Taxiforsure – Pertinent Observations

Waiting for Kumaraswamy’s Tiger

Finally, last week Softbank announced that it has closed its $9.3 Billion investment in Uber. Since the deal was in the making for a long time, the deal itself is not news. What is news is what Softbank’s Rajeev Misra told Uber – to “focus on its core markets in US, Europe and Latin America”.

One way of reading this message is to see it as “keep off from competing with our other investments in Didi, Grab and Ola“. If Uber takes Misra’s words seriously (they better do, since Softbank is now probably Uber’s second biggest shareholder, after Travis Kalanick), it is likely that they’ll go less aggressive in Asian markets, including India. This is not going to be good for customers (both drivers and passengers) of taxi marketplaces in India.

Until 2014, the Indian market had three vibrant cab marketplaces – Uber, Ola and TaxiForSure. Then in early 2015, TaxiForSure was unable to raise further funding and sold itself to Ola, turning the market into a duopoly. Back then I’d written about why it was a bad deal for Indian customers, and hoped that another company would take TaxiForSure’s place.

Three years later, that has not come to be and the Indian market continues to be a duopoly. When I visited Bangalore in December, I noticed service levels in both Uber and Ola being significantly inferior to what I’d seen a year earlier when I was living there. Now, if Uber were to cede ground to Ola in India (as Softbank implicitly wishes), things will get further worse.

Back in 2015, when TaxiForSure was shutting down, I had assumed that another corporate entity, perhaps Meru (which runs call taxis) would take its place. And for a really long time now there have been rumours of Reliance entering into the cab marketplace business. Neither has come to be.

So this time my hopes have moved from corporates to politicians. The word on the street in Bangalore when I visited in December was that former Karnataka Chief Minister HD Kumaraswamy had partnered with cab driver associations to start a new cab marketplace, supposedly called “Tygr” (sic). The point of this marketplace, I was informed during my book launch event in Bangalore in December, was that it was going to be a “driver oriented app”.

This marketplace, too, has been coming for a long time now, but with the Softbank deal, it can’t come sooner. Yes, it is likely that it will not be a great app (if it is “too driver oriented”, it won’t get passengers and the drivers will also subsequently disappear), but at least it will bring in a sense of competition into the market and keep Ola honest. And hopefully there will also similar competition in other cities in India, though it is unlikely that it will be Kumaraswamy who will disrupt those markets.

A lot is made of the fact that investors like Warren Buffett own stocks in all major airlines in the US. Now, Softbank seems to be occupying that space in the cab marketplace market. It can’t be good either for drivers or passengers.

Why the proposed Ola-TaxiForSure merger is bad news

While a merger intuitively makes economic sense, it’s not good for the customers. The industry is consolidating way too fast, and hopefully new challengers will arise soon

Today’s Economic Times reports that Ola Cabs is in the process of buying out competitor TaxiForSure. As a regular user of such services, I’m not happy, and I think this is a bad move. I must mention upfront, though, that I don’t use either of these two services much. I’ve never used TaxiForSure (mostly because I never find a cab using its service), and have used Ola sparingly (it’s my second choice after Uber, so use it only when Uber is not available).

Now, intuitively, consolidation in a platform industry is a good thing. This means that more customers and more drivers are on the same platform, and that implies that the possibility of finding a real-time match between a customer who wants a ride and a driver who wants to offer one is enhanced. The two-sided network effects that are inherent in markets like this imply super-linear returns to scale, and so such models work only at scale. This is perhaps the reason as to why this sector has drawn such massive investments.

While it is true that consolidation will mean lower matching cost for both customers and drivers, my view on this is that it’s happening too soon. The on-demand taxi market in India is still very young (it effectively took off less than a year back when Uber made its entry here. Prior to that, TaxiForSure was not “on demand” and Ola was too niche), and is still going through the process of experimentation that a young industry should.

For starters, the licensing norms for this industry are not clear (and it is unlikely they will be for a long time, considering how disruptive this industry is). Secondly, pricing models are still fluid and firms are experimenting significantly with them. As a corollary to that, driver incentive schemes (especially to prevent them from “multihoming”) are also rather fluid. The process of finding a match (the process a customer and a driver have to go through in order to “match” with each other), is also being experimented with, though the deal indicates that the verdict on this is clear. Essentially there are too many things in the industry that are still fluid.

