Is Uber taking us for a ride?

Remember when getting a taxi meant calling a despatcher or standing by the roadside waving your arms frantically in the hope of catching the eye of a passing cabbie?

Today of course many of us turn instead to our smartphones to quickly and conveniently hail a ride. There is, as the saying goes, an app for that.

Indeed, recently we have seen a profusion of taxi apps. From San Francisco-based Uber to Malaysia-founded GrabTaxi, we also have Easy Taxi from Brazil and London-born Hailo, which recently debuted its service here in Singapore.

Uber’s argument is that the entrenched taxi order – as it is practiced in much of the world – unnaturally restricts competition, reduces consumer choice, encourages poor service and puts a stranglehold on economic opportunity for drivers.

As well as established taxi firms developing their own apps, dozens of other firms have sprung up, promising to match our transport needs with the drivers to service them.

The ubiquity of affordable smartphones and cheap, always-on mobile data, combined with a critical mass of tech-savvy consumers has been the key enabler; while the speed with which consumers have taken to these apps shows there is certainly a demand for this kind of service.

Among these newcomers promising to reshape the urban transportation market Uber is easily the most high profile, for reasons both good and bad.

As well as allowing users to book regular taxis, Uber has also crafted a new business model, taking on the taxi firms by acting as an intermediary to connect private hire drivers in an emerging sub-industry dubbed “ride sharing”.

$40bn valuation

taxi280As a disruptive tech startup, Uber has taken on its mission with an enthusiastic – some might say abrasive – zeal. Using none-too-flattering language, it has made no bones about its full frontal assault on the established, and in many cases highly-regulated, taxi industry.

Uber’s argument is that the entrenched taxi order – as it is practiced in much of the world – unnaturally restricts competition, reduces consumer choice, encourages poor service and puts a stranglehold on economic opportunity for drivers.

In short it sees the taxi trade as flabby and outdated.

Founded in 2009, Uber’s most recent fundraising round valued the company at around $40bn, placing it on a par with Delta, the world’s largest airline with a heritage going back 80 years.

That’s not bad for a five-year-old firm that is essentially an app and little more.

Indeed, by creating a whole new transport market – aiming to provide a faster, more convenient and cheaper service than long-established players – Uber is to be commended.

But while this mega-valuation naturally grabs headlines, what it means in reality is unclear.

What is undeniable though is the global buzz that Uber has generated; the hundreds of millions of dollars in private funding it has consequently managed to attract; and the resulting surge in imitators launching their own apps in this apparently booming division of the tech market.

Roadblocks ahead

Uber, as its name perhaps suggests, has grand ambitions and says it wants to reshape the way cities work. Its next round of expansion, it says, will be focused on building its presence here in Asia.

But is it already coming up against roadblocks?

apps280Reports in recent months have seen Uber faces a series of legal challenges and protests from transport regulators and taxi unions. Most recently authorities in Madrid and Bangkok have ordered a halt to Uber services

It’s also been banned from operating in some states and cities even in the US – a nation usually seen as most welcoming to disruptive technologies.

At the same time Uber’s management have been accused of a “frat boy” approach to business, allegations of underhand tactics against competing service providers, and what critics say is a cavalier approach to the norms of corporate responsibility.

In India an alleged rape by an Uber driver in Delhi has raised questions over the firm’s vetting process for drivers and triggered a nationwide ban on the app ordered by the Indian government.

Uber’s business model is essentially to be the ultimate outsourcer. It needs few staff to operate, but creams off a cut for each journey from its thousands of freelance drivers around the world.

The critical point, the firm argues, is that it is not a transportation service. Instead, Uber says, it is a service – an app – that brings people to the market place. It operates by matching demand (i.e. passengers) with supply (i.e. drivers) and beyond that, Uber argues, its responsibility ends.

It does not own the cars or employ the drivers therefore, it argues, it is legally not subject to the regulations that apply to traditional taxi firms.

It’s a subtle but important distinction, and one most consumers are probably unaware of.

For example, customers who opt to use Uber’s ride-sharing service rather than a standard licensed taxi might find they get a cheaper and quicker service, but with a driver and vehicle that are not subject the same regulator-monitored security and safety checks.

Uber’s approach to date has been to go for rapid expansion and worry about regulation later. But as it grows the question arises as to whether waiting until something goes wrong before acting is the right approach.

Safety and security

While Uber’s argument over the limits of its responsibility may legally hold water, at least for the time being, the regulatory framework will have to catch up with this new reality.

ThinkAloud4This is not only for reasons of customer safety and security – although this is undoubtedly important. Customers should, at the least, expect that their drivers aren’t criminals and have adequate insurance.

There are also key issues surrounding accurate taxation, especially in a business that commonly involves cash transactions and which inherently makes use of public roads as a basis for their operations.

And there is the need to incorporate Uber and other similar services into urban transportation planning.

This is especially relevant in carefully planned urban contexts such as here in Singapore, where traditional taxi firms are regulated and expected to conform to standards that form part of the broader national transport infrastructure plan.

Leaving Uber and its kind to operate as free agents, unencumbered by such obligations, undermines the effectiveness of such planning.

So there is little doubt then that there will need to be some kind of meeting of minds between regulators and the upstart Ubers of this world.

In Singapore this is already happening, with new rules on app-based services due to take effect in mid-2015. Regulators elsewhere, meanwhile, are wrangling with their own issues over how to respond.

But we should take from this some important lessons. Not least that the taxi industry is far from the only business ripe for an Uber-style shake-up.

Indeed, as technology develops we should expect to see this kind of app-based intermediary service emerge in virtually any industry, disrupting existing business models and recalibrating established norms with similar implications for regulatory response.

We’re seeing it already in the financial sector, where non-banking actors are acting as intermediaries matching those with capital to those that need it.

We might well even see it in my own trade – education – with students needing tutoring on specific subjects being matched up with professors anywhere in the world willing to teach them.

Uber, then, may just be the tip of the iceberg.

A version of this article was published in the Today newspaper on December 22, 2014

  • Author Profile

    Sumit Agarwal is Dean's Chair professor in the departments of Finance, Economics and Real Estate at NUS, Low Tuck Kwong Professor and Deputy Head (Research) of the Department of Real Estate. Sumit is also the Research Director at the Centre for Asset Management Research & Investments (CAMRI) at NUS Business School.

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