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Business Commentary Montreal’s Téo Taxi gravely underestimated its many economic pressures

Nura Jabagi is a PhD candidate in business technology management

Montreal’s all-electric, app-based taxi service, Téo Taxi, has reached the end of the road. After a failed cash call last week, and suspicions that Taxelco (Téo Taxi’s parent company) would be placing itself under protection of the Bankruptcy and Insolvency Act, Téo has finally announced that it will cease its operations. François Bonnardel, Quebec’s Transport Minister, has called the Téo Taxi business model “broken," according to the Gazette.

With Taxelco remaining tight-lipped about the situation, many are left wondering how the brainchild of serial entrepreneur and tech millionaire Alexandre Taillefer failed, despite benefiting from sizable provincial grants and support as well as several rounds of funding from seasoned investment firms. The simple answer is that Téo bit off more than it could chew.

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As an app-based transportation service, Téo positioned itself as the local competitor of industry titan Uber Technologies Inc. With the appeal of being a homegrown service that differentiated itself with its fleet of electric vehicles (fittingly painted green and white) coupled with fair treatment of its drivers (drivers are salaried with paid leave and vacation) there were high hopes for the socially conscious startup.

However, despite its noble aims, Téo gravely underestimated the economic pressures in a platform-based market. While Téo’s points of differentiation might have been sufficient to capture clients’ attention in a pre-Uber taxi industry, the current app-based transportation market is highly cost-conscious due to Uber’s aggressive pricing model and, more recently, price wars between Uber and Lyft as both companies race toward initial public offerings this year.

Taxi signs are seen in a Téo Taxi parking lot in Montreal on Jan. 29, 2019.

Paul Chiasson/The Canadian Press

In this environment, Téo’s cost structure left the company at a considerable disadvantage from its inception in 2015 (since its rates are subject to government regulation, Téo’s fares are significantly higher than Uber’s). Furthermore, by paying its 450 to 500 unionized workers a fixed rate of $15 an hour, Téo lost money during off-peak periods, unlike its chief rival. Uber pays drivers only for actual trips and employs dynamic pricing, allowing it to charge higher rates during peak periods. To make matters worse, Téo underestimated the idling time of its electric vehicles, which require charging for several hours per day. Add to that the overhead associated with owning a fleet of cars and paying employee benefits (challenges Uber avoids through its business model), and Téo’s financial struggles are obvious.

After several rounds of funding and revised profitability expectations, investors were right to pump the brakes on the project. Téo’s ability to become profitable should have been put to question much earlier, considering that ride-hailing services such as Uber and Lyft are operating at losses, despite having significantly lower overheads compared with Téo Taxi. Moreover, these companies also have deep coffers, allowing them to outlast any price-cutting a smaller competitor like Téo could have implemented to stay afloat.

Even if Téo could have secured more funding and reduce costs, its biggest challenge would have been getting more cars on the road in order to capitalize on the indirect network effects underlying ride-hailing business models. In the context of Uber or Téo, indirect network effects mean that a ride-hailing platform becomes more attractive to riders as the number of drivers on the platform increases, since wait times are reduced and service coverage increased. Simultaneously, as the number of riders on the platform increases, the platform becomes more valuable to drivers since the opportunities for revenue increase.

Unfortunately, without enough cars in its fleet to rival Uber, Téo customers likely faced longer wait times and reduced service coverage, resulting in platform abandonment. As riders abandon the platform, the platform becomes less attractive to drivers. Téo would face a vicious cycle of downward-spiralling market share.

Ultimately, Téo was trying to do too much with too little. But I believe its business model might have been fixed with some changes along the way. Ironically, its saving grace might have been Uber’s unsustainable market strategy: Whereas Uber has an advantage over Téo in its capacity to add cars to its fleet, Uber can only add so many drivers to its platform before drivers abandon the platform because of low earnings (i.e., too many drivers chasing the same number of passengers). The same can be said of its aggressive pricing strategy; the company is already losing money and furthering price-cutting is likely to hit drivers’ take-home pay.

More importantly, when drivers and riders can participate on competing ride-hailing platforms simultaneously (a phenomenon known as multi-homing) and switching costs between platforms are low, a platform’s network effects (its attractiveness based on the amount of users) tend to attenuate once companies get average wait times low enough. In this context, ride-hailing services can only compete on brand differentiation where, with enough cars and rates at least close to those of Uber, Téo could have lived to fight another day.

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