- Leaving office at 10 pm used to be a nightmare for Neha Agarwal. This associate at a consultancy firm in Gurgaon would wonder how to get back home. Taxi hailing service Uber changed this. “Uber has made travelling at any hour much easier,” she says. “It’s so comfortable in fact that it feels like I have my own car.”
- For the past seven months, Shivaraju (name changed) has been able to plan his days better and even take a Sunday afternoon off. He manages 12 rides in his Uber cab in Bangalore every day—that will fetch him a Rs 1,100 incentive. It’s certainly better than his days as a tourist taxi driver doing long distances almost every weekend and hardly getting to see his family. “If I have personal work to do, I go offline for a while,” he says, pointing to the smartphone in front of him.
- Recently, Maheshwer Peri, Careers360 publisher, put up this post on Facebook: “My neighbourhood taxi driver Rakesh has been serving me for a decade. Today, he sounded distraught. Ola/Uber are hurting him.... Many of his loyal customers are saving the pennies and giving up this precious relationship for these new services. This business practice is killing competition with zero cost VC money. Disruptive business model, my foot!”
These three short stories capture how a taxi-hailing app is at the forefront of a raging worldwide debate on how a new kind of economy is turning all the rules upside down. Many have tried to give this phenomenon a label—platform or sharing economy being the most popular. But the most apt description is disruptive economy. Five-year-old Uber is being touted as the fastest start-up to get a $50 billion valuation tag—it managed that in fewer years than Facebook did.
At its heart, this ‘new’ model performs a very old function—connecting buyers to sellers. The difference is that thanks to technology it is easier to connect people without the traditional layer of middlemen and intermediaries. This has opened up new marketplaces—Airbnb (which is valued at $13 billion), for instance, has a model for letting people rent their homes (or part of it) on its platform. Consumers can now capitalise on an otherwise underutilised asset. This aggregation via smartphone apps is only spreading—budget hotels under an umbrella label or ride-sharing or food and restaurant delivery etc.
Uber is the face of what some hail as the new phase of capitalism. The bigger disruption of the new phenomenon, however, is that everybody can make a bit of money with whatever they own or by putting something that is lying idle to better use. Like Uber’s case globally, anybody with a car and free time can become a cab driver and earn money because the app connects them to a user (in India, it’s only with commercial taxi services). But governments across the globe have various rules that regulate these things.
It has been disruptive, for sure. A few months ago, Germany banned UberPop, the low-cost taxi service, after a court ruled it violated transport rules. Uber’s rival Lyft is fighting lawsuits over minimum wages in the US. Airbnb’s model of letting people rent their homes on its platform doesn’t find favour in New York because of regulations on short-term rentals, though the UK recently revised rules to allow the business. Fundamentally, regulations have been lagging behind or new businesses are ignoring existing business rules. Governments and local bodies around the world are slowly coming around to it, like the Philippines and Netherlands, to bring in new, progressive rules.
“Social good is an incidental effect. Uber is here to make profit, no one should have to point this to them.”
Pankaj Ghemawat, Global strategist
In India too, there’s tension. Consumers are by and large thrilled. Bangalore has never had a taxi-hailing culture like Mumbai, except probably rides to the airport in recent years. But more people are now tapping their phones and hopping on, mostly because of the business model that keeps fares affordable and drivers happy. Disgruntlement, however, is apparent in Mumbai where regular cabs charge Rs 15 per km but the tourist taxies now enlisting with the aggregators are offering Rs 11 per km, says union leader A.L. Quadros. “Why does the government allow this competition, why does it not fix the rates for them?” he asks.
Uber recently announced a $1 billion investment in India over the next nine months. Part of this will go into acquiring customers, which means fares will continue to be kept low. “This is a period of investment for us—so a lot of it will go for acquisition strategy in terms of riders and drivers—but a lot of that investment will go into new products and new payment solutions,” an Uber spokesperson told Outlook. The incentives for drivers vary from city to city—from per trip to the total number of trips in a day, the time drivers are actually online and so on.
The premise on which aggregators typically offer discounts to grow the user base is that prices would settle to reasonable levels once high volumes are achieved. “Frankly, it’s the same thing with e-commerce and airlines Rs 1 ticket or Rs 999 tickets,” says Jaspreet Bindra, an influential angel investor who has recently joined the Mahindra Group. “It has nothing to do with the shared economy. When a new industry comes up, you need to get more consumers and therefore people spend lots more money. So who pays the bill? Well currently, frankly, it’s the American pension funds most of all.”
Uber and its rivals such as Ola largely dip into the same pool of commercial drivers. Transport officials in Delhi, however, say Uber so far hasn’t complied with the revised Radio Taxi Scheme. Existing guidelines require city cab operators to own their vehicles, but the government is expected to soon notify new guidelines that would clarify rules on operating taxis as well as liabilities of the operator. Moreover, many of the issues raised by academicians, politicians and workers’ unions relate to how platforms across the transportation, food and hotels space seem to control the business but aren’t liable when a problem crops up because they don’t own anything.
