CREATIVE DESTRUCTION CHALLENGING REGULATION

Ride sharing services

Ride sharing service is based on a smartphone application connecting passengers with non-professional drivers of vehicles for hire.

One of the advantages offered is that customers can track the reserved vehicle's location and that there is no need to use either cash or credit card directly. Of the companies creating this market segment over the past years, Uber seems to have the fastest growing business. Other players include Hailo from Europe and other U.S. based firms like Lyft, GetTaxi and SideCar. Uber started with luxury cars for hire, UberX with smaller vehicles started in 2012. Some years later, experimenting with lower fees, they became extremely competitive with traditional taxi services. Passengers can nowadays choose from up to four different quality car services. A ride from downtown Chicago to O`Hare Airport costs USD 23-30 if you take an uberX car, 42-56 bucks with an uberXL, USD 75-98 riding on an uberBLACK and up to USD 123 if you opt for an UberSUV. In other cities, like Budapest, customers do not benefit from such a wide choice, they have to be satisfied with an uberX service.The base here is HUF 300 (USD 1,25), the fare is 25 HUF/minute and 130 HUF/kman amount below taxi price.

Thanks to digitalization, overheads of the companies are lower, without the minicab office and telephone operators. Uber's pricing is similar to metered taxis with the exception that all hiring and payment is handled exclusively through Uber and not with the driver personally. If the Uber car is travelling at a speed greater than 11 mph (18 km/h), the price is calculated on a distance basis. Otherwise, the price is calculated on a time basis. At the end of a ride, the complete fare is automatically billed to the customer's credit card. No swiping is necessary and gratuity is included. Since Uber is just a third party that passes on the jobs, it can charge competitive prices, and pay the drivers about 80% of the fare paid by the customer.Passengers can also be sent a photograph of the driver and the car's registration number. The whole journey is recorded on an emailed receipt.

Depending upon the size of the Uber car, the price can be more than a taxi ride would cost. But the premium is worth for those who are keen on ordering comfortable transportation on demand. During high demand times such as New Year's Eve, or severe weather conditions, Uber increases its prices to "surge price" levels to attract more drivers. Customers receive notice when making a reservation that prices have increased. This price fluctuation can be fairly intense. During New Year's Eve of 2011, prices were seven times higher than the normal rates.

Regulatory reactions in the U.S.

As it happened in the late XXth century in the telecommunication industry, technological development and the entry of new entrants may lead to significant restructuring of the cab business. Taxi and limousine services are usually subject to regulation usually adopted by municipalities or regional authorities. Regulations intend to secure the safety of the service by imposing rules both on drivers and the cars themselves. There are examples for price regulation as well. In Hungary, the city of Budapest recently introduced fixed tariff rates, fulfilling an important demand by the taxi drivers’ society. In other cities, like Chicago, tariffs are capped, leaving some room for price based competition. The more the taxi industry is regulated, the more tension arises with newcomer ride-sharing companies who challenge both the position of taxi companies and existing regulation of car passenger services.

For-profit ridesharing companies are strongly criticized by taxi drivers and their associations suggesting that they are illegal or at least grey market operators undermining fair business and endangering the safety of their passengers, and indirectly undermining the credibility of the person transport industry. Taxi service apps have run into opposition from established taxi operators and regulators nearly everywhere they started to recruit drivers.

The first regulatory issues arose in the U.S. in May 2011 when Uber received a cease and desist order from the San Francisco Municipal Transportation Agency. The order stated that it was operating an unlicensed taxi service, and another legal demand from the California Public Utilities Commission that it was operating an unlicensed limousine dispatch. Both claimed criminal violations and demanded that the company cease operations. In the fall of 2012, the California Public Utilities Commission issued a cease and desist letter to rideshare companies were fined each $20,000. However, an interim agreement was reached in 2013 reversing those actions. In September 2013, the CPUC made the agreement permanent, creating a new category of service called transportation network companies.

 

California was not the first jurisdiction to recognize this new service. In June 2012, the City Council of the District of Columbia legalized sedans used by Uber’s car-service partners. The legislative amendment will permit Uber to do business till the end of that year, when the legislation needed to be revisited. The D.C. Council adopted in October 2014 the Vehicle-for-Hire Innovation Act of 2014, heavily opposed by the taxi unions for not creating a level playing field but praised by Uber for codifying safety standards they say have already been in place. The law required background checks on Uber drivers going back seven years, annual safety inspections, a prohibition of street hails by UberX drivers, and $1 million in liability insurance when a driver is en route to a rider and when the rider is actually being transported. An amendment aimed to ban ride share app users from charging less than the minimum fare for a taxi was not approved. The legislation “could be a model for the rest of the country and maybe the world,” commented David Plouffe, Uber’s chief strategist and former aide to President Barack Obama.

New York City initially barred Uber and its competitors from launching an e-hail service. Then in December 2012, the local regulator approved a year-long "pilot program" that would test out a few apps in a limited area in order to ensure smooth integration with existing payment systems and regulations. A court ruling in Manhattan in April 2013 ensured that the pilot program will proceed and incumbents will have to adapt. Most recently, the Committee for Taxi Safety has called the Taxi & Limousine Commission to suspend Uber’s license after reports that it has been abusing access to data about its passengers’ rides. This move follows a Buzzfeed report that Uber had used the company’s “God’s View” technology to track the movements of one of its reporters. Before that, a senior executive at Uber suggested that the company should consider hiring a team of opposition researchers to dig up dirt on its critics in the media — and specifically to spread details of the personal life of a female journalist who has criticized the company.

