Business Case Studies #2: Uber Partners with Yellow Taxis

What's up, everyone. This is Alex Lieberman, co-founder and Executive Chairman of Morning Brew. Welcome back to Founder’s Journal, my personal audio diary, where I give you, the business builder, the tools you need to think better in order to build better, whether that's building a business, a team, or a new product. Today, I am talking about big news over at Uber and how you should be thinking about it. Let's hop into it. 

Uber takes on taxis

So Uber, the enemy of yellow taxi since the company launched in the 2010s, has officially struck a deal to include New York City's 14,000 yellow cabs on the Uber app in New York City. And this is on top of approximately 80,000 vehicles that are used for ridesharing in Manhattan. The cost for a taxi that you hail on the app will be about the same as you trying to get an UberX and Uber will take the exact same rate for taxis as it does for its own vehicles.

And to make this happen, Uber teamed up with basically the two apps that allow you to hail taxis digitally, which is Curb and CMT, CMT runs the Arrow app. And so that is what happened, but what's interesting about this is like why we should give a shit. And I want to paint a picture of what the relationship between Uber and the taxi cabs have been over the last however many years so that we can dig into the issue. So Uber and Travis, it's co-founder, and taxis have generally mixed like oil and vinegar. They have a long history together. Definitely not a loving romantic one. Kalanick co-founded Uber, primarily for the purpose of destroying the taxi industry. He literally thought taxis were a racket, that there was collusion, that it was not good for consumers. And he is on the record saying in 2014, “We're in a political campaign and the candidate is Uber and the opponent is an asshole named Taxi.” And in true form of businesses since that period of time when Uber launched, especially for businesses that operate with network effects, which I've talked about in past Founder’s Journals, basically when you have network effects, every additional user makes the product more valuable in a businesses that are operated with network players, it tends to be winner takes all, and this turned into a winner takes all market. So when Uber picked up market share in New York city and any of these major cities where taxis generally operate, the industry was decimated. So to give you context, medallions in New York City, so to operate a taxi in New York city, you need a taxi medallion In 2011 before Uber had, you know, obviously launched and taken market share medallions were trading at a million dollars a pop like these things were incredibly prized possessions. And at that same time, the market cap of all medallions, so you add up all medallions that taxi drivers had in New York City, it was $16.6 billion of value. To paint a picture pre-Uber and post Uber, September of 2021 obviously Uber is where it is now massive business medallions are going for $80,000. And obviously you could imagine this was tragic for the taxi industry and specifically drivers because tons of drivers were running into issues where they had taken out loans to buy medallions because most people obviously can't afford to buy a million dollar medallion. So they were taking out loans to buy them. They bought the medallions with their loans, but then they had to pay them back. And unfortunately, what ended up happening was demand dried up because of Uber and drivers were having issues where they couldn't pay back their loans. All of this, to say that clearly what Uber and Airbnb and so many of these different businesses, these network players, these two-sided market players have shown is that lower prices and better UX can crush an industry, in this case, the traditional cab industry.

But this is where things get interesting, right? Because we're talking about over the last 10 years, the power dynamics have been entirely resting in the palms of Uber. But actually right now, in this specific moment, Uber needs taxis more than ever. You see what happened was tons of drivers left the platform during COVID because demand from riders had plummeted. They were staying home. They didn't want to go in cars with other people. And drivers were leaving the platform, not just because of demand issues, but also because they were worried about contracting COVID. And so what ended up happening is you decrease supply and you decrease demand also. But what ended up happening was demand started coming back as concerns around COVID started going down, but drivers were not coming back as quickly. So you had an imbalance of supply and demand, ton of demand coming back, not as much supply. And so fairs and wait times specifically in populated cities has supposedly been insane. The other part of this around why drivers have not been coming back and why supply is such a big concern for Uber right now is a lot of drivers have not been happy with their earnings. They don't believe they're making enough of a living to justify being Uber drivers, especially as gas prices have crept up over recent months. And so this is why this whole story is so important.

It's important because it's just such a change in the historical dynamic between basically old industry players and new incumbents that have disrupted entire industry. It's also interesting because in this weird sense, Uber has more power than it ever has had, but it needs taxi cabs more than it ever has because it has this huge scarcity of supply right now. And it needs more drivers in order to better serve its riders. 

My take on the deal 

And so here's my take on the whole thing. When I originally read the story, I was really concerned about the decision for two reasons. The first is brand dilution. I was honestly kind of skeezed out by the idea of ordering an Uber and getting a taxi cab instead. And I generally find it way more enjoyable to ride in an Uber than in a taxi. I find it cleaner. Usually the drivers drive more safely. And so I was worried about just riding in taxis when I wanted to drive in cars that weren't yellow cabs. Two things about the story kind of solved this concern for me. The first is that in the app, in the Uber app, when they launched this partnership with CMT and with Curb, you are going to put in your destination, you're going to look for your driver. And in the same way that right now in the app it shows, you know, UberX, UberXL, Uber Pool, taxis will be separated. And so you can choose whether you want to get a taxi or not.