For instance, Uber was banned in Delhi at the start of the year after one of its drivers was accused of raping a passenger. Just recently, taxi drivers in Delhi wrote to the chief minister to protect their interests even as the state police began handing out fines and impounding Uber and Ola cabs that didn’t run on compressed natural gas, which is mandatory for commercial vehicles in Delhi. Besides, there have been tax issues which the last Union budget sought to resolve by introducing the concept of ‘aggregator’ in the service tax rules, and making an aggregator of services liable to service tax.
“Nations should not let rich US firms take over their markets without trying to develop advanced sectors.”
Frank Pasquale, Law prof, Maryland Univ
“We are in touch with the authorities in India and look forward to working closely with them to develop sector-specific regulations that encourage innovation, provide consumers more choice,” says an Uber spokesman. “Transportation regulations were developed at a time when the ubiquity of cellphones—let alone smartphone apps—was never imagined.” The firm says it is addressing safety concerns with features such as an sos button in its app which alerts the police control room in case of an emergency.
“In India, what a bunch of us found out was that there was already a large supply out there which was not being used in a rightful manner,” says Ritesh Agarwal, the 21-year-old founder of Oyo Rooms, which has created a pool of independently-owned budget hotels to which it lends its brand after ensuring quality and service standards. “For example, there’s a large set of hotels already available, which are not branded, with occupancy rates of 20-25 per cent. With us coming in, we can drive it to 95 per cent.”
“I think shared economy companies, people like us, are a part of the solution, and not the problem,” Ritesh goes on to say. Oyo recently raised Rs 635 crore from investors, including Japan’s SoftBank, and wants to have around 50,000 rooms by the end of the year across 100 Indian cities, from 13,000 at present. Like several others, Ritesh too is looking for clarity on how service tax rules apply to his business, especially after the aggregator clause was added. The term ‘aggregator’ has been defined to mean a person who owns and manages a web-based software application and, by means of the app and a communication device, enables a potential customer to connect with persons providing a service of a particular kind under the brand name or trade name of the aggregator, says tax consultant Mahesh Jaising, partner with the bmr & Associates llp.
“Until this budget, the government was not able to collect any taxes from these IT platform-based companies like Uber. From March 1, 2015, India amended the law to collect tax from the aggregator—the person who owns or manages the IT application,” says Jaising. “Now the liability to collect tax is with Uber and not the franchisee taxi driver.” An Uber spokesman said service tax is paid on every ride. It also recently re-introduced card payments after complying with an RBI rule.
Much of the action still is largely a big-city phenomenon, at least when it comes to food, says Saurabh Kochhar, India CEO of Foodpanda, the mobile food delivery app which set up shop in India less than three years ago and has grown tenfold in the past six months. The company takes orders from the user, undertakes delivery for the kitchen and all else in between. “Customers order online through our interface and the order gets placed in the system of the restaurants,” says Kochhar, who reckons apps which create platforms for products have now become indispensable to people. “Be it to order a cab or order home a meal, these apps have now become an integral part of the average Indian’s day-to-day life.”
“A new industry needs consumers and lot of money’s spent. Right now US pension funds are footing the bill.”
Jaspreet Bindra, Angel investor
So, how do you govern these platforms? Ramesh Vaidyanathan, managing partner of Advaya Legal, says in many countries the conflict between technology and regulation is a continuing phenomenon. It happened even when automobiles arrived on the scene to replace the horse cart, he says. If the rules end up throttling the new service provider by creating artificial barriers, then there is bound to be a backlash from the end users, he warns. Incidentally, in New York, city mayor Bill De Blasio recently had to ease up on a plan to cap Uber cabs fearing traffic congestion after a public outcry. The mayor has been a critic of the taxi-hailing firm’s policies.
But for all their apparent success, setting up a fairly unconventional business in India still poses its unique set of problems. “Indian customers are more price- than quality-conscious. A huge part of our growth process is still trying to figure out what the customer wants,” says Durga Raghunath, senior vice-president, growth, at restaurant aggregator Zomato. Still, the fact that funding is more easily available now gives companies more space to experiment with new business models, she says. “Entrepreneurs are now asking themselves how can I disrupt something conventional to come up with ideas that cater to a young, more tech-savvy audience.”
Indeed, the idea of renting out your personal space to a tourist you have never met with just a flick of a finger over the internet sounds bizarre. Airbnb however made it real. Inc’s 2014 Company of the Year, Airbnb “works for low-maintenance, low-budget travellers who seek more privacy and cleanliness than a hostel”, says Aditi Sriram after using Airbnb for a trip to Berlin. Airbnb has over 8 lakh listings in over 190 countries, but the Indian market is not suitable for a “home stay model” yet, say experts. “Without a proper judicial or policing mechanism, people will avoid giving out their space with the fear of how somebody will live in it,” says Himanshu Chadha, co-founder at RoomWale, a service that formerly offered vacation rentals.
Given all the concerns, why is there so much money riding on these platforms? Quite frankly, it’s a fast forward kind of model—the money is put upfront, a lot of buzz is created, and then equilibrium is reached. Given continuous competition, until that elusive state is reached, it’s fair to call it disruption. We’d better get used to it.
