Uber

 and  the  Taxi  Industry    

 
“Some  day  the  cab  business...will  shake  itself  down  into  an  orderly  trade;  the  various  
drivers'  unions  will  be  welded  into  one;  the  many  owners'  associations  will  combine;  
the  idle  aldermen  will  pass  proper  ordinances;  the  mysterious  marshal  of  the  mayor  
will   see   that   only   proper   men   are   licensed;   the   police   will   exercise   effective  
supervision;  the  public,  enlightened,  will  not  ask  how  much.”    
 
Vance  Thompson,  “The  New  York  Cab  Driver  and  His  Cab”,  Outing  Magazine,  
November  1906    
 
“The  number  of  taxis,  or  medallions,  in  New  York  has  basically  been  flat  since  1946.  
The  same  number  of  taxis  there  were  in  the  city  in  1946  is  the  same  number  of  taxis  
that   are   out   there   today.   That   value   of   that   medallion   is   worth   about   a   million  
dollars   a   pop.   There’s   13,000   medallions   in   the   city   of   New   York,   so   you   have   $13  
billion  directed  at  keeping  Uber  from  being  successful.”    
 
Travis  Kalanick,  Uber  CEO,  October  2012  
 
It  was  spring  of  2013  and  the  management  team  at  Uber,  a  fast  growing  company  
offering  a  black  car  service  available  at  the  tap  of  a  button  in  the  popular  Uber  app,  
was  considering  introducing  a  new,  cheaper  offering.  Having  originally  come  to  the  
market  in  June  2010  with  a  black  car  service  in  San  Francisco  that  was  offered  at  a  
significantly   higher   price   point   than   regular   yellow   cabs,   Uber   had   been  
experimenting   in   San   Francisco   and   New   York   with   a   lower   priced   service   called  
UberX  based  on  hybrid  cars,  though  this  was  still  priced  above  yellow  cabs.  Uber  
was   now   facing   an   increasingly   competitive   market.   Upstarts   such   as   Lyft   and  
Sidecar   appeared   with   similar   iPhone   and   Android   apps   but   with   services   utilizing  
regular   vehicles-­‐-­‐and   Uber   now   had   to   decide   whether   to   compete   with   them  
head-­‐on  at  a  price  point  lower  than  yellow  cabs.    
 
Creating  a  down-­‐market  offering  would,  on  the  one  hand,  expand  the  market  and  
provide   new   avenues   for   revenue   growth.   It   would   also,   however,   likely   depress  
margins  and  may  affect  public  perception  of  the  Uber  brand  as  a  premium  service  
often  described  using  words  such  as  “magical.”  
 
Development  of  the  Taxi  Industry    
 
The   word   “cab”   came   from   the   French   word   cabriolet   and   originally   stood   for   a  
horse  carriage  design  that  used  a  single  horse  and  a  two  wheel  carriage.  Cabs  were  
omnipresent  in  the  19th  century,  just  as  automotive  taxis  became  a  common  sight  
in  most  of  the  world’s  cities  throughout  the  20th  century.  From  London’s  familiar  
black-­‐colored  “Hackney  carriages”  to  the  ubiquitous  black  and  yellow  Ford  Crown  
Victoria’s   in   New   York   City,   many   cities   even   managed   to   create   strong   brand  
association   through   mandating   vehicle   types   and   color   schemes.   The   taxi  
industry’s   history   had   been   one   of   successive   waves   of   regulation   and   de-­‐
regulation,  starting  with  the  very  earliest  days.    
 
The  first  automated  taxi  vehicles  appeared  in  New  York  City  in  1897.  The  Electric  
Carriage  and  Wagon  Company  began  operating  12  electric  cabs  in  July  of  that  year,  
had   100   on   the   streets   by   1899,   and   300   in   1907,   when   a   fire   destroyed   the  
company’s   depot   and   forced   it   to   shut   down.   That   same   year,   the   New   York  
Taxicab   company   began   operating   65   gasoline-­‐   powered   vehicles   imported   from  
France;   one   year   later,   in   1908,   the   company   operated   700   of   the   then   red-­‐and-­‐
green  vehicles.  
 
