The End of the Taxi Era

The bankruptcy of San Francisco’s largest cab company is just the beginning. Thanks to Uber, the entire industry is doomed.

SF taxi.
Yellow Cab in San Francisco is the first high-profile casualty of taxicabs’ battle with ride-hailing startups Uber and Lyft.

Image by f1monaco31/Thinkstock

It’s old news by now that taxis are struggling to compete with ride-hailing apps like Uber and Lyft. What might be less obvious is just how swiftly their demise could come if they don’t adapt—and perhaps even if they do.

Yellow Cab, San Francisco’s largest taxi company, is filing for bankruptcy, the San Francisco Examiner reported this week. It will continue operations while it attempts to restructure.

One proximate cause of the company’s troubles is a flurry of lawsuits over traffic accidents. But that shouldn’t obscure the underlying story here: Yellow Cab in San Francisco is the first high-profile casualty of taxicabs’ battle with the Silicon Valley insurgents.

It’s a battle the taxi industry appears increasingly certain to lose. The only questions at this point are how long it will take and what will be left standing in the end. It’s beginning to look like the answers will be: “not long” and “not much.”

Obviously, the financial woes of one company in one city can’t tell us everything about how the revolution will transpire. Yellow Cab in San Francisco claims only about 1,500 drivers, which makes it the largest operator in the city but amounts to a trivial proportion of all U.S. cabbies. It would be relatively easy, then, to shrug off its Chapter 11 filing as a one-off, irrelevant to the trajectory of the industry at large. Surely many other taxi companies will do just that.

But a closer look at the forces that drove the company to the brink reveals that the ground may be starting to shift faster than almost anyone expected. And it should be enough to unnerve anyone who’s still banking on taxis to avoid the fate of newspaper classifieds, movie-rental stores, or payphones.

Yellow Cab officials have gone out of their way to avoid naming Uber and Lyft when pressed on the company’s struggles. Asked about the bankruptcy, they’ve blamed the lawsuits and “business challenges beyond our control,” while insisting that the company has a viable future. “We have the best color scheme there is in the world, we’ve got a lot of loyal customers, we still get a high volume of calls to our color scheme on a daily basis,” former Yellow Cab president Jim Gillespie told the Examiner.

Yet that quote illustrates the denial still at work in the taxi business, even as its wheels are starting to come off. The “best color scheme there is in the world” is only of value in a world where the best way to catch a ride is to stand on the curb with your eyes peeled until an empty one happens by. There’s a reason Uber’s cars aren’t garishly painted: Color doesn’t matter when you can hail a driver at the touch of a button. As for “loyal customers,” there may be a few people out there who would let other companies’ cabs pass by while waiting for a yellow one. But counting on them to drive your business is analogous to AOL staking its future on dial-up subscribers.

In other words: Yellow Cab is just part of the front crumple zone in an industry that is about to get totaled.

San Francisco’s oldest and second-largest cab company, DeSoto Cab, already saw the impact coming—and swerved. Tossing 80 years of history and an iconic local brand out the window, last year it renamed and rebranded itself as FlywheelTaxi, highlighting its partnership with a Silicon Valley–based taxi-hailing startup called Flywheel. It repainted all of its cars from blue to red and shifted its focus and marketing efforts from phone orders and street hails to rides booked through the Flywheel app. The app accounts for just 20 percent of the company’s business today—but FlywheelTaxi is smart enough not to count on that other 80 percent for growth. “Taxis have gotten their ass kicked,” then–DeSoto owner Hansu Kim admitted to the San Francisco Chronicle in February. “This is a counterpunch to Uber and Lyft. We have to make sure the public knows they can use an app to book and pay for a cab.”

If you had to guess which of San Francisco’s two best-known cab companies will be profitable in five years, FlywheelTaxi would be a smarter bet than Yellow Cab at this point. But my money is on “neither.”

What’s foreboding about Yellow Cab’s downfall, however, was that the company actually knew it had to change its business, and made a serious effort to do so. Yellow Cab developed its own mobile taxi-hailing app, called YoTaxi—not an insignificant endeavor for a local business. But that app works only for Yellow Cabs, of which there are far fewer on the road at this point than Uber or Lyft cars. Uber now claims about 20,000 drivers in San Francisco. If there were ever a time when taxi companies might have been able to leverage their market position to defeat Uber on its own terms, that time has long passed.

And in any case, a mobile app at this point is only a part of what gives Uber and Lyft an edge over taxi companies. The startups’ customer experience is different from end to end, offering a growing array of services (e.g. black car, UberX, UberPool), a stronger focus on consumer satisfaction, and a rating system for both drivers and passengers. On the business side, Uber and Lyft enjoy different cost structures, fewer regulations, and advanced data analytics, not to mention billions of dollars of venture-capital money aimed explicitly at helping them corner the market without having to worry too much about the bottom line.

Even the lawsuits that have hit Yellow Cab, seemingly unrelated to Uber or Lyft, could be read as a bad sign for the taxi business. The most notable was an $8 million judgment in which the company tried to argue that it wasn’t liable for the actions of a driver who allegedly plowed into stopped traffic at 60 mph, leaving his passenger partially paralyzed. The highly publicized episode undercut some of the industry’s most plausible remaining claims to superiority over the insurgents, including that its drivers are safer and its passengers better-insured.

It makes sense that San Francisco is on the leading edge of the market’s upheaval. The Bay Area’s newspapers were also among the first to hit the skids when the Internet began to disrupt the media. At the time, other papers around the country pointed to what they perceived as problems specific to the San Francisco Chronicle and San Jose Mercury News. We can see in retrospect that the problem was industrywide, that it was fast-moving, and that no newspaper was immune.

As recently as 2013 in New York City, taxi medallions were going for $1.32 million apiece, Bloomberg Businessweek reported in a fascinating look at the downfall of the city’s “taxi king.” By August 2015, “desperate” medallion owners were hoping to recoup less than half that amount.

Meanwhile, the New York Times reports, medallions are “barely selling at all” in Boston and Chicago. “Typically, medallion buyers rely on financing to afford the purchase price,” the Times notes. “In an echo of the housing crisis, tighter credit has led to a sharp slowdown in medallion sales that conceals the fall in values.”

If taxi companies only had to worry about passengers’ changing preferences, they might look forward to, at worst, a long, slow decline in business as more and more consumers opted for Uber and Lyft. But they make their money from drivers, who pay them to take shifts. Those drivers are highly sensitive to changes in the marketplace, making them prone to bolt en masse as it becomes clear which way the wind is blowing. Indeed, Yellow Cab executives told the Examiner that their ridership numbers are still relatively healthy; it’s the drivers who are fleeing. A crash in the value of medallions is likely to accelerate the trend. If you’re going to bet on an asset that requires substantial capital outlay, a shiny black car with a leather interior certainly looks more attractive at this point than a little tin plate with a number and an expiration date.

There is much to dislike about the way Uber does business. It has been ruthless and at times unscrupulous in its bid to overthrow taxis and crush would-be rivals as the dominant provider of on-demand rides. It treats its own drivers as commodities and is actively working to replace them with robots. And it regards regulators and their regulations with scorn.

But the fact remains that its business model is far more convenient and congenial to consumers than that of the taxi companies. And it has already outgrown the stage at which its growth could have been squelched by aggressive regulatory action, à la the Internet-TV startup Aereo. At this point, any regulatory crackdowns will only serve to define the contours of Uber’s dominance.