Uber’s spending $400m in India. Ola just raised $320m. (Each of those, if you’ve been reading Capital Mind, is greater than all the IPOs in 2014 in India, put together)

This money will go to something, someplace. They won’t buy taxis, but will help finance drivers who would like to buy a car. (UberOla)

I’ve used both services – Ola and Uber – and am watching the landscape change rapidly. From being expensive beasts, they’ve both gone to the lower end of the taxi ecosystem – and Ola even has autorickshaws on its network.

How do they work?

I have been speaking with drivers and in general, the concept is: You pay less (through discounts) and the driver gets paid a lot more. Uber and Ola are funding the difference, largely as “acquisition cost” for customers. I tweeted this lot:

  • 1/ Uber and Ola pay their drivers a different amount from what you and I pay when we take a ride.
  • 2/ Uber is prepaid, Ola has prepaid options. Effectively, money goes from you to the startups, and from them to the drivers.
  • 3/ The drivers see the Rs. 10 per km plus x,y,z rate. Plus a Rs. 100 per ride bonus if they do a minimum number per day. (5 for Ola)
  • 4/ What you and I pay is a discounted fare plus coupons plus whatever else. Half or less of what driver gets.
  • 5/ So we pay less than an auto would cost us. The driver gets more than what he would get otherwise.
  • 6/ This sounds stupid. But the logic their investors say will work is: Get them cheap, and keep ‘em, we can charge more later.
  • 7/ But like you see in Flipkart and Amazon, that day can be YEARS away. So enjoy this and hope it lasts for a while.
  • 8/ Neither startup is yet innovating on car tech or pooled rides yet. Their money will make that happen.

Nothing wrong with this at all. In fact, like Flipkart’s big discount sales and Amazon’s low prices, it’s a great time to be a user. When their discounts vanish, it will seem like they have driven competitors out of business…for a few hours. In the retail business, margins have stayed very low forever, in mass products – if many companies die, new ones will quickly fall in place. Kinda like the airline business, where hardly any one is ever profitable because someone or the other keeps coming up and discounting like crazy.

Their Valuations Are Irrelevant

To me, it doesn’t matter that they’re raising money at what sounds like obscene valuations. I wondered in 2011 whether the Indian Internet was a bubble. My thoughts were, yes, but so what, you should still participate! We cannot, because Flipkart and Amazon and Infibeam and Snapdeal are not listed. Neither are Ola and Uber. That means while I would love to piggyback on the bubble (it’s not necessarily bad as a word) I simply cannot.

In that sense, the fact that they are overvalued in someone’s opinion is not relevant. It’s not your money, it’s not going to be your money, so boo.

But the relevant question is: Do they continue to need funding to be alive? If the money stops coming, are they dead? Will that ruin everything?

It will be good even if they die

Assume they run out of money; it won’t be now, they will take, say, a year to die, or more. Even if that, they have created an ecosystem that won’t go away in a hurry.

Destruction can be a powerful thing. It generates good, with what is left behind and what people can start to pick up on the cheap.

With Ola and Uber, we’ve seen what is possible – for a traveller to be able to communicate with a taxi driver who wants to ferry people and get paid, through the internet and mobile phones, using credit cards and prepaid money, and online maps for discovery. This is the alternative to you having to walk down to the road, find a cab/auto and hope they will take you to where you want to go. For people with kids, health issues, disabilities and time constraints, it’s gone from a terrible experience to a decent one.

Assume Uber and Ola grow to 100,000 cars, and you could find them anywhere. Then take away that Ola and Uber; any other service that accepts credit cards and has mapping software will be created in less than 3 months. Drivers already know what to do – click accept, take person from place A to place B, get paid. If all it takes is this software, and Ola and Uber have established the practice, they are unlikely to be beaten by lack of funding, it will be either competition or regulation that will kill them.

My point is: Their death will not change the fact that our lives have been changed – in fact, we’ll find ways to make them better. So we shouldn’t worry about that consequence, really.

More Banked Drivers Means So Many Things

You get drivers on the network, all of whom have a bank account. They all are businessmen, not employed by Uber or Ola. They are all independent entrepreneurs.