The problem with consolidation at a time when paradigms and procedures are still fluid is that current paradigms (which may not be optimal) will get “frozen”, and customers (and drivers) will have to live with the inefficiencies and suboptimalities that are part of the current paradigms. It looks as if after this consolidation the industry will settle into a comfortable duopoly, and comfortable duopolies are never great for innovation and for finding more optimal solutions.

Apart from the network effects, the reasons for the merger are clear, though – in the mad funding cycle unleashed by investors into this industry, TaxiForSure was a clear loser and was finding itself unable to compete against the larger better-funded rivals. Thus, it was a rational decision for the company to get acquired at this point in time. From Ola’s point of view, too, it is rational to do the deal, for it would give them substantial inorganic growth and undisputed number one position in the industry. For customers and drivers, though, now faced with lower choice, it is not a great deal.

This consolidation doesn’t mean the end, though. The strength of a robust industry is one where weak firms go out of business and new firms spring up in their place in their attempt to make a profit. That three has become two doesn’t mean that it should remain at two. There is room in the short term for a number three and even possibly a number four, as the Indian taxi aggregation industry tries to find its most efficient level.

I would posit that the most likely candidates to emerge as new challengers are companies such as Meru or EasyCabs, which are already in the cab provider business but only need to tweak their model to include an on-demand component. A wholly new venture to take up the place that is being vacated by TaxiForSure, however, cannot be ruled out. The only problem is that most major venture capitalists are in on either Uber or Ola, so it’s going to be a challenge for the new challenger to raise finances.

\begin{shameless plug}
I’m game for such a venture, and come on board to provide services in pricing, revenue management, availability management and driver incentive optimisation. 🙂
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Finally some sensible Uber regulation

Ever since Uber launched, regulators worldwide haven’t had a clue as to how to regulate it – it has been such a big disruptor in the taxicab market. Some countries and cities have taken to banning it outright (the list is too long to post links here). Others (such as some states in India) have tried to get Uber to register itself as a “taxicab company”.

The problem with all these regulations is that the Uber model (being replicated by firms such as Ola and TaxiForSure in India) is a fundamental gamechanger. As I have written in this earlier post, the on-demand model propagated by Uber implies that a number of the inefficiencies in the taxicab market don’t exist any more. In this context, trying to regulate it by moving it back to the earlier (extremely inefficient) model is extremely regressive. The right way to regulate is to create a level playing field for taxicab aggregators (which includes Uber) and move the market to a regime where the new technology-enabled efficiencies are made good use of.

And that is precisely what Los Angeles has done. In a rather progressive move (which ought to be copied by other states and cities and countries), the city has decreed that all city-based cab operators need to offer app-based booking services. The interesting bit in the regulation (see link above) is that drivers who fail to install the e-hail app are actually going to be fined.

What this will lead to is that the local taxi market is itself going to become more efficient which should definitely increase both profitability for the local cab industry and also availability of local cabs to the people of LA. What this will also do is to give people of LA a choice between using Uber and the traditional taxi app, which will lead to an improvement in Uber’s service levels. As things stand now I don’t see any downside from this LA regulation.

I hope the model succeeds in LA and other cities see the brilliance of the model and accept the efficiencies brought into the market thanks to this model and adopt similar regulation. I see this kind of regulation coming into the Bangalore market though the backdoor though. Ola already helps match auto rickshaws to customers and now TaxiForSure is also getting into that market. Will this mean that autos won’t have to line up for hours together in front of Lalbagh gate for passengers arriving in the city by bus?

Oh, and LA is not the first city to implement regulations requiring taxis to be “hailable” via an app. When I visited Singapore in November 2013, I found that cabs in the city worked the same way. Locals had an app which they would use to call taxis. The problem there though was that the app was only available to locals (your android/iOS had to be registered in Singapore for you to be able to even install the app), which made it a nightmare for us tourists to move around.

Oh, and while on the topic, a good revenue source for companies such as Ola or TaxiForSure would be to provide the technology backbone to cities that are seeking to use app-based hailing services for their cabs.