New Yorkers are increasingly switching from hailing a cab by hand to hailing a ride by Smartphone as ridesharing applications Uber and Lyft offer alternatives to traditional transportation solutions. That shift to new competition is stirring the ire of the taxicab industry because – as we’re learning – it’s having a financial impact on the industry.
According to data from the New York City Taxi and Limousine Commission, the value of a taxicab medallion – the placard that authorizes a driver as a taxicab – has fallen some 25 percent in recent years. After hitting a high of $1.3 million per medallion in April 2013, the value is now roughly at $840,000. This is the first time the value of those medallions has fallen – and what a fall.
Medallions are required in order to legally pick up passengers flagging a ride on the street. Very few other cities have medallions, but in New York City the medallion represents a significant investment – the cost of a pretty nice house or apartment.
Between 2004 and 2012, the average annual inflation-adjusted price of an independent taxi medallion had increased 214 percent and "exponentially" since taxi regulation was implemented in 1937. It’s lucrative for taxi companies that hold many medallions and lease them out to individuals.
New York is not the only city where taxicab medallions are falling out of vogue. In Boston, they’re down at least 20 percent, though that may be off and there have been only five trades since July. Chicago hasn’t had a medallion sale since November, and when one did sell, it sold for $298,000 — 17 percent dip from the city’s peak price.
New York officials are trying to put good spin what's bad news for the industry.
New York taxi medallion prices are plummeting as ride sharing takes off in the city, but the head of the Taxi and Limousine Commission insisted that her industry is not in danger of collapse.
"We'll see some shifting—I still think the core and the majority of people will still choose hand-hailing, but there is a segment of the population that will definitely rely solely on smartphones to get around," TLC Chairwoman and CEO Meera Joshi CNBC's "Squawk on the Street" on Tuesday.
The price of yellow taxi medallions is not directly tied to the health of the greater industry, she said, explaining that the number of green, all-borough cab rides has skyrocketed at the same time that Uber has grown.
Since the supply of medallions in New York City is constant, the value is derived purely from demand. But even if competition from ride-sharing apps is leading to falling prices, Joshi said she does not anticipate Uber replacing the conventional taxi.
"The city is better off," she said of the business model employed by Uber and its peers. "It's provided a level of competition that I think will increase service for the entire city."
Business Insider projects far more dire consequences for the taxicab industry based on the likelihood of medallion forecloures:
The rise of Uber is destroying the traditional taxi business, according to this compelling chart from data compiled by the New York City Taxi and Limousine Commission.
The scariest part — for taxi companies — is the bottom part of the medallion chart, where the blue bars indicate sales coming from foreclosures.
Medallions used to confer on companies a type of monopoly or cartel — you could not operate a taxi in New York without one. Now, however, Uber lets anyone drive a taxi for the entry-level price of merely owning your own car. For many drivers there is simply no point in owning a medallion or working for a medallion company. And so the transaction value of those medallions has dropped off a cliff, even though the economy in New York has gone through the roof.
Innovation is a celebrated aspect of our free market system. In front of us we're seeing what cobblers and dressmakers in the 19th century faced as factories and mass production replaced the individual or small-scale capabilities of a one-man shop. That's difficult for the cobbler but growth opportunity for an industry and our economy.
We can sympathize with those who feel the squeeze of competition from ridesharing services, but lobbing the government for protections to cement their dominance is not the right way for the taxi industry to respond. If the industry can’t compete, then it will cease to thrive. Anybody using the pony express these days?
The taxicab industry would be smart to look at the competition and find ways to be innovative. It might begin by looking at barriers for people to enter the industry, including the prohibitive cost of leasing medallions.
Meanwhile, the biggest winners in all of this are customers. We have more choices. That's the promise of the free market at work.