Uber Closing In On Ola

Are you going to pick me up or should I uber it?” That or “Say Ola to your driver,” are part of everyday conversation today as taxi aggregator services become more deeply entrenched into our bustling cities. So disruptive has this model been that people now think twice about buying a car, a fact admitted to by Mahindra Group chairman Anand Mahindra recently when he said that Uber and Ola are the biggest potential threats to the traditional car industry. “We are changing consumer behaviour and dissuading them from buying their second car,” says Amit Jain, president of Uber’s India operations.

And Uber may well talk. It has marched into city after city across the world, brazenly stared down its many problems and refused to blink first in the face of trouble.

Cut-throat Competition
But make no mistake. The taxi aggregation business isn’t easy and has sparked off a cut-throat rivalry between the two dominant players in a market which has grown from $5 billion in 2009-10 to $9 billion in 2015-16, as estimated by Rajiv K. Vij, founder of Carzonrent, a Delhi-based car rental service.

Ola came first, in December 2010 and Uber followed three years later in October 2013. But the two are so neck and neck in competition today, you wouldn’t remember who started it.

It wasn’t long before phone-based pre-booking cab services like Tab Cab, Mega Cab, Spot Taxis and the traditional flag-down black-and-yellow cabs too faced severe pressure from the app-based models — across the world, often resulting in strikes, agitations and riots, as the livelihood of regular cab drivers are threatened.

“The non-aggregation models are relatively less scalable,” says Pragya Singh, vice-president, Technopak, an advisor for startups. “These players will need to reinvent themselves. If they can’t compete on price and instant availability, they will need to find a proposition on which they can compete.”

Some old market share reports have pegged Ola’s share at about 75 per cent. Uber claims it has more than 45 per cent market share as of March 2016 as against just 5 per cent in January 2015. It says it has been growing at 40 per cent month-on-month. Uber claims to have 2.5 lakh driver partners, while Ola claims 3.5 lakh drivers plus 80,000 autos-rickshaws.

Neither private company is bound to disclose revenue or market share figures. Analysts point out that even if one were to assume that Ola has 75 per cent market share, it is spread across 102 cities and its share in the more profitable metro cities could be much less.

Intangible Advantage
There are important intangibles, besides market share, that show how both are positioned. Uber was clearly on a slow wicket in India as long as the electronic wallet was the only mode of payment. Accepting cash payments and heavily incentivising drivers based on number of rides and customer experience were measures that turned Uber around. Uber drivers say that their company is incredibly strict about driver ratings and consistently low ones are dealt with seriously. The 5-point customer rating system is vigorously implemented by the company and drivers with consistently low scores are penalised and logged off the system. This makes drivers work hard to reach quickly for pick-ups and keep their cabs and interaction with customers at a high-level of hygiene.

Uber also has been focusing on technology a lot more than its rivals. In March this year, it inaugurated its engineering centre in Bengaluru which is also the first in Asia for the company. “With this we aim to deliver a world-class experience from India,” says Thuan Pham, chief technical officer, Uber Inc.

Pham says Internet connectivity, traffic congestion, and accuracy of routing are some of the key challenges faced by Uber in India. “We are working to make our ETAs (estimated time of arrival) better,” he says.

Spread Too Thin
Unlike Uber in India, which has concentrated on its core business by leveraging technology to win customers with better rides, Ola has been experimenting with peripheral businesses such as Ola Café and its hyper local grocery delivery service and Ola Store which shut down this year. Industry watchers say the operational costs are too high and margins too thin to sustain the online food business.

Ola is currently present in 102 cities in India while Uber is in 26. But that’s Uber’s business strategy. “The idea is not to get into 100 cities and spread ourselves too thin,” says Jain. “We want to focus on growing deeper into the markets we are in. Out of the top five cities that see the highest volume of business, we are leading in three. The idea is to grow our business stronger in these high-volume markets.”

Ola agrees that 90 per cent of its business comes from the top 10 cities which could suggest that the company is making losses in the other cities. Given their demographics with lower disposable income and higher illiteracy rates, smaller towns may indeed turn out to be a loss-making venture for the aggregators.