Mayor   Fiorello   H.   La   Guardia   passed   a   law   in   1937   that   introduced   the   taxi  
medallion  system  to  limit  the  number  of  vehicles  on  the  road  and  to  provide  safety  
to   passengers   through   an   examination   system   of   the   drivers   and   cars.   The   law  
limited  the  number  of  medallions  to  16,900  initially,  and  the  total  decreased  to  a  
low  of  11,787  after  World  War  II  (for  lack  of  demand)  before  climbing  back  up  to  a  
total   of   13,437   in   2014.   Owning   a   medallion   authorized   the   owner   to   pick  
passengers   up   anywhere   in   the   city   via   street   hail,   and   owners   typically   leased  
their  cars  for  shifts  throughout  the  day  to  maximize  total  revenue  per  medallion.    
 
Taxicab   drivers   had   to   apply   to   be   licensed.   This   generally   involved   them  
completing   a   comprehensive   application   form   that   included   a   requirement   to  
disclose   any   criminal   convictions.   In   addition,   drivers   often   had   to   take   a   test   to  
demonstrate  their  knowledge  of  their  city’s  roads.    
 
In  addition  to  the  yellow  cabs,  New  York  had  a  number  of  other  vehicles  available  
for   transportation.   Livery   vehicles   numbered   25,000   and   provided   pre-­‐arranged  
services   in   the   outer   boroughs,   while   around   10,000   black   cars   provided   similar  
services   to   corporate   clients.   Street-­‐hailing   was   not   permitted   for   either   of   these  
two   classes   of   vehicles,   though   livery   vehicles,   in   particular,   could   often   be   spotted  
late  at  night  in  particularly  crowded  areas  looking  for  a  passenger.  
 
Typically  licensed  and  regulated  by  the  state,  livery  services  operated  black  cars  or  
limousines  with  no  company  identification.  They  were  only  allowed  to  carry  pre-­‐
arranged   passengers,   often   with   a   specified   minimum   time   between   booking   and  
pick-­‐up.   Some   states   required   livery   vehicles   to   carry   a   formal   schedule   of  
passengers,   pick-­‐up   points   and   destinations.   Fares   were   typically   based   on   time  
and   need   to   be   agreed   upon   before   the   journey   was   undertaken.   Livery   services  
were   generally   much   more   expensive   that   taxicab   services.   A   large   proportion   of  
livery   work   was   for   corporate   clients   with   ‘payment   on   account’   -­‐   the   passenger  
providing  the  driver  with  a  contractual  voucher.    
 
Medallion   prices   and   taxi   economics   were   highly   dependent   on   various   physical  
characteristics  of  a  city,  such  as  geographic  size,  population  density,  and  commute  
patterns,   as   well   as   the   regulation   of   the   taxi   industry.   Exhibits   2   and   3   show  
disparities  between  cities  in  physical  attributes  and  the  resulting  diversity  of  taxi  
densities.   Exhibit   4   shows   typical   medallion   prices   across   cities   that   allow  
medallion  transfers.    
 
In  San  Francisco,  there  was  a  similar  commission  set  up  to  regulate  taxicabs.  Table  
A  shows  the  regulated  pricing  for  taxi  fares  in  San  Francisco.  
 
  
 

 
 
The  taxi  meter  calculated  the  price  automatically  and  displayed  it  in  real  time  for  
the  passenger  to  see.  So,  as  an  example,  a  14-­‐mile  ride  to  the  airport  from  one  of  
the  popular  hotels  close  to  the  Ferry  Building  location  on  the  Embarcadero  in  San  
Francisco,  would  result  in  a  charge  of  $3.50  for  the  flag  drop  plus  $38.50  in  mileage  
charges   for   a   total   of   $42.00   (assuming   no   traffic   delays   or   waiting).   The   route  
taken  affected  the  final  price.  As  an  example,  the  same  ride  would  take  14  miles  via  
US-­‐101   but   19   miles   via   I-­‐280,   a   popular   alternate   route   with   less   traffic,   and  
would  then  cost  $55.75  (again,  assuming  no  traffic).  
 
