Excerpted from Tim O’Reilly:
“One way to think about the new generation of on-demand companies, such as Uber, Lyft, and Airbnb, is that they are networked platforms for physical world services, which are bringing fragmented industries into the 21st century in the same way that ecommerce has transformed retail.
Let’s start by taking a closer look at the industry in which Uber and Lyft operate.
The coordination costs of the taxicab business have generally kept it local. According to the Taxicab, Limousine and ParaTransit Association, the US taxi industry consists of approximately 6,300 companies operating 171,000 taxicabs and other vehicles. More than 80% of these are small companies operating anywhere between one and 50 taxis. Only 6% of these companies have more than 100 taxicabs. Only in the largest of these companies do multiple drivers use the same taxicab, with regular shifts. 85% of taxi and limousine drivers are independent contractors. In many cases, the taxi driver pays a rental fee (typically $120/$130 per day) to the owner of the cab (who in turn pays a dispatch and branding fee to the branded dispatch service) and keeps what he or she makes after paying that daily cost. The total number of cabs is limited by government-granted licenses, sometimes called medallions.
When you as a customer see a branded taxicab, you are seeing the brand not of the medallion owner (who may be a small business of as little as a single cab) but of the dispatch company. Depending on the size of the city, that brand may be sublicensed to dozens or even hundreds of smaller companies. This fragmented industry provides work not just for drivers but for managers, dispatchers, maintenance workers, and bookkeepers. The TLPA estimates that the industry employs a total of 350,000 people, which works out to approximately two jobs per taxicab. Since relatively few taxicabs are “double shifted” (these are often in the largest, densest locations, where it makes sense for the companies to own the cab and hire the driver as a full time employee), that suggests that half of those employed in the industry are in secondary support roles. These are the jobs that are being replaced by the efficient new platforms. Functions like auto maintenance still have to be performed, so those jobs remain. Jobs that are lost to automation are equivalent to the kinds of losses that came to bank tellers and their managers with the introduction of the ATM.
Technology is leading to a fundamental restructuring of the taxi and limousine industry from one of a network of small firms to a network of individuals, replacing many middlemen in the taxi business with software, using the freed up resources to put more drivers on the road.
Uber and Lyft use algorithms, GPS, and smartphone apps to coordinate driver and passenger. The extraordinary soon becomes commonplace, so we forget how our first ride was a magical user experience. That magic can lead us to overlook the fact that, at bottom, Uber and Lyft provide dispatch and branding services much like existing taxi companies, only more efficiently. And like the existing taxi industry, they essentially subcontract the job of transport?—?except in this case, they subcontract to individuals rather than to smaller businesses, and take a percentage of the revenue rather than charging a daily rental fee for the use of a branded taxicab.
These firms use technology to eliminate the jobs of what used to be an enormous hierarchy of managers (or a hierarchy of individual firms acting as suppliers), replacing them with a relatively flat network managed by algorithms, network-based reputation systems, and marketplace dynamics. These firms also rely on their network of customers to police the quality of their service. Lyft even uses its network of top-rated drivers to onboard new drivers, outsourcing what once was a crucial function of management.
It’s useful to call out some specific features of the new model.
* GPS and automated dispatch technology inherently increase the supply of workers, because they make it possible for even part time workers to be successful at finding passengers and navigating even to out-of-the-way locations. There was formerly an “experience premium,” whereby experienced drivers knew the best way to reach a given destination or to avoid traffic. Now, anyone equipped with a smartphone and the right applications has that same ability. “The Knowledge,” the test required to become a London taxi driver, is famously one of the most difficult exams in the world. The Knowledge is no longer required; it has been outsourced to an app. An Uber or Lyft driver is thus an “augmented worker.”
* The reliability and ease of use of Uber and Lyft makes it much easier for passengers to get pickups in locations where taxis do not normally go, and at times when taxis are unavailable. This predictability of supply not only satisfies unmet demand but leads to increased demand. People are now more likely to travel more widely around the city, whereas before they might have avoided trips where transportation was hard to find. There are other ancillary benefits, such as the ability for passengers to be picked up regardless of race, and for some previously unemployable populations (such as the deaf) to serve as drivers.
* Unlike taxis, which must be on the road full time to earn enough to cover the driver’s daily rental fee, the “pay as you go” model allows many more drivers to work part time, leading to an ebb and flow of supply that more naturally matches demand. Drivers provide their own vehicles, earning additional income from a resource they have already paid for that is often idle, or allowing them to help pay for a resource which they are then able to use in other parts of their life. (Obviously, they incur additional costs as well, but these costs are generally less than the costs of daily taxi rental. There are many other labor issues as well; these will be the subject of a later essay.)
* Unlike taxis, which create an artificial scarcity by issuing a limited number of medallions, Uber uses market mechanisms to find the optimum number of drivers, with an algorithm that raises prices if there are not enough drivers on the road in a particular location or at a particular time. While customers initially complained, this is almost a textbook definition of a Supply and Demand Graph, which uses market forces to balance the competing desires of buyers and sellers.
More drivers means better availability for customers, and shorter wait times. Uber is betting that this will in turn lead to changes in consumer behavior, as more predictable access to low-cost transit causes more people to leave their own personal car at home, and use the service more. This in turn will allow the service to lower prices even further, which will increase demand in a virtuous circle. This is the same pattern that has driven American business since the Great Atlantic & Pacific Tea Company (A&P) pioneered the model in the early part of the 20th century.
There are concerns about whether lowering prices affects driver income. So far, there are many accusations from critics but no hard evidence that this is the case. Uber argues that greater demand will actually increase driver income. In any case, Uber is now putting its money where its mouth is and guaranteeing driver income when it lowers fares.
There are also concerns about the impact of Uber and Lyft on urban congestion. But the data on the subject is equivocal. And while the current algorithm is optimized to create shorter wait times, there is no reason it couldn’t take into account other factors that improve customer satisfaction and lower cost, such as the impact of too many drivers on congestion and wait time. Algorithmic dispatch and routing is in its early stages; to think otherwise is to believe that the evolution of Google search ended in 1998 with the invention of PageRank.
A crowdsourced rating system is far from perfect, but delivers visibly better and more consistent results than whatever management processes were performed by traditional taxi companies.
There is no absolute requirement that drivers be individuals, and the supplier networks to these platforms will continue to evolve.”