The app attack that may up-end taxis

Business Spectator

There are plenty of industries ripe for disruption, but not many are in such dire need as the taxi industry. Considered to be overpriced, underserviced and out of touch with consumer needs, the taxi industry in most Australian capital cities is far from ideal.

Victorian Premier Ted Baillieu understands this. He approved an inquiry into the Victorian taxi industry in order “to undertake a comprehensive investigation into all aspects of the taxi and hire car industry … focused on achieving better outcomes for the travelling public” with former Australian Competition and Consumer Commission chairman Allan Fels as the point person.

What has eventuated to date from this investigation is a draft report with recommendations around three key areas considered essential to rebuilding the industry – boosting supply, restoring trust and boosting demand.

The core problem with the taxi industry nowadays can be squared at the level of regulatory hoops that operators need to jump through, combined with the tremendous cost of acquiring the right to operate a taxi or a hire car (a licence transfer can cost as much as $550,000 depending on the market at the time of transfer). On top of this, operators also pay annual fees.

The problem with implementing sweeping changes in the taxi industry is twofold. For one, the Fels investigation commenced almost two years ago and has yet to be followed by any government action. The second, and more delicate issue is that it will be difficult to make amendments that improve supply and reduce costs without putting current licence holders at a disadvantage.

This mix of complexity and delay will ensure any legislative changes to the industry will happen at a snail's pace. One thing, however, that doesn't move at a snail's pace is the evolution of technology, and technology is coming to disrupt the taxi industry. Well, it isn't coming… it's already here.

Enter Uber, a US start-up that has launched quietly in Melbourne after launching in beta mode in Sydney over the past few months. Uber positions itself as your on-demand private driver. The app allows users to order a ride using their phone's GPS function and entering their destination. This ride can be at your door within minutes, and all transactions are cashless, with billing done via credit card.

The technology is impressive – elegant and stable. Uber recently closed a heavyweight $37 million series B fundraising – with the likes of Goldman Sachs, Amazon.com founder Jeff Bezos and large Menlo Park venture capital firm Benchmark investing. The service is also active in North America and parts of Europe.

Although Uber may market itself as a taxi service, it really isn't. Uber doesn't own any of the vehicles it uses. It doesn't employ any of the drivers. It doesn't hold any taxi or hire car licences. It is, effectively, an elegant way of connecting passengers and drivers – these drivers being what would be categorised as ‘hire car drivers' – with Uber taking a clip for facilitating the transaction.

Uber simplifies what is more often than not a frustrating process. Ordering a hire car is challenging. The reality is, in a lot of cases the price difference per kilometre between a taxi and a hire car is relatively small – a hire car is generally 20 to 25 per cent more – however most people wouldn't consider a hire car to be an option despite many being willing to pay more for convenience and quality.

Uber makes it easier to source a hire car, easier to work out the cost and easier to pay. It is a premium offering at a premium economy price point – and if successful could create a middle tiered offering that lies between the taxi and the chauffeur.

If Uber can facilitate $10 million to $15 million in fares per year per territory it would most likely be profitable after wages, overhead and modest launch marketing expenses. For Uber to be successful in a market like Melbourne it would need to dramatically increase fares facilitated to the $50 to $60 million mark annually. This would require 600,000-plus journeys per year through Uber, which would be problematic with the current volume of licensed hire cars in market (936).

Uber will not disclose how many drivers it has recruited to date in Australia, Uber general manager David Rohrsheimstates that the Uber fleet “is growing every day to meet client demand”.

Removing burdensome requirements to obtaining a hire car licence, combined with fare facilitators such as Uber, would make operating a hire car a more appealing proposition for many drivers, in particular owner-operators. For consumers, this would increase choice and provide a higher volume transport option vastly superior to the current taxicab option at a modest additional cost.

Uber will be nothing if not controversial, similar to the likes of Flexicar and Zipcar when they helped redefine car hire almost 10 years ago. Most debate will revolve around the legality of Uber and the legislative complications of a booking intermediary operating in the presently protectionist, archaic taxi industry. Uber has faced these challenges in all markets and has vigorously defended its right to operate, so local opponents shouldn't expect an easy battle, especially with its VC funding giving it deep pockets.

But the real battle for Uber isn't going to be a legal one; it will be in recruiting an active user base. Disruptive businesses such as Uber generate initial headlines for the unexpected challenges they confront a comfortable industry with, yet must generate lasting revenues and sustainability from operating beyond these and scaling via solid customer sales and marketing.

If Uber can connect – that is, recruit a solid customer base and participating hire car drivers – its success will force a desperately needed catalyst for positive, structural change in an industry in real need of one.

Ben Shepherd is a media and technology consultant. He blogs at Talking Digital.