Uber Battle: Cabbies vs. Startup

by Matt Diamond November 30 2012, 11:05

Those who have hailed a taxi or used public transportation can attest to the downsides of urban transportation including dirtiness, crowdedness, and unreliability. Since its founding in 2010, San Francisco-based startup Uber has aimed to appease the unsatisfied market of urban dwellers that desire easier, cleaner, more dependable transportation than has been available. Uber operates as “your on-demand personal driver” allowing users to hire and pay the nearest of the company’s “sleek black cars” (think Lincoln Towncar) as a chauffer through the users’ mobile phones. Unsurprisingly, Uber has clashed with regulators, cabbies, and others who claim that Uber is skirting existing regulations that protect customers. Cities including Chicago, Washington, D.C., and New York City have proposed or threatened to propose regulations that would effectively run Uber out of their respective towns. In addition, cab drivers in several cities have filed class action suits alleging that the company is engaging in “unfair business practices.” Many cities Uber has or plans to expand to have regulations that govern taxicab operation and separate regulations that govern livery (“black car” and limo) services. Taxicab regulations include such components as standardized fare calculation, operational requirements (like having seatbelts, giving receipts, and accepting credit cards), and a limit on the total amount of cabs to be licensed to operate, while livery service regulations are less restrictive. Uber has encountered its legal issues because its service is a taxicab-livery service hybrid. Regulators and taxicab companies claim that Uber is skirting both sets of regulations and thus gaining a competitive advantage over both industries.

Uber connects users with the nearest available car in their network through their mobile application that tracks the user’s location and trip by GPS, charges fare and tip to their app-linked credit card, and allows both drivers and riders to rate each other at the conclusion of the ride. In just a few seconds, a user can view a map of available vehicles, request a ride, and receive an estimated pickup time (usually less than 15 minutes). Uber’s network of vehicles is composed of vacant livery service cars who are alerted of nearby ride requests and have 15 seconds to respond before the option moves to the next closest vehicle. Users are picked up, request a destination, and their trip is tracked through Uber’s GPS technology. Uber does not publish its exact formula for calculating fares, but states that “[p]rices start with a base fare. After that, we charge depending on speed. When travelling at over 11mph, we charge a distance fee. Below 11mph, we charge a time fee.” The company’s fare calculation also includes proprietary algorithms that measure location and quantity demand, which have caused fares to increase to two or three times regular fares in the highest demand times (users are notified through the Uber app if fares exceed 2X regular fares). Uber also charges an automatic 20% gratuity to each transaction, which is passed on to the driver. The startup is further removed from regulation as it technically does not run any car services, but merely funnels customers to existing ones.

Uber’s opponents include regulators, cabbies, and taxicab and livery services. Uber’s cited “offenses” have ranged from suspect fare calculations and improperly operating livery services as taxicabs to failing to provide customers with printed receipts. After initial clashes, several cities have proposed regulations that would outlaw Uber’s operations. The City of Chicago’s proposed rule PV1.10 would preclude Public Passenger Vehicles (“PPV”) from charging non-prearranged fares “calculated based on distance and/or time travelled.” PPVs operating in this way, such as Uber’s, would be considered unregistered taxicabs and could not legally operate. Washington, D.C. has treated Uber like a not-so-welcome guest by first claiming that black cars could not charge by time and distance. When that argument was won by Uber, Washington’s Taxi Commission ran a “sting” operation impounding an Uber driver’s car for not issuing a printed receipt. In September the Commission proposed new regulations including prohibiting sedan services with less than 20 vehicles, like Uber, from operating within the city. Uber fought this proposal by mobilizing a Washington user protest that has resulting in the Taxi Commission stalling its actions. A group of San Francisco cab drivers have filed a class-action suit against Uber claiming that the company is illegally operating as a taxicab company to the detriment of the cities taxicab drivers. Taxicab and livery service companies have followed suit by filing claims in Chicago.

So is Uber a regulation-dodger aimed at destroying the taxicab industry and the livelihoods of cabdrivers? Yes and no. Uber is essentially running livery services as taxis. They are a disruptive technology startup that is operating at the fringe of regulation like no other company in the industry has before. Depending on the interpretation of various city regulations, Uber may indeed by just outside of violations. However, the vast majority of concerns and claims against Uber are the result of fear mongering and are unfounded. Regulators and taxicab companies claim that taxicab regulations exist for public safety and that by evading them Uber is a constant danger to the public. However there is much evidence to the contrary. Drivers are better off, being paid more due to higher fares, allowing them to drive safely. Customers cannot jump out of the car to avoid fares because their credit card is linked to their account. Uber’s demand algorithms adjust rates in “surge” times until they reach the equilibrium where supply equals demand, and customers are clearly willing to pay a premium for punctual classy transportation. The ability of both drivers and passengers to rate each other ensures at least adequate driver service and polite customer behavior. These checks and balances are not available in regular taxis. The opposition Uber has faced in almost every city it has expanded to stems from the fear of incumbent taxi and livery service companies who are threatened by Uber’s superior product. Uber satisfies the market failure that regulations have caused and which fails to connect willing customers with available transportation. Because of regulations standardizing fares and limiting the type and area of service, the only way for cab drivers to make more money is to complete trips faster and to pick up passengers as quickly as possible. This leaves only the most densely populated areas of cities with consistent cab service. With Uber, no matter where you are in a serviced city you can find a guaranteed ride.

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