The  fares  collected  by  the  driver  were  used  to  cover  all  costs.  If  a  driver  worked  for  
a   company   that   owned   the   medallion,   then   the   driver   would   pay   the   operating  
costs,  including  gas,  vehicle  lease  payments  and  maintenance  costs,  plus  a  daily  fee  
to  the  taxi  company  known  as  the  “gate  fee”  that  allowed  the  driver  use  of  a  taxi  
medallion,   insurance,   dispatch   services,   and   all   city   licensing   fees.   If   the   taxi  
company   owned   the   taxi,   then   taxi-­‐related   costs   were   bundled   into   the   gate   fee.  
The   driver’s   take-­‐home   pay   was   left   over   after   covering   all   costs,   and   most   taxi  
drivers  were  independent  contractors  and  thus  also  had  to  independently  pay  for  
other  benefits  such  as  health  insurance.  
 
According  to  a  study  commissioned  by  the  San  Francisco  Municipal  Transportation  
Agency   in   2013,   an   average   taxi   medallion   brought   in   $215,000   in   annual   revenue,  
and  the  expenses  broke  down  as  shown  in  Table  B.  
 
  
 
 
Uber’s  initial  entry    
 
Uber’s   origins   were,   if   not   exactly   humble,   not   change-­‐the-­‐world   ambitious.   As  
Travis   Kalanick   recalled   in   November   2013,   he   and   co-­‐   founder   Garrett   Camp   “just  
wanted   to   push   a   button   and   get   a   ride.   And   we   wanted   to   get   a   classy   ride.   We  
wanted  to  be  baller  in  San  Francisco.  That’s  all  it  was  about."    
 
Kalanick   and   Camp   were   both   serial   entrepreneurs.   Garrett   Camp   co-­‐founded  
StumbleUpon,   a   popular   web   discovery   and   recommendation   service,   in   2002.  
Travis   Kalanick   co-­‐founded   Red   Swoosh,   a   peer-­‐to-­‐peer   file   sharing   company,   in  
2001.   In   2009,   Camp   and   Kalanick   were   living   in   San   Francisco   and,   on   the   side,  
built  a  simple  prototype  application  for  an  iPhone  that  allowed  them  to  call  a  black  
car  driver  at  the  tap  of  a  button.  The  service  so  impressed  their  friends  that  they  
set   up   a   company,   UberCAB,   and   launched   the   service   in   San   Francisco   in   June  
2010  with  a  few  drivers  they  had  hired  before.    
 
Their   expectation   for   the   company   wasn’t   immediately   ambitious.   The   two   did   not  
want   to   dedicate   themselves   full-­‐time   to   it   and   brought   in   Ryan   Graves   to   be   the  
CEO  of  the  company.  But  customer  reaction  was  so  positive  that  it  made  them  re-­‐
think  their  plans,  and  five  months  later,  in  October  2010,  UberCAB  raised  a  $1.25m  
angel   round   led   by   prestigious   venture   firm   First   Round   Capital,   and   Travis  
Kalanick  took  over  as  CEO.  
 
With  the  initial  service,  passengers  could  download  a  free  iPhone  or  Android  app  
to   their   mobile   device,   which   would   identify   their   current   location   using   the  
phone’s   build-­‐in   GPS   and   show   their   location   on   a   map   of   the   city.   It   would   also  
show   them   nearby   Uber   drivers,   and   when   a   customer   tapped   a   button   that   said  
“Pick   me   up”   the   location   would   be   sent   to   nearby   drivers,   who   would   then   accept  
the  ride  and  head  to  the  pickup  location.  This  was  a  much  simpler  and  faster  user  
experience  required  to  order  a  ride  than  calling  a  traditional  taxi  dispatch  service  
and  stating  the  address,  only  to  wait  for  the  dispatcher  to  speak  with  and  confirm  a  
driver  is  on  their  way.    
 
In  addition,  at  the  end  of  the  ride,  the  passenger  could  just  step  out  of  the  vehicle  
and   the   payment   was   settled   with   a   credit   card   that   Uber   collected   at   sign-­‐up.   This  
made   for   a   frictionless   experience   that   delighted   customers   who   were   used   to  
having  to  pay  the  fare  shown  on  the  meter  upon  arrival,  using  cash  or  a  credit  card.  
A   frequent   complaint   amongst   passengers   was   that   taxi   drivers   preferred   not   to  
take   credit   cards   and,   though   technically   required   to   accept   credit   cards   in   many  
places,   asked   for   cash   to   avoid   paying   credit   card   fees.   This   caused   annoyance  
amongst   passengers   who   were   faced   with   a   negotiation   over   payment   once   they  
had  already  arrived  at  their  destination.  With  scale,  Uber  believed  big  data  analysis  
and  smart  algorithms  could  enable  much  more  efficient  routing  and  further  bring  
cost  savings  to  the  entire  urban  transportation  system.    
 