The fact that they are banked, and are getting continuous credit into their accounts means banks and financiers can lend to them. From short-term credit to appliances to things that can make their rides better. From TV for children (who will then not jump around) to barf bags for late night party pickups to in-seat massagers to whatever – it’s a market that will flourish and currently does not even exist, for the most part.

The drivers themselves can offer more than just a ride. They can offer “regular” rides to customers who go to the same place every day, if Ola/Uber were to allow this somehow. (Or, think of another startup that does it, for regular rides!)

You could pool a cab for two-three riders, online. Supposedly Uber has a car pool in test already. I’d love to have rides even that cheap.

The lowest-cost car, the Tata Indica has an owner payout of about Rs. 1500 per day on a weekend, says an Ola driver I talked to. He drives the car on the weekends only – his day job is as a corporate driver. Since the average driver can do 10 rides a day and sees Rs. 900 by Ola just as bonuses, this is probably the lower end of the spectrum – they should be able to earn Rs. 2500 to Rs. 3000 per day.

Costs are largely the EMI on the car – which would probably be Rs. 15,000 per month for a 3 year loan on a taxi. (Say Rs. 750 a day). Running costs are Rs. 5 per km (diesel) or Rs. 7 per km (petrol). This can also be cut down by intelligent use of fuel, or by using second hand versions of better cars. For a 100 km per day, this means a cost of Rs. 500 per day. For a total of Rs. 1250 per day as cost, the equation favours the driver. (In fact, it makes so much sense for unemployed graduates to become drivers – its far more money!)

Auxiliaries: The TaxiCab Training Academy and Rental

Given that the industry’s problem is that drivers aren’t adequately trained and perhaps don’t have enough knowledge of the roads, it makes sense to create a training academy for etiquette, how to use maps, how to escalate issues etc.

There’s a ticket to employment as a car owner/driver at the end, so people will pay. Much like they pay for Java courses.

Ola/Uber can pay for each successful hire – since they get trained professionals. (Startups are lousy customers in India though – they’re more likely to put people on the road outside your academy and hire them directly. But lets say this doesn’t happen)

Such training academies can facilitate a different person owning a car than driving it – a car rental system where drivers take a car, pay on a daily basis and ride it around. This is the system that currently prevails in autos.

A driver can be a delivery person as well, in off-peak hours. (Deliver goods from one part of the city to another – nodes of a courier company for instance).

There’s so much you can do with this kind of ecosystem.

The Game: It’s only the end of the beginning

While this game may end tomorrow in some worldwide crisis we should have foreseen, note that it is impossible to say when it will be over. By that time, Ola/Uber may be entrenched. Or, there could be a hundred such operators with someone like Google telling you, through colourful icons on maps, which service’s cab is available at what distance from you.

Bus operators (like BMTC in Bangalore) can get their act together and offer maps of each bus in real time so you can decide which one to take.

Regulators can clamp down on pricing and force rates on to such operators.

Uber has had a lot of negative press because of their negative relationship with press in general. I wouldn’t read too much into that, because honestly this is just a big-ass ego trip for everyone. It may be relevant that a CEO is an ass, or it may be more relevant that your alternatives are worse. We won’t get into that today; it’s important, but a different point.

But whatever happens, these players will be around for a year or more, at the very least. This is the time to make the best of their investments; use their free services while they’re available. Not selling my car, sorry – when they suddenly find it’s time to be profitable, I will miraculously find my car keys.

It’s a great time to be a consumer and we need to make the best of it – please, feel free to use Uber or Ola and let the investors’ money flow into your pockets for a change.

In fact sign up at:

Disclosure: No interest other than if you actually click that link and sign up, I get a free ride. I’m not being paid by these companies for anything else, but they’re subsidizing my taxi fare just as they subsidize yours.

This was a “sunday” post that’s dipped over to Monday. Think of it as light reading, not the heavy stuff Capital Mind is more used to. And do comment!

The original post was published here. Crossposted with permission.

This post was written by Deepak Shenoy. Deepak writes on Money, Markets and Economics at Capital Mind.  He works with financial big data analysis in an early stage company and lives in Bangalore. 

(c) Capital Mind 2014.