On February 12, Praveen Kumar, unable to pay for his taxi’s EMI, became the first Uber driver in India to commit suicide. As violent strikes by Ola/Uber drivers entered its eighth day on Friday, it is time to question the real cost of these subsidy-led, asset-light models that dominate the on-demand economy.
‘On-demand’ is a fantastic premise but there are several flaws in these models:
On-demand, but at what cost: We all know getting things faster and better cost more. So how much would it cost to get a ride on a new car instantly? Less than what it would cost you to hail a regular cab. This sounds illogical but it isn’t. Almost all on-demand players have been using money of venture capitalists (VCs) to subsidise their price to a tiny fraction of their real cost. They have been charging passengers less and paying drivers more, and calling that customer acquisition. Of course, both passengers and drivers loved it till the party lasted. And Uber and Ola wipe smaller players and local taxi services off the market.
But as the money inevitably started to run out, so did these subsidies. The ecosystem, fed on artificial low prices, started rebelling when the actual cost for on-demand became apparent.
Some rules can be bent, others broken: Whether it’s AirBnB running the world’s largest hotel service without a single license or Uber flouting Bengaluru’s rideshare ban, legislations have forever been playing catch up with these innovative models that seamlessly straddle the real and online worlds. Indeed, a large part of the sheen of these businesses was their ability to create lighter balance sheets because they could control everything without having to pay for salaries/benefits, infrastructure costs, licenses/fees etc.
However, as the markets matured, systems for holding these companies accountable have become stronger. This week, a Brazilian court held that Uber drivers had to be considered employees. There have been similar verdicts by judges across US and elsewhere that have been quietly settled out of court. But these thoughts are gaining ground, as are pressures on these services to invest in their own infrastructure and comply with local norms. As the costs of these changes add on, the balance sheets of aggregators like Uber and Ola could start looking more and more like those of traditional players, making them potentially undifferentiated and unattractive to investors.
Too big to fail: As mentioned, most aggregators run on very asset-light models. This means someone else owns the infrastructure, the people, the maintenance, the depreciation, the compliance and the domain expertise - these companies come in an hoist an app on top it and call all of it their own. What happens if and when they choose to stop or withdraw from a market? The ecosystem that depends on their demand generation and subsidies could potentially collapse. A year back, this happened in Austin and San Antonio. In the face of new, tougher rules, Uber and Lyft threatened to suspend operations in both cities. Austin held a referendum that decided against them. Two days later, Uber and Lyft had left the city, leaving Austin’s public transport infrastructure in tatters, and many Uber/Lyft drivers on the verge of financial ruin. San Antonio, on the other hand, surrendered. As a result, Uber and Lyft has the freedom to operate in that city with less than minimal accountability and no restrictions.
Now imagine if, in reaction to Delhi and Bengaluru banning rideshare, Uber and Ola decides to exit these cities. The companies would miss their revenue but can set up shop in in another city and get it back.
But what happens to new Swift Dzire, Hyundai Excent and Datsun Go cars that drivers bought with their savings? Banks would repossess their vehicles, many would become bankrupt and homeless. Some, like Praveen, would die.
These private companies, if not checked early, could grow to have a chokehold on our public infrastructure and policy-making. Fortunately, these aggregators are still in their infancy in India, and limited to urban centres.
The key is to get them into a compliance regime right upfront, and hold them accountable for the supply chain that they choose to own and control, not just their own employees.
It is also critically important to appreciate the human cost of subsidies, and build sufficient checks and balances to ensure subsidy into public infrastructure is not treated as a short-term marketing strategy.
Perhaps it’s time to question why we need an aggregator at all.
Oracle provides ERP to banks without taking over their operations.
Why can’t we have someone provide an app to taxi services without taking over their business?
Dipanjan Purkayastha is a fintech executive, who consults and invests in emerging startups in the marketplace, social and cloud space
The views expressed are personal