Daily Archives: July 9, 2015

Will Microtransit Startups Find a Role in Urban Transportation?

There was some interesting discussion on Twitter the other day about “microtransit” startups, which are worth commenting on at further length.

What is Microtransit?

First, what is microtransit, especially in the context of venture capital backed tech startups? Vox calls it “Uber for buses”, a description more apt than one might realize at first. Like a micro apartment that would have just been called an efficiency, bachelor, or single-room occupancy in years past, the basic service being provided by Uber – the taxi ride – is not new. Likewise, microtransit services have long existed under names like vanpools, jitneys, dollar vans, and so on. Unlike the smartphone, for example, these startups do not offer services that were not available, or at least technologically possible, in the past. Shared ride vans have been plying the streets of NYC’s outer boroughs and Bergen County, NJ for decades.

What is the Innovation?

Since these services are being branded as tech startups, it’s worth asking what innovation they are offering. In the case of Uber, the innovation is software that lowers the transaction costs of buying and selling taxi services. By transaction costs, we mean the difficulty of matching buyers and sellers, i.e. finding someone willing to drive you to a place you want to go, at the time you want to go, for a price you’re willing to pay. Uber’s software and app are essential to this; imagine how hard it would be to run Uber if everyone who wanted a price quote for a ride had to call a central dispatch, and then the dispatch had to call all potential drivers to see who was willing to make the ride.

However, there’s another innovation in Uber’s model, one which is just as significant, if not more: they created, almost overnight, a political constituency powerful enough to challenge entrenched players in a heavily regulated industry. The key here is that taxi services were undersupplied, as a result of regulation and the influence of dominant taxi companies. This allowed owners of cabs and medallions to engage in rent-seeking, meaning that they profited without contributing anything to the system. Medallions in NYC were famously worth over $1 million, even though they conferred nothing other than permission from the government to offer taxi services.

A few individuals trying to buck this system would quickly find themselves squashed by regulators (except where, as in parts of NYC, taxi services were so egregiously undersupplied that regulators looked the other way most of the time). By creating an enormous constituency of both taxi drivers and taxi riders, Uber made it politically possible to crack the regulatory stranglehold on taxi services. This is no small achievement; consider the fate of the Chinatown buses, which, despite having grown into proven businesses with considerable ridership, have increasingly found themselves the target of regulatory actions that conveniently benefit larger, more established bus companies.

Does This Translate to Buses?

So, how does this relate to microtransit and startups that are challenging buses? For sure, their software will greatly facilitate matching potential drivers with potential riders. However, while bus service is also heavily regulated, it is regulated in a much different way than taxi services.

The overarching scheme of taxi regulation is to force the undersupply of taxi services, thereby creating excess profits that can be skimmed by owners of cabs and medallions. The overarching scheme of bus regulation is to force the oversupply of services, such that providers of bus services almost always lose money. (Note: we’re only saying bus service is oversupplied from the perspective of profitability given other external factors; from the perspective of societal benefit, service is undersupplied.) Again, this is not always the case; dollar vans are profitable in NYC on routes not served by NYCMTA bus. But most likely, bus startups are not going to find some high-demand route that’s not already being served by some type of fixed route service.

Unlike Uber, which was tapping into unmet demand, a startup will probably only be able to compete with existing bus services if it is faster, pays lower wages, and operates on the highest demand routes. A service will only be able to do so by eliminating low-demand stops and routes, something that transit agencies often try to do but it is a huge political challenge because of equity issues. In other words, the political “innovation” here would be something much less desirable: the ability to take away service from the least profitable routes and stops, and the ability to circumvent higher wages earned by transit agency drivers. This will probably prove to be politically unpalatable; without unmet demand to create a pool of new drivers and riders, services directly competing with municipal buses will face increasing regulatory pressure to conform to the same requirements as publicly provided services.

On the other hand, suppose you had the option of taking an Uber for a certain cost or a shared-ride van for, say, 60%-75% of that cost. This is a situation where the shared-ride microtransit services should be able to compete. By pooling rides among passengers willing to tolerate a longer trip, they could offer lower fares and possibly higher wages. This suggests that microtransit will be more likely to compete with taxi services than with bus services, and my guess is that Uber understands this and that’s why they’re trying to get into the game with Uber Pool. It makes a lot more sense to compete for taxi service profits that exist than for practically non-existent municipal bus profits.

A Role for Tech in Transit

I do think there’s a separate transportation market where the technology being developed by these startups might be beneficial: demand response paratransit.

Demand response service refers to transit service provided to disabled persons who are not able to use standard fixed route bus and rail services. Paratransit functions similarly to shared-ride services for this submarket, and it tends to be both inconvenient and inefficient. Persons using the service must often call to request a ride hours, if not a full day, in advance of the trip, which requires careful planning and limits the freedom of mobility. Meanwhile, transit agencies report typical per-trip costs of $30-$45, with NYCMTA reporting a single paratransit trip costs the system almost $72, meaning these trips require large subsidies.

Software algorithms similar to those developed by Uber and the shared-ride startups might be able to greatly improve transit services. By more efficiently pooling rides, we could both reduce the cost of paratransit and reduce the onerous advance-planning requirements for riders, increasing their personal mobility and freedom. The services still wouldn’t be profitable per se, but the savings from more efficient service might allow transit agencies to offer a fair profit to someone developing the software.

It’s not as flashy as a startup bus, and I’m not sure if there’s enough demand to allow significant efficiency gains, but it if feasible it would improve services that could really use it.