The future of taxi-hailing apps

Over the past two months, two major taxi-hailing apps received new rounds of funding - in December, Baidu announced an investment in Uber while SoftBank, Alibaba Group and Tiger Global committed US$600 million to KuaiDi Dache.

However, the growth of such apps face many hurdles.

Firstly, legal concerns. China's Ministry of Transport also announced bans on taxi-hailing apps for private cars without taxi licenses last month, which would theoretically place limits on the growth of taxi-hailing apps.

While Uber has been pushing for legislation in some US states to identify them as "transportation network companies" that can operate under certain sets of rules, legislation in other parts of the world may not been passed. For example, taxi-hailing apps like Uber are seen as illegal by Spain, Canada and Thailand.

Secondly, there remains the question of how much room is available in the market for a variety of big and small competitors characteristic of healthy competition. For instance, the cut-throat competition between Lyft and Uber in the US that has been well-documented by US media.

In Hong Kong, Easy Taxi decided to cease its operations in Hong Kong and announced that it will also be pulling out of Taiwan this year. Local Hong Kong start-up taxi-hailing app Taxiwise was bought up by bookings company Ikky last year.

Why are big companies still investing in these taxi-hailing apps? How are these apps taking advantage of possible marketing revenue coming from brands and what does the future look like?

Why taxi-hailing apps have been so popular

Convenience and offering an alternative outside of the traditional taxi industry are cited as major reasons for the popularity of these apps.

"Taxi-hailing apps shake up an industry that has been doing the same thing, the same way, for a long time. Taxi-hailing is not new but it's not necessary for a company running these apps to bring taxi drivers onto their own books.  You sign up a driver and that's it," James Mckeogh, director of management consulting, KPMG China, said.

"It's a very liberal, open market and a convenient way of hailing taxis for customers."

Colin Light, digital consulting leader of PwC China and Hong Kong, agrees.

"Most taxi industries around the world are monopolies with rates regulated by local governments. Different taxi firms still have one regulated rate. The apps create a free market for taxi rates at any given time, breaking a regulated monopoly and giving consumers more choice," Light said.

Bad press surrounding taxi-hailing apps

Taxi-hailing apps have created field days for newsrooms around the world. There have been protests by taxi unions, controversy about whether laws legalising their mode of operation should be passed, safety of ridesharing such as reports of assault by drivers, insurance coverage, privacy concerns about data collection and transparency of pricing systems.

"The problems with taxi-hailing apps arise out of the ethics of individuals within the ecosystem," Mckeogh said.

Meanwhile, Light said, "What is your promise? If it's leading you to the nearest available taxi, that's one thing, but if you validate private cars which are not also public taxis, that's a different promise. Taxi-hailing apps come with different promises, which can come with risks."

Meanwhile, the grief expressed by the taxi industry is partly because even apps that list only licensed taxis challenge existing ways of doing things.

"In some markets, such as Germany and the UK, taxi-hailing apps are messing with heavily unionised businesses. They go around the union and create a free market for what is a regulated business, breaking apart the monopoly and making a lot of people upset," Light said.

While some taxi drivers are willing to be listed by taxi-hailing apps to find better fares and to receive incentives offered by these apps, others may feel uncomfortable about e-payment.

Mckeogh said, "Taxi drivers don't want to lose tips, which is part of their income. They are also not used to receiving their fares for the day in an electronic way, transferred to a bank account."

Meanwhile, transparency of pricing is another subject of debate. For example, during Sydney's Lindt Cafe siege in December, Uber prices surged due to high demand as many people wanted to hail a taxi to travel away from the downtown area where the siege was taking place.

"If an event triggers an increase in demand, the apps need to pull in more cabs from the suburbs into the city, and this is costly.  There's an increase in value and it's a transparent system - the taxi-hailing apps tell you the price is high and asks if you want to continue," Mckeogh said.

Monetisation and Marketing

To break into a new market, some taxi-hailing apps offer cash and incentives to drivers and passengers. This brings the apps publicity and market share. Afterwards, they are able to hike up fees such as by adding booking fees.

"This isn't marketing - it's just viral noise," Mckeogh said.

"App providers might throw cash and incentives at it in the beginning but they won't continue doing that in the long run. People continue to pay after the fees are added because it's convenient."

The other way in which taxi-hailing apps have been earning money is by acting as a marketing platform for brands.

"Tesla allowed people to book test-drives on Uber in Shanghai for a product launch while Porsche partnered with Uber in Hong Kong for Operation Santa Claus," Light said.

"The taxi-hailing app is an incredibly attractive engagement tool. It knows where customers are going and what kind of money you can target."

Mckeogh agrees on the fact that taxi-hailing apps can collect a wealth of data about customers and said this data could be sold to a third-party with user consent.

"The apps track you from point A to point B and they know where you live and work, and where your friends live and work through recognising patterns in repeated rides. The apps can use the data themselves or sell them to others as long as their customers consent to it in the terms and conditions," he said.

Why some operators are being pushed out of the market

For Light, it's because a high volume of business is required to make a profit out of the small cuts that taxi-hailing apps take out of rides.

"Apps are brokers and any broker taking a chance in the market relying on small cuts want a high volume of business," he said.

That explains why these apps pay the drivers incentives on top of customer fares to gain market share.

Light said, "The investment only works if you have a high volume. If you're not one of the top two apps, you're nowhere, because it's a volume game. Realistically, how many taxi apps will you install on your phone? It's a very risky business."

Is the taxi-hailing app market is saturated?

In large markets like China and the US, for example, market saturation seems only apparent in large metropolitan areas. In contrast, the suburbs and rural areas offer more opportunities for smaller operators.

"You see KuaiDi Dache and Didi competing fiercely in large metropolitan areas in China and it's a very small window. But outside the city, more local and social versions of these apps have viable business models, even if the big companies are going for scale and recruiting drivers in a competitive way," Light said.

He sees the taxi-hailing app market as becoming a duopoly or a small oligopoly where a small number of companies dominate.

"Factors that matter for new apps hoping to lend themselves to scale are the ability to recruit a certain number of available cars and passengers to match the top apps, trust, localisation and social connectivity," Light said.

Future applications of the taxi-hailing app beyond ridesharing

Mckeogh see community applications evolving out of the taxi-hailing app model in the future.

"You could have a community bartering system that runs on credits and drivers can earn credits by doing small favours or errands for members of the community," he said.

The apps would connect members of the community with what they need, provided by another member of the community who has a car. For example, if you live in a faraway suburb or rural village, you could drive a neighbour to town on your way to work, or pick up groceries on the way home for an elderly person who lives alone.

Community logistics is another example, where in areas not served by big-name logistics companies, residents could broadcast a message on an app about free space in their cars and help ship goods to another location en route to their destination.

"We may see these apps and systems springing up in the future where there's safety and trust.  Technology prevents some social processes that block these kinds of interactions in communities such as judging who the person is before you decide whether to help them," Mckeogh said.

"These apps have the potential to increase the social connectivity, convenience and sense of being united for communities and this adds value to society."