UberCab   launched   in   2010   advertising   on   the   website   as   costing   “about   1.5x   the  
price   of   a   taxi.”13   Table   C   shows   a   side-­‐by-­‐side   pricing   comparison   in   July   2010.  
Uber  charged  drivers  a  commission  of  around  20%  of  the  fare.    
 

 
 
The   14   mile   ride   to   the   airport   mentioned   previously   in   the   case,   from   the   Ferry  
Building   to   San   Francisco   International   Airport,   would   cost   $36.60   plus   tip   in   a  
yellow   cab   and   $68.60   in   a   black   Uber   cab   in   2010   (making   Uber   about   twice   as  
expensive  for  this  relatively  long  ride).  
 
Uber   grew   rapidly,   in   part   thanks   to   PR   stunts   such   as   the   Uber   ice   cream   truck.  
Ostensibly  in  its  desire  to  celebrate  National  Ice  Cream  Month,  Uber  introduced  ice  
cream  cone  icons  into  its  app  in  July  2012  that  allowed  customers  to  order  an  ice  
cream  truck  that  would  come  to  them  and  serve  them  five  ice  cream  cones  for  $12.  
The  word-­‐of-­‐mouth  and  PR  attention  brought  with  it  greater  awareness,  and  with  
greater  awareness,  greater  usage  for  the  car  service.    
 
Almost   immediately,   Uber   ran   into   a   regulatory   backlash   as   entrenched   interests  
alleged   that   Uber   was   breaking   laws   designed   to   protect   consumers.   In   August  
2012   the   City   of   Boston   shut   Uber   down   on   the   grounds   that   the   iPhones   its  
drivers  were  using  were  “unapproved  devices”  for  measuring  mileage  ridden  and  
therefore   could   not   be   used   for   commercial   transactions.   Boston   reversed   itself  
less  than  a  day  later,  claiming  that  the  Division  of  Standards  of  Massachusetts  has  
learned  that  “this  device  [iPhone]  is  already  being  evaluated  for  certification  by  the  
National  Institute  of  Standards  and  Technology.”  
 
Not   all   cities’   objections   were   as   easy   to   overcome.   In   October   2012   New   York’s  
Taxi   and   Limo   Commission   forced   Uber   to   retreat   from   offering   its   iPhones   to  
yellow   cab   drivers   after   it   announced   that   cab   drivers   could   lose   their   licenses   if  
caught   using   Uber.19   Highly   public   battles   with   commissions   in   California   and  
Washington,   DC,   ended   up   swinging   in   favor   of   Uber,   but   nevertheless   slowed   it  
down   and   put   doubt   in   the   minds   of   prospective   drivers   and   investors.   But   by   late  
2012,  Uber  was  far  from  alone  in  the  ridesharing  business.    
 
Building  Lyft    
 
Logan  Green  grew  up  in  southern  California,  and  the  vexing  traffic  patterns  of  the  
region  occupied  him  from  a  young  age.  While  attending  the  University  of  California  
in  Santa  Barbara,  he  started  a  campus-­‐wide  initiative  similar  to  Zipcar  (then  only  
on   the   East   Coast)   allowing   students   to   check   out   cars   by   the   hour   using   RFID  
cards.   Still   as   a   student,   he   joined   the   board   of   the   Santa   Barbara   Metropolitan  
Transit   District   and   learned   first-­‐hand   about   the   operations   of   a   public  
transportation  authority.  
 
