in high-density areas).

If all dispatch companies screened their customers with the same criteria, they would definitely increase their profits— but at the expense of an accessible public transit system.

In short, Uber's limo’s network is innovative. Peer-to-peer taxi apps are not. There’s nothing necessarily wrong with using technology or a business model to change policy if it’s done in open consideration of all of the stakeholders. But tech companies should not be able to extract millions from an industry unless their technology creates value or eliminates waste.

For pre-scheduled limo service, Uber Limo creates value by aggregating supply and demand for limos, which are typically fragmented in networks of ~20 cars whereby rides are assigned by email or text message. Uber’s technology distributes rides more efficiently so that drivers spend less time waiting and travelling. But the taxi industry is different: It’s not fragmented, and automated GPS dispatch systems have started a revolution in the industry several years ago.

The peer-to-peer taxi apps offered by Hailo, GetTaxi, MyTaxi, and UberTaxi are all at the gate, armed with tens of millions, for a race to flip the North American taxi structure on its head, capitalizing on the new open taxi market they think is within reach. All they need is DC regulators’ seal of approval.

Here’s to hoping the regulators think twice before caving to PR that will frame this as a war between technology/innovation and corruption/red-tape. In reality, tech companies see that Uber created an opportunity to influence regulators, and plan to capitalize on massive regulation change that is pointless at its best, harmful at its worst.

[Image Credit: Al Fed on Flickr]