Uber in Toronto

Nissan Figaro
1991 Nissan Figaro http://autoweek.com/article/car-life/we-take-ride-one-few-nissan-figaros-north-america

The first taxi business in Toronto was started by one Thornton Blackburn and his wife Lucie in 1837. Offices were in the east end at Sackville and Eastern. Thornton and Lucie escaped slavery on the underground railway from Louisville Kentucky in 1831 – settling in Toronto in 1834. Slavery had been abolished by Governor John Graves Simcoe in Upper Canada (Ontario) since 1793 and in the British Empire by 1833.

In their book Blue Ocean Strategy, Renée Mauborgne and W. Chan Kim advises that a winning strategy for products or services is to find new markets where there is no competition for a new idea.

If you lived in a mansion on Jarvis Street, you owned your own horse, coach and employed a driver. Everyone else walked through the muddy streets of early Toronto.

Blackburn’s blue ocean strategy was to copy the taxi business of Montreal and provide the service to middle and lower class passengers with low prices. Travelling from A to B in now avoided what were often muddy conditions not to mention deep snow in the winter.

By 1888, Thornton had a virtual monopoly on taxis. By 1919 taxis were expensive and used only by the rich.

Uber

Fast forward to 2014. Uber enters the Ontario Market as an unregulated taxi service.

By 2016, Uber was making 45,000 trips per day using 15,000 drivers. Taxis handled 65,000 trips using 9,500 licensed drivers.

Uber’s blue ocean strategy is:

  1. Compete on price in the hope that the competition will be driven out of business. The goal is to achieve monopoly pricing in 300 cities in 60 countries around the world.

Factors supporting this approach include:

  1. Ignore local laws related to the taxi business.
  2. Offer segments of services such as the limousine and town car service Uber Black and low cost fares with UberX.
  3. Deny that Uber is not a taxi company but instead a “ride share” company and argue that it does not have to comply with civic regulations as for Taxis.
  4. The driver supplies the car.
  5. The driver and rider are connected via a smartphone app. In fact Uber views itself as the app and without the service fulfillment bits such as the car and driver.
  6. Uber uses a flat rate per trip model rather than a metered rate. The minimum Uber fare is $3.25 plus a 30 cent “city fee”.
  7. Rating the driver and passenger keeps unruly passengers from using Uber and drivers offering poor customer service from driving for UBER. A driver is dropped if their rating falls below 4.6 stars on a five point scale after 50 rides. The average target is 4.8 stars.
  8. Raise ever increasing funding to drive price competition.
  9. Pay the driver/owner as little as possible.
  10. A political strategy to create new legislation regarding the taxi industry and employee/employer relations and permit surge pricing. In the mean time, ignore regulation.
  11. Expect a never ending stream of lawsuits governments, drivers, passengers and competitors over labour and taxi licensing issues.

After numerous legal wranglings, regulations controlling Uber now falls under the City of Toronto’s Bill 571. Passed on May 3, 2016,  Toronto created a new class of taxis called Private Transportation Companies or PTC’s. PTC’s include both driver and company facilitating the ride. The bill stipulates the regulations for ride sharing transportation companies such as UberX. Drivers must now obtain a background check. The regulations permit surge pricing by existing taxi companies and ride hailing using a smartphone app.

Unlike taxis, PTC’s cannot pick passengers off the street or wait for the next ride in Taxi stands. Only Uber Black licensed limos can pick up passengers at Pearson Airport. UberX drivers are fined $11.25 for picking up rides at Pearson.

Employees or Contractors?

A class action suit was filed with the Ontario Superior court on January 24, 2017 contending that Uber drivers are employees and not independent contractors. The suit seeks $200M in damages for a class of 20,000 Uber drivers.

In August 2016,  a case in the UK won on the contention that the driver is an employee since if they was a contractor; the driver would be able to negotiate the fee for their services. Uber dictated the fee.

The ruling impacted 30,000 drivers in London who can now expect basic employment rights such as minimum wage for their labours. If Uber loses the case in Ontario, they would be forced to pay for standard employee benefits. Prices would have to increase.

As well,  Uber would be liable for any insurance claims.  Yellow Taxi in San Francisco was placed into bankruptcy as a result of a driver being designated an employee and multimillion dollar insurance claims followed.  Uber would be exposed to the same risk.

Uber Financials

Uber is a Zombie company that has never made a dime of net profit.

Uber has lost more money than any start-up in history. Unlike every other company, losing money is business as usual. Yet it is valued at $69 Billion.

Uber posted a loss of $1.2 Billion with a B in the first half of 2016. Uber posted a loss of $708 million in the first quarter of 2017.

Uber has lost well over $7 Billion since its inception in 2009 in its quest to provide ride share around the globe. Revenues were $5.4B in Q3 of 2016. Since it only keeps 25% of the fare, net revenues after paying drivers would is $1.35B.

Uber lost $2.0 Billion on experimenting in the China market. Losses for 2016 are projected to be $3.0B.

Yet Travis Kalanick remained in the CEO office.

Where does the money come from?

Uber recently raised $3.5 B from the Kingdom of Saudi Arabia’s Public Investment Fund.

Where does the money go to?

The price competition strategy means there is no money to be made by collecting fares to ferry a rider from A to B. Instead, Uber compensates select drivers who meet certain criteria such as $500 if the driver picks up over 120 rides per week. Without the incentive, there would be no Uber cars on the street.

All the legal actions against Uber and attempts at changing the local regulator must cost them a pretty penny.

How is Uber kept afloat?

Borrowing money – lot’s of it and maintaining an unreasonable valuation of $60 billion.

What is the end state?

Either Uber goes bankrupt,  achieves its goal of being a monopoly or merges with a third party.

As we have seen by 1919 in Toronto, taxis were expensive and the choice of transport for the rich. Will history repeat itself if Uber becomes a taxi monopoly?   History shows that taxi monopolies in Toronto do not last as the regulatory environment changes to serve the citizens of this town.

Uber entered the taxi market where profits are next to none. It is a one trick pony  offering low prices. Its business model relies on the poorly paid drivers and battles the constant churn of drivers and their cars.

To counter the churn,  Uber offered sub-prime loans on cars to increase the pool of drivers and hence business.

Uber’s business model is not sustainable. Rider fees  only cover 40% of the ride cost.

Uber is destined to become another case on the scrap heap of forgotten ex dotcom companies.

There may be a smidgeon of hope for redemption in Uber to remedy it’s cultural issues.

In fact, on June 21, Travis Kalenick was forced to resign by a group of investors Your fired! which is a good first start. He still remains the largest shareholder but should now be removed  from day to day operations

In the meantime, enjoy the subsidized ride brought to you by King Salman of Saudi Arabia.

Additional Reading

Thornton Blackburn

http://www.becktaxi.com/about

Blue Ocean Strategy

Beck Taxi