The other interesting thing is that taxi drivers, right, historically in cities, you can't refuse a customer if they want to ride in a taxi Taxi cab drivers using Uber can refuse it because that's what Uber drivers are able to do. 

The second thing about my concern with this from a brand dilution perspective or the reason the brand dilution question was solved is because from all of my friends who are living in Manhattan right now, and remember I'm outside of Manhattan, people in New York City have been finding that the Uber experience has been absolutely brutal recently because of longer wait times and higher prices. And people have actually been opting back into taxis because they've been cheaper and they haven't had to wait as long, which obviously speaks to the severity of the supply problem that Uber is having in densely populated cities.

And basically the second concern I had around this decision was I wondered if this quick grab for supply, meaning all of the entire fleet of taxis in New York City, would cause wages to drop because more supply was being added to this two-sided network in a way that would just cause more drivers to leave Uber because they felt like they weren't being paid enough because now there's more supply, so with more supply prices go down. And the concern was, is this just a bandaid on a ongoing supply problem or an ongoing problem of, can you make the economics of Uber work while also having drivers feel like they're making enough in wages? I spent some time thinking about this and after reflecting on it more, I not only believe that this is the decision that Uber had to make, I do also think it is net good for the business long-term and I'll tell you why. 

Why Uber had to do this 

The first is they need to solve their current supply issue because long wait times and inflated prices are absolutely killer to the experience of their drivers. And as a kind of UX, customer driven company, they just can't have that happening for an extended period of time. So they need more supply. And this is the way that they can get an access to a lot of it. It's in a way I think of this as a channel partner, It reminds me how direct-to-consumer brands, whether you're thinking about Warby or Casper, all these director of consumer brands started selling online, but then all of them have opened brick and mortar and worked their way into big box retailers like Target and Walmart, etcetera, to access more distribution, probably lower margin distribution, but more distribution and customers. It's just very simple. They have a huge supply issue. The thing that makes network businesses or specifically two-sided marketplace, vibrant businesses is when they have the most liquidity, as much supply and demand as possible. And right now there's very clearly an imbalance where there's too much demand and not enough supply to satisfy the demand. The second thought on, you know, why is this a good thing? Is I assume that basically joining hands with New York City taxis is a huge kind of like positive from a brand perspective of Uber in the eyes of regulators in New York City. For the longest time, Uber has completely butted heads with the taxi commission in New York. And I think by partnering up and including yellow cabs on its app, it has to help long term in how it works with major cities. 

The final thing, and I actually think this is the most important one, long-term, this is actually a tried and true strategy. This is not the first time that Uber is working with cab companies and it has proven fruitful, especially internationally. So internationally, Uber has partnered with taxi operators in Singapore, Spain, Germany, South Korea, and other countries. And it's a big opportunity for two reasons. The first goes back to liquidity of a two-sided marketplace. The more that you are able to basically just grab a ton of distribution at once, so basically all of the taxis in a city, the more efficient your marketplace is going to work and the better the experience is going to be for riders who will then come back to Uber over and over. The second part of this is the strategy has been tested and specifically in Hong Kong, thirty-five percent of users who took a taxi on the Uber app ended up going back onto Uber's app later to use other products. And so I think this is a huge thing when Uber thinks about how do they extend the lifetime value and also have a more profitable relationship with their customers? It's by getting them to make repeat purchases, not just of the same services, but of Uber Eats, Uber Pool and all of the other services it offers in these major cities. And it's been stated, and it makes sense that Uber now has the goal of having every taxi on Earth on its platform by 2025.

TL;DR

And so to sum it up, this is big news. It's big news because this is such a deviation from how Uber has played in the space for so many years, but Uber needs this right now. Taxis need this more than ever before. I think we're going to see medallion prices go up for the first time since 2011, since Uber entered the space and basically crushed the value. And I think net net, this is not only needed right now to solve the supply problem, but it also is a good strategic bet to use basically taxis as the wedge to get net new customers using Uber for other things moving forward. 

I want to hear from you

And so I'd love to hear from you. First of all, what are your thoughts on this story? Do you agree that Uber partnering up with taxis in New York city is a smart move? Do you even think it will have an impact long term? And second, I want to hear if there is a recent business news story that you think is big enough and interesting enough that you would love for me to break down and give my opinion on in an upcoming episode. So shoot me an email at alex@morningbrew.com. And I will try and get back to you as quickly as possible, and maybe include one of your stories in an upcoming show. Thanks so much for listening and I'll catch you next episode.