Uber Launches War Against Yellow Cabs, Cuts New York Fares By 20% As Ali-Baba Launches Chinese Uber Competitor

Tyler Durden's picture

Curious what Uber is spending the record $1.2 billion in cash it raised in its most recent funding round (which valued it at a whopping $18.2 billion)? The answer: subsidies.

In a page right out of Amazon's playbook, the management of Uber has found that the best use of proceeds now that it may have finally saturated addressable markets, is to use its cash on hand to fund sub-equilibrium pricing losses and in the process, hopefully, put its competition out of business.

Earlier today, the Uber blog announced that UberX is "now cheaper than a New York City taxi." It added the following:

We just dropped uberX fares by 20%, making it cheaper than a New York City taxi. From Brooklyn to the Bronx, and everywhere in between, uberX is now the most affordable ride in the city.

 

 

KEEP IN MIND

 

These prices are only in effect for a limited time. The more you ride, the more likely we can keep them this low!

 

We know you may be asking yourself how this affects our partner drivers. What we’ve seen in cities across the county 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 what mean in the long run? They’ll be making more than ever!

"More than ever", at least until the subsidy cash runs out. And since Uber's valuation is one that will make sense only if Uber effectively manages to put the bulk of the legacy taxi business in the US out of business, the conflict with the existing cab industry is about to go into overdrive.

Because while one may or may not believe that Uber will ultimately succeed in putting NYC's cab drivers out of business, and it is very much doubtful if legacy Yellow Cabs will follow Uber in its price dumping strategy, one thing is certain: the value of a New York Yellow Cab Medallion, which about a year ago hit a record $1.3 million price, will suffer - at least in the near-term - as the conflict between Uber and Yellow Cab picks up, and as the NYC market is suddenly flooded with countless providers of cab-equivalent services.

Recall from August of last year:

The best returning asset class traded in the NY Metro area is yellow but doesn't change hands on Wall Street. As ConvergEx's Nick Colas notes, over the last 12 months New York City taxi medallions have risen 49% in price, besting the relatively humdrum returns of the S&P 500 (up 21%), the NASDAQ (22%) and the Dow (18%).  Medallions – essentially the right to operate a for-hail taxi in New York City – now trade for as much as $1.3 million, an all-time record.  

 

 

 

Part of this dynamic is fixed supply – there are just 13,336 medallions available for a city of 8.3 million people.  There is also a macroeconomic point, with a stronger NYC economy for those inhabitants who can afford the service.  The more surprising observation, however, is that new technology in the form of in-car credit card machines and more recently smartphone hailing apps both materially increase the value of owning a medallion.  In a world where every technology is deemed “Disruptive”, here’s a case where the status quo has actually reaped much of the reward.

Alas, there is no way to short the Medallion "price" which with the ongoing private status of Uber makes arbing the future of the cab industry rather difficult except for the most connected institutional investors, those which will have no choice but to keep investing in future Uber rounds at ever higher valuations until one day the Amazon strategy of beggar thy competitor either succeeds or fails.

And while the future of this particular Uber tactic is unknown, what most investors in the startup are wondering is what will its fate be in its largest addressable market, China. It is here where a far more notable development has taken place, with Bloomberg reporting that Hangzhou Kuaidi Technology Co., a taxi-booking service backed by Alibaba Group Holding Ltd. is adding luxury cars in China to boost revenue as it steps up its challenge to Uber Technologies Inc.

Kuaidi is targeting wealthy travelers with a new smartphone application as it partners with chauffeur companies in Beijing, Shanghai, Guangzhou and Hangzhou, Chief Executive Officer Dexter Lu said in an interview. The new cars include the 5-Series from Bayerische Motoren Werke AG and Audi AG’s A6.

 

Uber and Kuaidi are competing with Didi Taxi, which is backed by Tencent Holdings Ltd. (700), for a bigger slice of China’s 500 million users who access the Internet from their phones and are boosting use of location-based services. The new app, known as “Yi Hao Zhuan Che” in Chinese, is part of Lu’s push for a revenue model to sustain the business, which generated 50 million yuan ($8 million) of sales last month.

 

We operate under a similar model as Uber does in China,” Lu said on July 4. “Our work load will be very heavy in the second half, but it’s also very exciting.”

 

Uber, which has valuation of $17 billion after a recent funding round, is expanding in China and hiring in 14 cities, according to a July 1 LinkedIn post. The San Francisco-based company has been targeting customers in China willing to pay a premium for the luxury of tracking the vehicle’s approach, not handling local cash and finding daily newspapers and a Wi-Fi access inside the car.

Looks like "zero barriers to entry" is a popular saying for a reason.