- Cost, Convenience Consumers aren’t complaining as they are getting faster, cheaper, hassle-free rides
- Passenger Safety Many feel Uber is safer given the use of tracking technologies like GPS
- Driver Liability Who does Uber’s driver employability, background checks? Are they adequate?
- Artificial Advantage Given the huge amount of subsidy, what happens when VC-backed discounts stop?
- Predatory Pricing Uber’s cut-throat fares are killing off existing taxi operators and drivers
- Hi-Tech Efficiency The app use helps Uber reduce wastage, helps idle resources find customers
- Low Investment Existing taxi businesses are also endangered by Uber’s low-cost, licence-free model
- Employment Avenue In cities with huge unemployment, diverts youth from wasteful pursuits
- Environment Friendly Use of taxis is pro-green. Fewer private cars on roads means less pressure on air.
- Unregulated, Lawless Experts argue Uber is circumventing many regulations and tax laws
- Model To Emulate Shows established businesses what they need to do if they have to survive
- Valuation Game Uber’s rocketing valuation is a smokescreen to make VCs, promoters very rich
The Uber Age
How the taxi service is changing the way we consume, transact with each other
- Globally, anybody with a car and free time can become a cab driver as the Uber app hooks them to a consumer. It’s worth $50 billion globally.
- How does it work? Using the app, consumers find a registered taxi for a fee. The driver gets a fee depending on rides in a day.
- In India, Uber connects users to commercial drivers. Uber expects to hit over 1 million trips per day in the next six to nine months.
- What’s this called? Loosely, it’s called on-demand economy, sharing economy, gig economy, collaborative consumption, etc.
- “My overwhelming usage of Uber stems from the virtually non-existent, uncomfortable and indiscriminately priced public transport in Delhi”
- “Uber is an audacious capitalist assault to reroute taxes, insurance and revenues from the state to big business without a physical address”
- “Uber is safer for women. The taxis are cleaner. The process of hailing it and paying for it is transparent.”
- “?Uber will hike up their prices once they have considerable control over the market. The cheap pricing now is only an attempt to regain their lost market after the Delhi rape.”
- “Taking an Uber to work every day gives me time to read the newspaper in the morning and while going back, listen to some music since I don’t have to drive. It leaves me in a better mood.”
- “Yes, an Uber driver makes more than a regular taxi driver. But who makes more money—Uber’s promoters or its drivers?”
- “The whole Uber experience is very professional. There’s no feeling of being conned or cheated.”
- “Why can’t those who sing in praise of Uber just pick up the phone and call their local cabwallah? It costs less and sometimes much less.”
- “?Taking a cab from my local taxi stand to the airport usually costs me around Rs 1,300 as the drivers insist on being paid for the return trip as well. On the other hand, on Uber I end up paying less than half that amount.”
- “I hope my life insurance covers me if an Uber taxi I am sitting in is involved in an accident?”
- “Taking an Uber is better than driving your own car. It’s the best way to avoid the stress of negotiating the chaos on our rage-driven roads.”
- “Traditional taxi companies which spend lots of enormous amounts of money on licence fees will not be able to compete with Uber’s low prices.”
- “Can evaluating an Uber driver’s conduct and skills through an app ever replace a physical test?”
- “Where were all these champions of socialism, the people who look so wistfully at the past when traditional drivers were being harassed and passengers were being fleeced?”
- “Cost and convenience cannot be the only driving factors for the consumer in the shared economy. She has to also worry about larger social and economic issues.”
- “In an era of joblessness, it provides a source of livelihood to unemployed youth. Hopefully, Uber will protect them when things go bad.”
- How come China has its own Google, Twitter, Amazon, and its own Uber. Why is India always reduced to opening its doors to the world without trying to create Indian equivalents of these companies?”
A Rage Across The World
Why Uber has become so controversial
- India: Passenger safety and tax issues; taxi unions in many cities are planning protests
- Germany: UberPop banned in March after local court ruled it violated transport rules
- France: Suspended Uber’s ride-sharing service after the government declared it illegal
- UK: Proposal to limit number of minicabs on London’s streets
- US: Growing concern over congestion as Uber wants to put more cabs on roads
- China: Has its own Uber version. Police clampdown on ride-sharing through sting operations.
- South Korea: Uber CEO Travis Kalanick accused of operating an illegal taxi service
The Uber Model
Global revenues from five key sharing sectors to reach $335 bn by 2025 from $15 bn at present, says PwC.
- Food Consumers meet eateries at Zomato, Foodpanda
- Hotels Oyo, the marketplace for independent budget hotels
- Home Rental Airbnb, $13 bn globally, has a growing presence in India
- Ride-Sharing French co Bla¬blacar offers platform for car poolers
- Flatmates& Travelmates Flatchat for roomies, tripthirsty for travel mates
By Ajay Sukumaran in Bangalore with Lola Nayar, Arushi Bedi and Hansa Malhotra in Delhi