This   obsession   with   transportation   prepared   him   to   appreciate   a   transportation  
solution  he  saw  while  on  a  trip  to  Zimbabwe  after  graduation.  What  he  saw  there  
inspired   him   to   found   Zimride   together   with   his   friend   John   Zimmer,   which  
eventually  became  Lyft.  As  Scott  Weiss,  partner  at  venture  capital  firm  Andreessen  
Horowitz  and  one  of  Lyft’s  investors,  wrote,    
 
“   When   I   first   met   Logan   Green   and   John   Zimmer...I   was   struck   by   the  
authenticity   of     Lyft’s   founding.   Originally   called   Zimride,   everyone   assumed  
the   company   was   named   after   John   but   it’s   actually   a   much   better   story:  
When  Logan  was  traveling  in  Africa  —  Zimbabwe,  to  be  exact  —  he  noticed  
that   despite   the   lack   of   infrastructure,   people   were   able   to   get   around  
efficiently  thanks  to  a  vibrant  ridesharing  movement.  Every  car,  van  and  bus  
was  full  and  people  would  literally  stand  on  the  side  of  the  road  waving  money    
instead   of   sticking   out   their   thumbs...     With   this   unique   vision   in   mind,   John  
and   Logan   went   about   launching   Zimride   and     Lyft.   The   information  
technology   problem   was   essentially   solved   with   the   proliferation   of   GPS-­‐
enabled  smartphones.  If  they  could  get  a  critical  mass  of  people  on  the  same    
network   with   information   about   when   and   where   people   wanted   to   go,   it  
would  be    relatively  easy  to  pair  up  drivers  and  riders  that  were  headed  in  the  
same  direction.”  
 
Zimride  received  a  $250,000  grant  from  Facebook’s  fbFund  in  2007  with  the  vision  
of   using   Facebook   and   other   social   networking   technology   to   share   information  
about  rides  and  facilitate  carpooling.22  Usage  got  off  to  a  slow  start  as  a  “carpool  
community”   sold   to   universities   and   corporations,   and   it   wasn’t   until   five   years  
later,  in  May  2012  when  it  introduced  a  newly-­‐rebranded  mobile  app  called  Lyft,  
that   usage   finally   took   off.   Uber   had   already   been   introduced   in   San   Francisco,   and  
John  Zimmer  positioned  Zimride’s  new  app  Lyft  the  following  way  in  May  2012,    
 “Uber   is   this   amazing,   luxurious   transportation   experience.   Our   vision   for  
Zimride  is  to  have  everyone  participate.  We  have  to  make  that  as  frictionless  
as  possible.”    
 
Lyft   saw   an   opportunity   to   recreate   the   Uber   experience   not   with   professional  
drivers  and  black  luxury  cars  but  with  regular  drivers  and  their  normal  everyday  
cars.   Innovation   was   required   to   make   it   work,   however.   Since   Lyft   drivers   were  
driving   their   own   cars,   passengers   had   trouble   identifying   which   vehicle   was   their  
Lyft   ride.   One   of   the   better-­‐known   innovations   Lyft   introduced   was   a   giant   pink  
moustache   that   Lyft   would   send   to   its   drivers   to   place   on   the   fronts   of   cars,   to  
facilitate  passengers  in  finding  their  rides.  Lyft  was  also  thought  to  charge  drivers  
around  20%  of  the  fare.    
 
Lyft’s   particular   focus   on   community   extended   to   the   behavior   it   encouraged   as  
well.   Passengers   routinely   got   in   the   front   passenger   seat   (Uber’s   passengers  
typically  sat  in  the  back)  and  would  fist-­‐  bump  the  driver.  All  this  portrayed  a  more  
fun,   communal   brand   that   echoed   the   original   Zimride   carpooling   roots.   As   John  
Zimmer  explained  in  September  2012,  three  months  after  Lyft’s  launch:    
 
Every   car   has   this   "carstache,"   it's   the   pink   furry   mustache.   When   we   were  
designing  the  app  experience  and  the  in-­‐car  physical  experience,  we  wanted  to  
create   something   that   would   help   people   recognize   the   car.   It's   a   person's  
private   vehicle,   so   they're   all   different.   We   wanted   something   for   riders   to  
identify.  It's  created  a  ton  of  buzz  because  people  see  these  cars  all  the  time  in  
San  Francisco,  asking,  "What  is  that?"  
 
Pricing  had  to  follow.  In  an  interview  in  September  2012,  John  Zimmer  said  they’re  
aiming   at     pricing   Lyft   at   “about   a   third   of   the   cost   of   Uber.”25   At   a   significantly  
lower   cost   and   offering   a   similar   service,   Lyft   was   well-­‐positioned   to   compete  
against  yellow  cabs,  city-­‐by-­‐city.