One thing is certain: the winner from this competition, however long it may last and whoever the corporate loser may be, are consumers.

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orangegeek's picture

pushes pressure on the New York nazis, oops, gewberment, to lower their extortion fees on cabbies

 

let's see if the nazis, oops, gooberment can do it - they've already figured it out

Pladizow's picture

Clean cheaper new cars vs. More expensive old dirty rude cabi's - I wonder who will win?

spastic_colon's picture

cue the "craigslist" style murder in an uber operated automobile and any other capitalist killing event that the unions can muster....they have all the washington support they need right now.

Tod E. Tosspot's picture

In this case the enemy isn't unions, but the crony types who buy the medallions or jump through whatever municipal hoop is required to secure its local fiefdom. But your point is well taken.

Thisson's picture

You ever seen a medallion holder?  They sure aren't your typical crony type.  They are usually 1st generation immigrants from 40+ years ago.

ParkAveFlasher's picture

I know a medallion operator, and he is a first generation immigrant, and he is definitely not a friend of Boss Tweed.

gallistic's picture

Nice!

+1 for the Boss Tweed reference.

Ignatius's picture

The enemy is cartel, not labor.

monkeyshine's picture

Uber is one über psycho killer away from a deeply discounted valuation.

Berspankme's picture

Because the problem in amerika is cabbies making 40k not jamie lloyd or fuckmelt.

Seize Mars's picture

You enjoy overpaying for shit service? Good for you.

Seize Mars's picture

What would the cabbie make if he didn't have to pay 1.3 million to bloomberg in order to go into business?

hedgeless_horseman's picture

 

 

Do the banks offer financing for those NYC Taxi Medallions?

Thisson's picture

Yes, you can finance a medallion.  And, ironically, if NYC didn't restrict medallions, driver income would be much lower (supply would skyrocket).

ParkAveFlasher's picture

You can take out a mortgage on a medallion as well.

Matt's picture

As I understand it, the medallions are sold at auction, so the only way to lower the price would be to increase the number of medallions, i.e. making them less valuable. Does NYC really need double, quadruple as many cabs as it already has?

hedgeless_horseman's picture

 

 

...the only way to lower the price would be to increase the number of medallions...

Or they could eliminate the medallion requirement and let market forces take care of the number of cabs.  I know, a market, in NYC, how stupid am I?

Thisson's picture

True - there would be way more cars available, and driver incomes would be much less (a good thing for consumers).

Matt's picture

This is a problem we have with the truck drivers at the port - too many, so they have to sit for hours waiting in an enormous queue, while operating at really low profits, cutting back on maintenance of their vehicles. 

If you remove the regulation on Taxis in New York, the whole city could turn into a parking lot, with $10 / day cabbies in rickshaws living in tar paper shacks. Go free markets!

GooseShtepping Moron's picture

I am proud to say that I upvoted this comment, because Matt makes a valid but oft-overlooked point. A world of perfectly free markets would be indistinguishable from a banana republic. There would be a small coterie of filthy rich fat-cats who own nearly everything, just enough of a middle class to service the fat-cats and make the trains run on time, and hundeds of millions of dirt poor people living in tent cities with no chance at all.

It is necessary to 'socialize' the goods of a modern industrial society so that the average man can afford to participate in it, but this should not be construed to mean that 'socialism,' a derivative of Marxist ideology, is the proper way to do this. It is best done by isolationism, by protective tariffs and duties, by limited and benefitial trade partnerships, and by nationalizing major industries. The ownership of private property should be strictly protected by the state not prohibited, but it should not be taken to the heights of abstraction that would allow financial money-pirates (i.e. those currently known as banksters) to accumulate immense private fortunes at the expense of the public weal. Property taxes ought to be virtually nonexistent in such a state, and should subsist as small, nominal tokens of fealty (a shilling to the king, or something like that) in exchange for which the fee simple title to the property is granted along with the conferral of the contractual obligations of citizenship. The government should obtain its revenue primarily from industrial production, which is the real backbone of any economy. Any other sales taxes should follow the VAT protocol and should be levied mainly on services.

This would allow even the poorest person to maintain ownership of some small, productive property and would ensure that necessary goods remain affordable. Of course, all this only works if you have a cohesive, homogeneous, and patriotic population and a monarchical but self-restraied form of government. England actually approximated to these conditions once, which allowed her to build the greatest empire in the world; and she lost it when she gre weary of maintaining it. Any ideology or action that would facilitate a society slipping out of these conditions ought to be regarded as the gravest of crimes.

goldpercent's picture

It probably needs as many cabs as the market will bear.

edit: hedgeless, you beat me too it.

