Disruption – Part One – the Taxicab Industry

The term “disruption” is everywhere in the popular press. You should “disrupt yourself” and new internet unicorns are going to “disrupt” all kinds of industries. Let’s think a bit about what really is disruptive and what isn’t. This post is going to start with the taxi industry. Later I will turn to other industries, where disruption was predicted but didn’t occur, and we can try to determine why.

I am very familiar with taxis, having traveled all around the country for business over decades and using taxis all the time in Chicago. Downtown Chicago is one of the few places where you could hail a street taxi at almost any hour of the day or night and assume that one could be found in a relatively short period of time (within 10-15 minutes at worst).

What were the elements of the traditional taxicab industry? They were as follows:
– Limited numbers of licenses were offered, and they were generally bought up and consolidated into a few taxicab companies
– The taxis operated mostly where they offered the highest returns; downtown, in wealthy areas, or near clubs and nightlife. While they theoretically served the entire city, in practical terms they ignored the poorer areas not only for the inherent danger but also due to the fact that it was hard to get a “return” trip once you dropped someone off, necessitating a drive back to a wealthier area and lost time with no earnings
– If you talked with a taxi driver, they typically worked very long hours and did not earn much money. Since driving a car an “entry level” skill, there were in practical terms an infinite number of possible drivers (a large supply) so the earnings of the drivers were as low as the market would bear (very low). The medallion owner then kept all the remaining profits
– The taxicab experience as a rider generally was lousy and perceived to be unsafe to single women. You didn’t have any information about the driver and they could be anyone; the low wages of being a taxicab driver also tended to attract drivers on the margins economically
– The taxicab used a consistent rate based on time or mileage plus a charge to start the meter and often specific additional charges such as tolls or airport fees. The costs could be high; for instance in Chicago if you left the city limits after the first city you were charged “meter and a half” – thus to travel out to a far suburb the fare could easily exceed $100. This was explained as the fact that the cab can’t get a local fare (they are licensed to pick up in Chicago, not the remote city such as Naperville) so they had to drive all the way back to the city to start working again. And on a big night like New Years’ Eve, it was a crapshoot to find a taxi since supplies were limited and not everyone was out driving
– The main role of the taxi associations was to limit new medallions (which increased competition) and manage the local regulators, who generally defined rates and other business conditions. After a while most cities had “regulatory capture” and didn’t issue new medallions and mainly kept the status quo
– If you were out of a major city, generally no one used cabs except maybe to go or be picked up at the airport. When I lived in Texas in the late 90’s I tried to get a cab and I was laughed at; cabs were terrible and no one took them. The alternative was drinking and driving or finding a designated driver

By now everyone knows what has happened to the taxicab industry. They have been disrupted practically out of existence by Uber (and to a lesser extent ride sharing apps like Lyft).

The primary reason that the taxicab industry was disrupted was due to an increase in supply. According to this article, there are 6995 medallions in Chicago. As a side note, these medallions used to trade for over $300,000 each, for a total market value of over $2 billion, most of which was financed through local banks. Ultimately, those banks will eat the costs of these loans as taxi medallions move to near worthlessness due to the rise of Uber. Per this article from early 2015, there were about 12,500 Uber drivers in Chicago, and they were doubling every 6 months. While imperfect, this would imply that drivers have doubled two more times in the last year or so which would put them at between 30,000 – 50,000. In any case, they dwarf the number of taxicab medallions in service, although many of the Uber drivers are part time while taxis are often driven around the clock. As an anecdotal measure, I see Uber cars everywhere I look in Chicago – often it seems like there are only cabs and Uber drivers on the road in the nightclub areas of River North where I live.

Besides the massive increase in supply, the cost of an Uber ride is very favorable to a taxi in Chicago. If I go to the airport, it is about $45 plus tip so let’s say $50 and I can get there in an Uber for $30 or less (no tips). Thus Uber is about 40% cheaper in this case. The savings are even bigger if you are leaving the city, since Uber does not charge meter and a half beyond the cities adjacent to Chicago. When I was in Houston it cost $75 to go from the airport to downtown; the return fare in an Uber was less than $40. While Uber is subject to “surge” charges, recently I have not had to pay a surge at all. I talk to the Uber drivers and they say that surges are far less common because of the number of drivers that have joined the system; and when surges do occur, they tend to get eliminated quickly as drivers move to the areas of higher rates.

Another huge advantage is the fact that Uber drivers are effectively tracked via GPS – while you probably won’t get the same driver twice, if something goes wrong you can escalate and Uber can figure out what happened. For single women – you likely are much better off being in an Uber than being in a random cab where anything can happen. I’ve had a couple of instances to need to complain / change something from Uber and both times they rapidly resolved the issue in my favor. It is also much easier to pay by Uber – in fact it happens automatically – so women don’t have to get their purses and money out, pay and then quickly rush out of the cab (which usually stops in the middle of traffic) and then try to hide their valuables back right away immediately afterwards.

Uber also eliminates the self-imposed demographic borders that the cab industry has imposed upon itself. It was theoretically possible that cab companies and municipalities could have worked together to provide a seamless, country or region wide service such as Uber, but in reality they had their little, protected fiefdoms and never would have collaborated on any sort of scale. You could get a cab in nice parts of the city or to and from the airport, but pretty much everything else was a crapshoot, and taking cabs outside the city limits (unless the company was paying for it) was prohibitively expensive. Now Uber provides a consistent, regional experience that uses “surge” pricing to bring drivers to wherever the demand lies, so that over some period of time areas of high demand will even out as drivers will come to where they can earn more money. When I went to a new city, such as my trips in California or Texas, I understood the Uber experience and trusted it rather than dealing with a new cab company that was completely unknown to me.

The cab companies frequently cite the fact that they are “licensed” and “comply with regulations” and while that is fine in theory no one I know who has taken a lot of cabs would attest that the typical cab experience felt particularly good or professional, given that cabs are often dingy with blaring advertisements you struggle to shut off and drivers who will start to tell you within 5 seconds of getting in the cab that they can’t make a living and often don’t know the basics of how to drive in the city. The Uber experience is usually far better and the private cars I ride in for UberX are usually far better than being jammed in the back of a cab with a big plexiglas wall in my face.

Uber realized that driving is just that – driving – and not that complicated. Leveraging existing cars on the road and making a seamless, GPS experience including dispatch and payment, and making it (mostly) consistent across geographic areas and the country at large, created a radically better customer experience than what the cab companies offered. By opening up supply in a limitless manner and using “surge” pricing to bring drivers to where the demand is, created an open economy that responds effectively without central intervention or planning. It is the “revolution in supply” that resolved this issue and utterly destroyed and decimated the taxi industry, which had effectively “captured” the regulators to limit the growth in medallions and then hid behind regulations while they delivered inconsistent and expensive services.

Cross posted at LITGM