Mohamed Salim (name changed), 34, a driver with Ola in Dhanbad, says, “There are days when we get only three or four rides a day compared to an average of 15 rides per shift in cities.” He says 60 to 70 per cent of passengers are those who try their first free ride and never come back. All that money spent on brand awareness and loyalty doesn’t quite cut it in small towns.

Sanjay Kumar, a student at Vinoba Bhave University says, “I will never spend Rs 100 on a 4-km ride and would rather use a shared auto that charges Rs 8 for the same distance.” Just like Kumar, the majority of people in small towns are either those who own a car or those who cannot pay a three-digit sum for a cab ride. Kanpur-based professor Raza Naqvi, who uses Ola’s service, says, “Seven to 10 per cent of people in a town like Jhansi or Ujjain own a car and the rest are not in a state to pay for the cabs.” Though most people use smartphones in Kanpur, more than half of them have no idea about how to use the apps, he adds.

So, who is using Ola or Uber in tier-II and tier-III cities? Says Umesh Singh (name changed), a Raipur-based Ola driver: “Sixty to 70 per cent of my booking comes from either the airport or the railway station for pickup and drop.” He says only a few people use Ola within the town. And a bigger problem is that Ola drivers have to face the ire of local cab service providers which sometimes turns into ugly brawls.

Predictably, Ola says it sees enormous potential in tier-II and tier-III cities especially with the launch of its cheapest cab version Ola Micro and e-rickshaws.

Flood and Surge
Uber’s game plan on the other hand is simple — keep cutting prices, raise demand for cheap rides, flood the market with drivers and ultimately kill any competition. Drivers who come on board feel the pressure as the company revises ride rates downwards to stoke demand. The strategy is to flood the market with cabs and drivers. And it is no slow train. The ramp up is fast and bitter.

In London, for instance, the famed Black Cab service was literally run to the ground as Uber ramped up its service over three years with relentless price cuts. Uber launched in London in June 2012 with 50 drivers. It was the 11th city and by any stretch one of the toughest markets to break. There were huge fleets of very organised taxi operators — the Black Cabs, and the app-based Hailo. Under-cutting them steadily and in the face of now-familiar protests by other cabbies, Uber, by mid-2015, officially surpassed the Black Cab strength with over 25,000 drivers on the road. Today, the Uber app is downloaded 30,000 times every week by people planning their first ride.

But once the app-based aggregators have you hooked they also cash in on high demand to pinch your pocket. Surge pricing or inflating prices two to six times over at the time of peak demand is a subject of huge controversy and regulatory debate in India.

Many technology-led businesses are new to India, and the laws were neither made for nor do they address the requirements of these newer business models. Such businesses end up working with ambiguous interpretations of existing regulations and continuously face legal challenges. As a consumer-friendly measure, the Karnataka government has recently banned surge pricing in Bengaluru using provisions in the Motor Vehicles Act, 1988. Delhi followed suit during the April odd-even experiment when a large number of private cars went off the roads for a fortnight. In response to the government’s ban, Uber’s Jain says in justification: “Dynamic pricing makes Uber reliable because Uber can vary prices to meet changes in demand. The magic of pushing a button and getting a ride happens because supply and demand adjust in response to price changes: without it the reliability of always having a ride when you need one becomes hard.”

In stark contrast to Uber’s stance, New Delhi-based Magic Sewa cab aggregator service feels surge pricing doesn’t make sense in India. Launched this February, Magic Sewa (which also accepts bookings online and through phone) is one of the latest entrants to the app-based cab aggregator space. “Surge pricing is an import from places like America and Europe where dynamic pricing is used to meet the high demand in events like a football match or a festival by pushing more private car owners to come out,” says Rakesh Aggarwal, founder, Magic Sewa. He says that many cab aggregators today use surge pricing as a “loss recovery mechanism” where they make up for losses incurred by their low-rate schemes during normal hours.

