On Friday, some of the country's most successful entrepreneurs and rich-list families backed an equity raising of taxi booking and payments app goCatch in the race to "break apart" the country's powerful $5.4 billion taxi industry.
Some of the backers of the business include billionaire family the Kahlbetzers, the Millner family, fund manager David Paradice, Malcolm Turnbull's son, Alex, and Square Peg, a technology venture capital firm backed by James Packer, Seek co-founder Paul Bassat and the billionaire Liberman family.
In a confidential presentation, goCatch's goal was simple: to capture a "dominant share" of the taxi market. It was a shot across the bow to incumbents. The company told investors: "goCatch is breaking apart the Cabcharge network model and redefining how the industry works."
It is big talk for a company that is still a minnow, valued at $19 million, compared with Cabcharge's market capitalisation of almost $600 million.
Its self-belief is coming from the emergence of disruptive smartphone technology and a loosening regulatory environment that began in 2012 when former competition tsar Allan Fels released a controversial report into the Victorian taxi industry.
The report put the spotlight on the many inefficiencies and arguably restrictive trade practices of the sector. More recently, the Harper review into competition called for reform.
Inspiration is also coming from the rise and rise of Uber, a US-based business that launched a phone app four years ago and now operates in 45 countries, including Australia. It is valued at more than $18 billion and Uber's Australian operations are valued at $728 million, according to the goCatch presentation.
goCatch co-founder and chief executive Ned Moorefield says that, when he was looking to start a business in 2011, he examined what kind of new business models were emerging with smartphones.
"We then looked at the industries with monopolies and ones that didn't have good service levels, and we then started researching countries such as Germany, [and cities such as] London and San Francisco," Moorefield says.
The taxi industry was ripe for reform. "People were screaming out for change."
But the latest $4.5 million equity raising wasn't a pushover, taking three months to get away, with Moorefield and co-founder Andrew Campbell agreeing to a radical management and board overhaul, including the departure of Campbell from the board and management.
In an October 14 investor update, it confirmed the appointment of Tim Fung to the board after the capital raising.
Fung is boss of Airtasker – an online business where people post tasks such as house cleaning at a set fee and workers respond to the job – and a director of venture capital group Tank Stream Ventures, which is backed by Markus Kahlbetzer.
The raising means a convertible note agreement with three investors, including Alex Turnbull and Washington H Soul Pattinson, will convert to shares instead of being redeemed. With tight cash flows, this would have put immense pressure on the company.
Instead it will have a beefed-up board, a simpler management structure and millions of dollars in cash to expand its business and take on incumbents such as Cabcharge.
For companies like Cabcharge, which for years has been clipping the ticket on most aspects of the sector, the old jig is almost up.
This year, the Victorian government introduced a 5 per cent cap on service fees charged for credit and debit cards and introduced legislation that includes slashing in half fees for processing card payments in taxis, as well as replacing the so-called limited-release perpetual taxi licences with annual licences. Cabcharge issued a statement to the ASX earlier this month flagging a similar move by the NSW government in December to cap service fees to 5 per cent.
It said the cap in Victoria reduced its service fee revenue by $4.5 million and it estimates the NSW cap will reduce revenue by $14 million. Total group revenue in 2014 was $197 million and profit was $56 million.
Its presentation was dominated by the challenges ahead. "With a changing environment, we need to refocus our business," the company said.
With 216 million taxi jobs a year, 280,000 registered passengers, 30,000 registered drivers and revenue of $5.4 billion a year, it is a compelling nut to crack. Even more compelling is that a whopping $2.8 billion of the revenue is generated from booked services, according to a report into the taxi industry by research house IBISWorld. The report says hire car and silver services, which make up 15 per cent of annual revenue, are becoming increasingly important.
The brutal reality is that the disruptive technology carries all the hallmarks of what happened in the media industry, the music industry, the book industry and some other traditional enterprises.
The IBISWorld report says: "Smartphones are increasingly changing the way industry participants relate to their customers. Features such as GPS enable both drivers and customers using apps to assess the number of options in their vicinity."
For taxi operators, it says smartphone apps may allow them to bypass networks altogether. "Apps such as goCatch allow customers to increase the likelihood of attracting service by bidding a tip, effectively subverting the supply-side dynamics of the industry."
In an industry that attracts more than its fair share of customer discontent, a rating system is invaluable.
Like goCatch, a plethora of start-ups are busily raising money as they vie for a slice of the traditional taxi industry pie.
Two weeks ago, UBS closed a $9 million equity raising for taxi payments start-up Ingogo, valuing it at $45 million. It follows the Google-backed Uber's global $1.2 billion raising to countries including Australia.
New models are emerging, such as the Sydney-based RideSurfing, which has circumvented the "network" by developing an app that uses a pool of private drivers and a suggested voluntary donation based on time and distance rather than an actual fare.
The traditional taxi industry is highly regulated. Taxis require a licence to operate. They also need to be affiliated with a network such as Yellow Cabs, Taxis Combined or Silver Service. Membership costs an estimated $700 a month for a service which includes taking bookings, then transmitting the details of the job to terminals installed in the taxis.
In more recent years, the networks have broadened their stranglehold by offering additional services to taxi operators and drivers, including safety, training, financial and leasing support, and electronic payment processing. This has further entrenched the networks.
The Fels report noted that the networks exerted too much control over the industry through "their cross-ownership of licences, fleets and electronic payment systems; their brokering of vehicle sales and taxi licensing; and their perceived close relationships with Cabcharge".
If the mandatory network system is dismantled, it will have a big impact on the incumbents.
Uber is causing an uproar as it moves into a new low-cost taxi market, UberX – a move which circumvents the network system. In January it hit headlines in France, when taxi drivers engaged in "guerrilla warfare" against Uber cars, slashing tyres and breaking windows.
In Italy, taxi drivers marched through the streets, calling on the government to ban the smart app that connects customers to the nearest hire car.
But the clock is ticking as start-ups pile into the industry to try to get an early advantage. In the meantime, the traditionalists should take heed of the mistakes of other industries and be part of the revolution, instead of building a fortress against it.
