Graduate Blog / Graduate Life

The End of the Taxicab

The Taxi industry is a rare case that, until today, has gone relatively unchallenged and undisrupted since its inception in the 17th century. Unlike most industries – where firms gain a competitive advantage through innovation and superior products/service – the proliferation and dominance of the taxicab is solely due to city-imposed regulation. To be fair, regulation isn’t unmerited. Cities have imposed regulations in order to protect passengers from unscrupulous drivers and to ensure the proper maintenance and mechanical integrity of the vehicles. However, most statutes regulating taxicabs are outdated and create an almost insurmountable barrier to entry for both new drivers and taxi companies.

Many cities, such as New York and Boston, operate on a “medallion system” where an arbitrary number of taxi licenses (medallions) are made available by the city. For example, in the city of Boston, one who wishes to become a taxi driver needs to obtain one out of only 1,825 taxi medallions. However, with the demand for a medallion far exceeding the supply, the cost of obtaining a single medallion has inflated to over $600,000 making it nearly impossible for new entrants into the market who are not wealthy.[1]  In addition, cities have regulations protecting taxicabs themselves from legitimate competition. In Portland’s city code, there exists a provision that requires no less than a 60-minute advanced reservation for a “non-taxi ride”.[2]

The result of outdated regulations governing the “ride for hire” industry has essentially led to a monopoly for taxicabs. Naturally (since until now the consumer had no other choice), this has resulted a nonexistent standard of service and a meager amount of innovation. Since the inception of the taxicab concept dating back to horse-drawn carriages, there have only been four major innovations:

  1. The adoption of automobiles at the dawn of the 20th century
  2. The invention of the taximeter in 1897 to calculate fares based on the distance traveled
  3. The introduction of two-way radios in the 1940s to enable communication between taxicabs and dispatch offices
  4. The introduction of computer assisted dispatching in the 1980s[3]

In any other industry where the dominant firm has only innovated four times over the course of over a century, there would have been plenty of opportunities for challengers to enter and take away market share. Yet being protected by regulation that was ironically created to protect passengers has enabled taxi operators to remain relatively undisturbed.

However, the outpacing of taxicab innovation by technology in the 21st century has proved to be too great to keep out new contenders. Today, a flurry of new “ride-for-hire” startups, led by San Francisco-based Uber, are taking aim at this previously untouched industry and are not letting up. Uber takes advantage of the advent of smartphone-enabled technologies by creating a mobile app that allows users to request a black car driven by a professional driver on demand in 45 major cities worldwide and counting. Uber’s mobile app ushers in several new innovations for hiring a ride including:

  • Allowing customers to see where the nearest available black car is, instead of standing in the street hoping for an empty taxi to come along.
  • Letting customers see how long it will take for the driver to pick them up.
  • Displaying a profile of their driver.
  • Giving customers a quote on their fair so they have a good estimate on how much the ride will cost.
  • Handling payment and gratuity automatically through the app using the customer’s preloaded credit card information so that there is no transfer of cash or hassle to the passenger.

Following Uber’s lead are ridesharing services Lyft and SideCar. These two services are similar to Uber in that they also operate through a mobile app that is almost functionally identical to Uber’s; however, instead of using professional drivers, Lyft and SideCar enlist everyday (pre-screened) people who are willing to chauffeur people around in their own cars for 90% of the “suggested donation” (Instead of charging people fares, Lyft and SideCar use a donation system where a donation amount is calculated based upon the logistics of the ride. This, they argue, makes them a ridesharing/carpooling organizer as opposed to a taxi service). All three of these new startups also offer a level of service that one would never expect from a taxi company that has been entrenched in its market dominance from the start. Many Uber customers report their drivers offering free water and snacks, and Lyft and SideCar drivers are trained to allow customers to control the radio if they please or to charge their smartphones while riding.

Uber, Lyft and SideCar have all been met with regulatory opposition from certain cities. Earlier this year, Uber was served with a Cease and Desist letter from the city of Los Angeles for being a “rogue taxi service” and not complying with local regulations. In Washington D.C., the Taxicab Commission’s chairman, Ron Linton, played a key role in the sting by hailing a car using Uber’s smartphone app then directing it to the Mayflower Hotel where city hack inspectors were waiting. The driver, identified as Virginia resident Ridha Ben-Amara, was ticketed for four violations — not holding a chauffeur license, driving an unlicensed vehicle, not having proof of insurance and charging an improper fare. The violations carry combined fines of $1,650[4]. SideCar, having been banned from the city of Austin, TX, fought back with a lawsuit against the Department of Transportation stating that the company isn’t in the business of providing “chauffeured vehicles” for a fee (which would be against city regulations); rather they are a ridesharing community where drivers are technically paid by voluntary donations.[5]

In spite of the efforts of taxi lobbyists to enforce outdated regulation, companies like Uber are still growing at a breakneck pace. This is precisely because the good that their innovation brings to this industry is undeniable. Smartphone apps give consumers access to service level that was never before possible with the old taxicab industry. Hiring and paying for a ride has never been simpler, and consumers never have to worry about how long their ride will take or which route their driver will choose to take them to their destination. Everyday passengers and drivers now share lasting relationships that were once only indicative of private drivers for the rich. The technology also provides an unparalleled level of safety by tracking every car and passenger by GPS and allowing consumers to have information about their driver. Finally, even as quality and service levels have increased, we are seeing prices being driven down due to consumers having a real choice in this suddenly fierce and revitalized industry.