ParkAveFlasher's picture

Medallions can be rented out, like custodial gold.  That is a price-balancing mechanism...not perfect, but it does cause price fluctuation based on how hot the business is at any given time.

Duke of Earl's picture

It is not possible to determine how many cabs NYC "needs".  The answers can range from zero to infinity.  The framed question itself implies regulation.

John McCloy's picture

   I used UBER for the first time Friday. LES 2am in the morning...I can track the cab by GPS..there in 4 minutes..everything was paid by the app no swiping, waiting for receipt, TIP Included.

The company is awesome.

RyeWhiskey's picture

Suspiciosly upvoted, woudn't you say? As all their self-praising online posts.

RafterManFMJ's picture

See, when you make a post like this how about posting your location?

Your post is meaningless - is a 2AM pickup significant? Is the response time low?

In LA no, in East BF yes.

Milton Waddams's picture

I thought UBERX was a service that provided both transportation and delivery of "narcotics". Oh, wait...

Dewey Cheatum Howe's picture

I thought the ice cream man was a service that provided both transportation and delivery of "narcotics". Oh, wait...

When I was kid I bought some of best porno mags a young horny underage male could get at the time from the friendly local Mr. Softy truck. The ice cream was decent also.

StandardDeviant's picture

From "Mr. Softy", seriously??  That's brilliant!

(As for the ice cream, I'm trying not to think about Fight Club...)

hankwil74's picture

How has NYC not put Uber out of business, since their business is illegal in that city?

spastic_colon's picture

Uber will eventually get a supreme court ruling ala Aereo /s

The Phallic Crusader's picture

Uber's an awesome concept - what sort of arguments are the cabbies putting up?

That you can only get that 'haven't showered in days' plus exotic spices smell in a nyc cab?

Matt's picture

The argument is that cab services have to buy a medallion to operate in NYC, and the Uber cabs don't have medallions, therefore they should not be allowed to operate within the city.

If they open it up to open competition, no medallions, whats to prevent traffic in NYC increasing ten-fold as everyone just operates their own cab, bringing traffic to a halt?

Thisson's picture

That's what we call a self-regulating market.  If there's too much traffic, nobody will take taxis.  It's like the Yogi Bera saying: nobody goes there anymore; it's too crowded.

Matt's picture

I bet if taking a cab was the same speed as walking, at least 75% of the people would continue taking a cab, especially during adverse weather or if they have to carry something.

RyeWhiskey's picture

So offshore tax-evading corporation that benefits from non-payment of local taxes and business licenses "cuts" prices?

I shall stop paying my taxes - and then "cut" prices on my competitors.

Sounds like a "great" business model.   / sarc off.

U4 eee aaa's picture

Yes, it seems odd. They are also subsidizing the costs with cash from other areas. Isn't providing a service below the cost of that service (with the assumption that their only goal is to hurt their competitors, not for the true benefit of customers) some sort of anti competitive trade practice?

pods's picture

Lemme go ask Walmart.

pods

PaperWillBurn's picture

Google mapped willaimsburg to east village...2.7 miles.   Does driving 2.7 miles cost more thn $15?

 

Doubtful. They're still turning a profit

monkeyshine's picture

Afaik, only for foreign importers. Domestic producers are free to sell at below cost. I could be wrong.

RafterManFMJ's picture

Owe yes the ever dull appeal of those that pay their slave head tax; I pays my taxes massa!!

Don't dare let someone else escape the plantation! Turn them in to the overseer!

Good for Uber - and fuck da NYC

buzzsaw99's picture

a million bucks for a cab. funny.

RyeWhiskey's picture

A million bucks 3 bedroom condo.  Seems to be the new norm in my area.

Thisson's picture

A million bucks 1 bedroom condo.

 

FTFY.

TideFighter's picture

If they used Tesla's, would the app show them arrivng in flames? Would they get there faster if they were on fire? Tesla Jubilee? Would they charge less to sit on the batteries. All things I need to know. 

yogibear's picture

Tesla's hot seat. Their cars are hot, real hot.

Seize Mars's picture

Pay 1.3 million to bloomberg for the privilege of going into business for yourself. Celebrate your freedom. Step 3 rake in the profits.

Dewey Cheatum Howe's picture

Bratton will be on it with his broken window police enforcement policy. Expect the papers to start demonizing Uber as unsafe, unsanitary gypsy cabs that are bad for the environment and children next along with the very public announcement of an NYPD crackdown on them.

teslaberry's picture

the new chinese competitor is being called 'noober'.

zipit's picture

Don't be a goober, Mr. Tesla (aka, rolling firebomb).