Singh agrees that the taxi aggregator model faces a ‘grey’ situation with no clear regulations. “Until the government comes up with a comprehensive policy, the players will need to work within the ambit of existing regulations. In the short term, these may impact some growth,” she says.

The suspension of two-wheelers operating as taxis is another example of how these app-based taxi aggregators will have to deal with legal nuances. India’s Motor Vehicle Act currently doesn’t have a provision for two wheelers to be used as taxis but that hasn’t stopped a thriving two-wheeler taxi service in Goa.

As Uber is all set to overtake Ola, the latter is cautious and putting its best foot forward to win the battle. For instance, both operators had suspended surge pricing in New Delhi from 15 April to 30 during the second phase of the odd-even traffic scheme after the Delhi government threatened to cancel permits for charging higher than prescribed fares.

But, while Uber brought back surge pricing on 1 May, a day after the end of the odd-even scheme, Ola did not.

Meanwhile, cab drivers have been caught in a tussle between the government and the aggregator companies. In Karnataka, for example, the state government has implemented the Karnataka On-demand Transportation Technology Aggregators Rule 2016 which mandates that aggregator companies obtain a unified license covering 100 vehicles at a cost of Rs 1 lakh. Non-compliance of this rule has hit individual taxis. In a recent crackdown, some 500 cabs were seized and the drivers incurred huge losses. Drivers also raised their voice against a rule that mandates that their all-India permits be converted to city taxi permits for which they have to shell out Rs 10,000.

Winning Cards
While drivers realise it is not all hunky dory with the aggregator companies, the latter are going about increasing demand and penetration by strategic partnerships. On 3 May, Uber entered a partnership with Chinese online payments major Alipay that would enable Chinese commuters to book and pay for cab rides through each other’s app across 400 cities where Uber operates. Uber is in the process of doing a similar product integration with Alipay-backed Indian digital payments platform Paytm for the India market.

In price sensitive India, the rates offered by Ola and Uber will play a big role in deciding volume of business. Currently, Ola’s cheapest offering, Ola Micro charges Rs 6 per kilometre with a minimum bill of Rs 40 for the ride. Uber’s most affordable, known as uberGO, charges Rs 7 a km with a minimum fare of Rs 60. These rates are as per the rate card in Bengaluru but the prices are similar in most cities.

Ola has the advantage of being built from the ground up for the India market. For instance, the Ola app is more 2G friendly, opening up seamlessly on slow connections. “Our engineers have worked on the 2G optimisation technology which automatically detects the network and accordingly optimises the user experience,” says Anand Subramanian, senior director, Marketing Communications, Ola. Uber needs at least a 3G or a WiFi connection.

According to brand experts, Uber has more global appeal. “Uber is more global, international and slick as a result of which it resonates better with the youth, professionals and business users,” says brand expert Harish Bijoor.

With the latest round of $500 million funding in November last year, Ola has closed over $1.3 billion of external funding from investors such as Tiger Global, Steadview Capital, Sequoia Capital, SoftBank Capital, DST Global, and Baillie Gifford.

In July 2015, Uber committed an investment of 1 billion in India, and there seems to be more in the pipeline. Uber CEO Travis Kalanick said in January this year that Uber could double its committed investment of $1 billion to $2 billion in India if it sees more than five times the return.

“Uber will continue to invest in India, which it can do with its deep pockets and ability to raise funding. It may have entered a bit late into the market, like Amazon did, but eventually, it will catch up, just like,” says Technopak’s Singh.

Competition sometimes turns bitter too. A recent newspaper report that Uber is acquiring a controlling stake in Ola sent shockwaves in the industry; but it was quickly denied by Ola. The Ola CEO @bhash tweeted, “We’re here for the long run, committed to building mobility for billion Indians. Planted malicious stories are sign of others’ desperation!”

While Ola still enjoys a larger market share and a wider presence, Uber is focusing on fewer, high-growth markets which might prove to be the winning streak. As the gap narrows, Uber, with a more focused strategy, longer global experience, deeper pockets, and a stronger brand image, might just race past Ola in a few months.

(With inputs from Arshad Khan)

ayushman@businessworld.in; @ayushmanb