Why Ola Cabs, Uber are willing to burn cash in India

For about five and a half decades, the taxi business in India followed a fairly simple structure. There were taxi stands in different areas in the cities, and independent licensed cabs operated out of those. There were some small entrepreneurs who would own three or five cabs, and hire drivers. There was also a minuscule segment at the top end - mostly operating through tie-ups with big hotels. These were operators that bought premium cars and catered to high-end business travellers.

Sometime in the first decade of this century, the first innovation in the market took place. Some entrepreneurs took radio cab licenses, bought cabs and started services in big cities. The services were called EasyCabs, Mega Cabs, Meru Cabs, etc. Barring Meru, they were not very big in scale. Meru, with funding from venture capitalists, became the undisputed leader. Today, it has a fleet of 6,000 owned cars and another 14,000 aggregated cars. The radio cabs charged marginally more than the old yellow and blacks, but they offered better, branded cars with proper air conditioning, uniform pricing, equipped with GPS systems, and the guarantee of a certain reliability.

In 2010, Ola Cabs came into being, following a very different model. While Ola Cabs had a centralised call centre through which customers could book a taxi, it focused more on its mobile app, which took the convenience of booking a cab to a whole different level. It also followed a pure aggregator model, instead of buying its own cabs a la the radio operators. Also, after raising a huge amount of money from venture capitalists, it began discounting heavily. If radio cabs were charging in the vicinity of Rs 20 per kilometre, Ola was offering rides at half that price. Despite charging low prices, they also provided special incentives to drivers to join hands with them.

In 2011, TaxiForSure was born, following much the same model as Ola, but as it managed to secure fewer backers, it fell far behind and a few months ago, Ola bought it lock, stock and barrel.

Meanwhile, in 2013, Uber, which had been making waves in the US, decided to set up shop in India as well.

As things stand now, Ola, with TaxiForSure, is the clear market leader and some estimates say it has over 80 per cent market share in terms of registered vehicles. Meru is number two. Uber, though still small in India, has just announced that it plans to spend over a billion dollars in the country over the next nine months. Reports say that Ola has embarked on a fresh round of fund raising, too. The radio cab operators have been forced to follow the aggregation model, too.

Like other e-commerce start-ups, Ola and Uber are burning cash and they have no immediate plans to turn profitable either. They are chasing market share.

But why is everyone so interested in what is still a money-losing venture? That's because the pot of gold at the end of the rainbow is huge. Estimates put the current total taxi market in the country to be around $14 billion in size (the organised bit is barely $800 million or so), and it is growing at over 20 per cent per annum. So the potential for growth is huge - and also the main reason so many investors are plunking down so much of cash.

Our cover story this issue looks at the great taxi war playing out. Also, don't miss out the fascinating story of how Ajay Singh is turning around SpiceJet.