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Kay Plantes is an MIT-trained economist, business strategy consultant, columnist and author. Business model innovation, strategic leadership and smart economic policies are her professional passions. A former Madison, WI resident, Kay now resides in San Diego, CA. The views on her blog are not those of her employer, IBM.

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March 19th, 2014

Uber: A business model innovation that benefits and exploits

Uber is disrupting regulated taxi and limo-service markets.

Uber is disrupting regulated taxi and limo-service markets.

“Is the Uber disruption of local taxi and town-car markets a positive business model innovation for consumers?” a former colleague asked me.

Uber, and its competitors Lyft and Sidecar, are disrupting the regulated taxi and limo-service markets by enabling ride-seekers to secure transit in privately owned cars using a mobile app. The entrepreneurs have used technology to both transform what has largely been a local market into a national/global market and dramatically improve customer service (e.g., automated billing, knowing potential drivers’ locations, cleaner cars, customer feedback on specific drivers, etc.).

I am not in the least bit surprised about the emergence of Uber and its direct and indirect competitors (like Ridejoy, an on-line car pooling service). These disruptions demonstrate a number of consumer-friendly trends underway in our economy.

  • Technology automates human tasks and makes markets more efficient and effective. Who needs friends–with-friends when you have  I love OpenTable for landing a reservation.
  • Technology turns traditional local markets into national and global markets. Enterprise IT and the Internet enabled big-box stores and globalization, lowering prices. UBER is the next wave – platforms best leveraged over larger geographies. Even babysitting, long a word-of-mouth neighborhood market has an on-line marketplace.
  • Digital technology enables new kinds of contracts. Today there is a computer behind almost every legal transaction, according to Hal Varian, Google’s Chief Economist. And its presence can be disruptive. Before Zipcar you had to borrow a friend’s car or sign a contract at a dealership or rent-a-car company to drive. Now you reserve a shared car.  eBay turned local consignment stores into an on-line market.
  • Lower prices win market share. During off peak hours, on-line ride services lower prices as private drivers have a lower cost structure than regulated drivers.
  • Recycling and re-purposing of material, products and assets. Markets are growing for waste materials (e.g., recycling of building products from remodeling and demolition) and companies are adopting cradle-to-cradle thinking. Airbnb turns unused rooms in your home into an on-line rental opportunity.

Uber has fought off regulators to date. As to the future, we shall see. Seattle will limit the number of ride-share cars to keep a vibrant city taxi service. Local governments will likely pass room taxes on Airbnb rooms, as they should. New Jersey car dealerships recently used their political power to stop Tesla, who had the audacity to want to sell its electric cars through company-owned dealerships!

On the negative side, Uber has figured out how to cream excess profit from its customers through surge pricing, raising prices when demand is highest. Uber board member Bill Gurley makes an impassioned plea for Uber’s price strategy, claiming that surge pricing increases supply and reduces demand, leading to a better market equilibrium. But this claim is based on the wrong economic curves. In peak periods, demand is highly inelastic so a surcharge will not lower demand for Uber by much. Like a tax on a necessity, the economic value of the higher price is captured almost entirely by Uber. (In economic-speak, the supply curve shifts upwards along a given (not shifting as Gurley claims) very steep demand curve.)

Sidecar is fairer to riders as it lets them know the exact cost before booking the rush-hour ride and transparently trade lower wait times for higher prices. City regulatory services have dealt with excess demand by forcing licensed cab companies to have a set number of cars on the road at peak hours. Technology could help them perform this role more effectively.

I’m not against surge pricing in principle. On highways, it streamlines traffic by getting tourists and shoppers off the road at peak commuting hours. For resorts, it balances demand over the seasons. Department store pre-season clothes are sold only at list – in essence a surge price in a heavily discount-priced industry.

But should surge pricing be used in all markets? Should higher education raise prices during a recession, because there is more demand for courses during a downturn? Should you be hit with a surcharge just because you have to catch a plane at the end of the day to get home for dinner with your kids?

My choice is to find a locally owned car service through Yelp. The rates are known and lower than Uber based on what drivers tell me and a recent WSJ article suggests anecdotally. My 24-year old daughter and her NYC friends do the same. And, because these services are regulated and a company owns the car, insurance coverage is assured. Were I a third place player in Uber’s markets, I would pivot to “Plan B” – sell my platform to local cab companies across the US to enhance their customer service, branding it “Taxi on Demand” with a value promise of assurance.

2 comments to Uber: A business model innovation that benefits and exploits

  • @mkplantes | I was just with a passenger who schooled me on insurance. So I dig up the latest news from @uber –

    There is clearly a lot to be resolved. I admire the @Uber team for their hustle since this is an undefined space. So I do see your point about the innovation here racing far ahead of the full regulatory framework being tested.

    Keep in mind that when it comes to Uber Black cars the insurance is not an issue: Uber requires $1M minimum of commercial (vs. personal) insurance. Many Uber Black cars carry $2M of insurance because with 2 or 3 passengers quite common (plus the driver of course), that’s really what you need to be safe. With UberX–that’s where there’s been a lot of ambiguity because there it’s the driver’s own personal insurance that’s at question, and as we know those policies can vary dramatically.

    So the link I posted–does it address or resolve any concerns you have about the insurance issue? Or are you reserving your opinion because none of this has been tested in courts yet–that is, who’s insurance is liable in an accident or incident?

  • Thanks Rashaun. I appreciate the link. (Although I disagree with Uber’s claim they are THE lowest cost.) I am surprised that Uber can get insurance on cars it does not own. I thought there were insurance regulations precluding this. In any event, I agree that Uber is working quickly – which I admire. And like Airnb it is a work in progress. One thought I had which will be a seed for a second blog is how public services – which taxis and airplaines were – are being privatized with the wealthy creating their own version of it, e.g., Uber limo, NetJet, private schools, etc. As the wealthy leave the public commons, the public loses funds and stakeholders. Then we see demands for less support for public goods….

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