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How Uber's Yellow Taxi Gambit May Backfire

Uber drops fares to take on New York's Yellow Taxis, but the ploy may not work.

It's a strategy as old as commerce itself. But will undercutting its competition work for Uber?

The ride share company Uber on Monday announced that it's taking on the New York City Taxi & Limousine Commission and its fleet of yellow taxis, with a new and discounted pricing scheme.

Here's what Uber is promising: For a limited time, Uber rides will operate at a 20 percent discount to the average taxi fare, roughly two dollars worth of savings on typical rides such as from the East Village to Brooklyn or Midtown to the Financial District. 

"From Brooklyn to the Bronx, and everywhere in between, uberX is now the most affordable ride in the city," Uber brags in a blog post from yesterday.

It's a brash and bold move, but one that lacks the authentic David and Goliath chutzpah that so many startups engage in every day. Rather, Uber is more like the spoiled child giant of Silicon Valley who's taken up residence in the Plaza's new plush condos for the super wealthy and wants to have its own way. Uber, the most highly-valued startup of all time, is currently valued at $18.2 billion after a fresh infusion of cash--$1.2 billion from investors such as Fidelity Investments. 

By trying to undercut New York City's yellow cabs, Uber may destroy a far more authentic entrepreneurial cab culture that the Big Apple has known for generations. (Maybe some will remember that Archie Bunker, of All in the Family, supported his family for a time by driving a cab.) Along with it, Uber is hoping to trade its pricing opacity for the regulatory clarity of the TLC and the nearly 200 million rides its drivers offer city dwellers annually.

Here's what we know about the TLC, the New York City agency responsible for the fleet of 50,000 vehicles that includes Manhattan's famed yellow cabs. It counts 100,000 drivers, whose licenses are reviewed annually and whose vehicles must pass regular safety and emissions reviews, among other things. The city has nearly 14,000 medallioned vehicles, a requirement for every yellow cab. Yes, the medallions are shockingly expensive--upwards of $1 million by some recent estimates--but that also means there's more skin in the game.  

Here's what else the TLC disclosed in its 2014 fact book: 

  • The average fare for a taxi ride in 2013 was $13.40, up 11 percent from 2012, due to a rate hike.
  • Average hourly gross pay for a driver is $26 to $44 an hour.
  • Average net pay is between $14 and $31 an hour after fuel and amortized lease payments for the cab.

As a private compnay, Uber isn't required to divulge much about its drivers or standards for hiring them. According its website, all that's necessary to become an Uber driver is to have your own car and insurance, and to submit to a DMV background check. So far, Uber's ability to duck regulatory scrutiny in most states has allowed it to grow phenomenally quickly. And that growth has led to numerous lawsuits, primarily from taxi drivers in other cities who resent Uber's ability to disregard the regulations that they must follow.

Uber's lack of driver scrutiny and refusal to take responsibility for its drivers has led to some really bad press for the company. Last month, a West Hollywood Uber driver allegedly kidnapped a drunk woman and took her to a hotel room where he may have sexually assualted her. On New Year's Eve this year, an Uber driver killed a 6-year-old, but the company refused to add to the driver's personal insurance payout for the death. And last month, a driver with a felony record reportedly physically assaulted a passenger when he shouldn't have been driving at all.

And while it may seem like Uber is taking on the traditional establishment in cities like New York, as this report from Bloomberg Businessweek shows, Uber's investor billions have allowed it to retain top lobbyists to keep fighting regulators:

In Illinois, where the company ran into opposition in Chicago, it retained Michael Kasper, a confidant of Mayor Rahm Emanuel; in Washington, D.C., it hired the Franklin Square Group, run by Joshua Ackil, a veteran of the Clinton White House. In California, where a bill advancing through the legislature would impose new insurance requirements on ride-sharing companies, Uber is represented by the lobbying firm Gonzalez, Quintana & Hunter, which also works for Facebook.

Meanwhile, rather than rely on its fat bankroll of VC cash, Uber is making its own drivers take the hit for its hyped New York City discount. Here's more from the same blog announcing the new pricing:

We know you may be asking yourself how this affects our partner drivers. What we’ve seen in cities across the country is that lower fares mean greater demand, lower pickup times and more trips per hour--increasing earning potential and creating better economics for drivers. What does [that] mean in the long run? They’ll be making more than ever!

Personally, I've had too many experiences with Uber's "surge" pricing to be sanguine. Rides that should cost $10 have cost $30 after a sudden traffic jam. Friends have winced as they've recounted tales of recent Uber trips across Manhattan during rush hour that have cost $50.

In 20 years of City life, I've never had much trouble with yellow taxis. Sure the drivers can be grumbly and rude, but that's to be expected sometimes in New York. Instead of secret sticker shock on my credit card bill, the fares are clearly metered. And while the rides can be expensive, at least you have a second-by-second accounting of the cost.

And sure, you can do some pretty intense maneuvering around other city dwellers to get a ride, but in a real pinch most New Yorkers will also share a cab with you, if you're heading the same way. Sometimes that means you make friends with strangers. And if you ask me, that's real ride sharing. 

 

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Last updated: Jul 8, 2014

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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