Uber vs. taxis, round 2: Technology, business models and incentives for service

February 8, 2016
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Here’s a business idea: What if we created an app for taxis just like Uber and sold it to the taxi cooperatives?

That was the text I received from a friend a couple of days ago, right in the middle of yet another protest from taxi drivers asking the government to intervene and block Uber. My buddy’s rationale was that by creating a similar app, we’d be saving the cooperatives money currently spent on radio frequencies, and on the salaries of the nice ladies who pick up the phone when you call the cab company. The ones who call you “corazón” after they’ve located a taxi for you.

We tend to focus on technology when trying to explain why companies like Uber or Airbnb are so successful, since the app itself is the face of the company. However, I told my buddy that in spite of our entrepreneurial spirit, apps like that already exist; even if they didn’t, they wouldn’t really do much to help the cabbies. The disruption being generated by shared-economy startups (those that connect people willing to provide a service with those demanding it) is not the technology itself, but instead what the technology enables – how it changes the interactions between parties and the rules under which business is conducted.

Let’s examine how the taxi industry has operated up to this point. The first thing you have to do is get a permit from the government, which can be a challenge because of the limited number of permits available. This puts the authority awarding the permits in a position to pick winners and losers; when resources become scarce, this creates an incentive for corruption. Even if the awarding process were completely fair and transparent, which is quite a reach, the scarcity could create – indeed, it has created – a black market where permits are sold at outrageous amounts or even rented out as an asset.

So drivers must get permit any way they can, get a hold of a red car, pay insurance, affiliate to a cooperative by paying a fee, and start working. After you have overcome the barrier to entry, you are good to go. There’s nothing that can prevent you from providing the service. What if you happen to be rude to customers? You can continue to work as a taxi driver. What if you like to play slalom on the highway and pretend you are Vin Diesel’s co-star? You can continue to work as a taxi driver. What if your thing is to have reggaeton blasting out of the speakers at full volume? This one actually happened to me). You can continue to work as a taxi driver.

In short: once you have crossed the bureaucratic hurdle, you can perform the service whichever way you want because there are no deterrents for bad service, nor incentives for good one. Once you’re in, nobody can take you out again. No one can tell you how to do your job.

See also: Taxi drivers throw eggs as Uber Costa Rica offers free rides

Let’s now see how Uber or any other sharing economy businesses operates. The company creates the platform (the app) and invites everybody to join, either as a driver or a passenger. As a driver, the rules to participate are transparent: you must meet certain guidelines, such as the maximum age of your car, and then you must complete the training, both in the interest of good service to the passenger. Because the company does not decide how many drivers should be out there, it doesn’t become a gatekeeper. The incentive to favor some in detriment of others is removed. Everybody gets to play. If there are not enough passengers, you can choose not to drive, but it is a supply and demand game now.

More importantly, Uber drivers get rated by customers, which builds their reputation on the platform and determines whether can continue to play. No good service, no play. Voilá! An incentive to provide excellent service on a daily basis is created. The only way for drivers to guarantee their continued participation in the game is to put in the effort to make customers happy on every ride. The driver, usually a regular Joe, is happy because he made a few bucks with some idle time. The passenger is happy because she received better service. The company is happy because it took a cut of the transaction.

All good, then? Not yet.

Some argue, very justifiably, that the service provided through the Uber platform should be regulated in some way. That’s only fair. Insurance, taxes and fees should be comparable so it doesn’t give those under the new model a way to undercut the taxis on price. Governments should move fast to regulate shared-economy businesses, instead of making it hard for them to operate by clinging to old regulations. This is increasingly relevant because every year, more and more companies with the exact same business model will come to market. Today, it is happening with public transportation, accommodation and errands. Tomorrow, it could affect all kinds of services.

While the war declared by taxi drivers is being waged on the streets, three things are certain. First, by blocking streets and making everybody late for work, all the cabbies are achieving is eroding the little good will they had among the general public and sending more new customers to Uber. Showing up in the news for throwing eggs at fellow taxi drivers who don’t join the protest is, by any definition, a big PR no-no.

Second, governments are slow, but they’re not dumb. Eventually they will realize that this is not something you would want to stop, and even if you wanted to, you really can’t. When that moment comes, all the kicking and screaming isn’t going to change anything. That’s called progress.

Finally – and this is relevant for entrepreneurs – if you want to start disruptive businesses, your first step should be to look for old industries with entrenched, outdated habits. Next, figure out how to fix their inefficiencies by creating better incentives. Then, and only then, do you build the app.

That’s what I’m going to tell my buddy.

Read more “Doing Business columns” here

Randall Trejos works as a business developer, helping startups and medium-sized companies grow. He’s the co-director of the Founder Institute in Costa Rica and a strategy consultant at Grupo Impulso. You can follow his blog La Catapulta or contact him through LinkedIn. Stay tuned for the next edition of “Doing Business,” published twice-monthly.

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