There are cities that chose another path. Seattle limited the number of ride-sharing drivers, companies like Uber, Lyft, SideCar could operate up to a total of 150 cars. That would have resulted in a significant decrease from the estimated 2,000 drivers the three companies operate in the city. On April 17, 2014, the council's ordinance was suspended by a coalition that obtained 36,000 signatures to put the question to voters in a referendum.

Regulatory non-action can also lead to lawsuits. Several taxi operators and associations are suing the City of Chicago. The City of Chicago has regulated the taxi and limousine businesses for almost one hundred years controlling virtually every aspect of the taxi and limousine businesses. Even tariffs are regulated through setting maximum metered rates for taxi transport services. The City has issued about 6,800 licenses called “medallions” sold at very substantial prices to operate taxis. To give an example, on September 13, 2013, the City tried to auction 50 medallions at a minimum price of $360,000. Against this background it is not surprising that Illinois judicial decisions have recognized that Chicago taxi medallions are property, and that the relationship between the City and medallion holders is contractual, not merely regulatory. Plaintiffs thus claim that medallion owners, and lenders holding security interests in medallions, own property that may not be taken by the City without payment of just compensation. By the way, Uber also experimented with relying on taxi drivers in Chicago in 2012, relying on to the high ratio of cabs in the city and the low price stemming from fierce competition.

Plaintiffs describe Uber, Lyft and SideCar as Unlawful Transportation Providers blatantly disregarding taxi regulations. They have not acquired or leased medallions thereby unfairly undermining plaintiffs’ investment-backed expectations. The City’s decision not to apply local regulation to the newcomers has imposed very serious adverse consequences, so runs the argument of the transportation plaintiffs. A strong point of their argument is when their public service obligations are emphasized. Unlike taxis owned by medallion owners, ride-share companies do not require drivers to respond to calls from persons in underserved areas or to serve passengers with disabilities. Rather, their drivers are free to turn down calls and thereby cherry-pick the customers.

European reactions

Expanding the service in Europe did not go smoothly either. The San Francisco-based company faced opposition from taxi operators in major European cities, with thousands of drivers in June bringing traffic almost to a standstill in London, Paris and Madrid. These protests might also have had an unintended effect. Before the massive demonstrations Uber had been relatively unknown among the general population in Europe. Now they know about it. On the same day when ten thousand taxi drivers protested in central London, Uber reported an unprecedented rise in sign ups to its mobile application.

In Germany, where Uber operates in five cities, Berlin officials ruled on two occasions against the company reacting on complaints of the Berlin Taxi Association. The first decision of April 2014 ruled that Uber's limousine service was in breach of local legislation, while an August 2014 decision banned the service from operating in Berlin due to safety and lack of insurance concerns. Authorities in Hamburg tried to ban the app in 2014 the same way, citing a lack of proper permits and insurance. However, local administrative courts suspended the bans in Berlin and Hamburg, pending procedural decisions and further hearings. Finally, in August 2014, a Frankfurt court issued an immediate cease and desist order against Uber that applies to all of Germany. The temporary ban remains in place until a full hearing takes place, and Uber could face a €250,000 (£198,000) fine per ride. This case was brought by the Taxi Deutschland Servicegesellschaft company, which offers a rival app that links users to registered taxi drivers. The company argued that Uber was not operating a legitimate service because its drivers did not have permits, were not properly insured, and were not subject to checks. German law allows non-registered drivers to pick up passengers but they cannot charge more than the operating cost of the ride. Uber resisted, appealing the judgment: "You cannot put the brakes on progress".

Taxis and minicabs are regulated differently in London. Black cabs, allowed to use bus lanes and to pick up passengers who hail them in the street, are more tightly regulated and their fares are metered. Licensed minicab drivers are subject to less regulation but also benefit of fewer privileges. London black cab drivers tried to argue a case based on infringing their exclusive right to use taxi meters in London. London's transport authority did not believe Uber's car service was breaking the law by using an app to determine charges. However, it would invite the High Court to give a binding ruling on the matter given the level of concern among the trade.

Anti-competitive regulations?

Federal antitrust regulator in the U.S. raised concerns in April this year that Chicago's attempt to regulate the fast-growing ride-sharing industry could restrict competition and hurt consumers. The Federal Trade Commission (FTC) explained in a letter that any regulations should be limited to safety and consumer protection concerns and not impose higher license fees or insurance requirements than traditional taxicabs have to meet. The FTC quoted a Supreme Court judgment underlying that “The assumption that competition is the best method of allocating resources in a free market recognizes that all elements of a bargain—quality, service, safety, and durability—and not just the immediate cost, are favorably affected by the free opportunity to select among alternative offers”. The letter points out that these software applications provide consumers with expanded transportation options, at potentially lower prices, thereby increasing competition and promoting a more economically efficient use of personal vehicles. The FTC criticized parts of the ordinance that unnecessarily impede competition by requiring ride-sharing services to pay higher annual license fees and carry more liability insurance than conventional taxis, and by prohibiting pickups or drop-offs at Chicago airports or the McCormick Place convention center.

Also the D.C. Taxicab Commission’s regulation attracted comment from the FTC. The FTC letter recalled that, in the taxi market, competition takes place on a variety of dimensions, including price, availability, timeliness, convenience, quality, vehicle type, payment mechanism, and other amenities. “A regulatory framework should enable these various kinds of competition and not directly or indirectly restrict the introduction or use of new types of applications or the novel features they may provide absent some significant evidence of public harm.” The FTC letter criticized the proposed regulation to require sedan-class vehicles — the vehicle class of choice for some new entrants — to be of a specific size and color because the regulation would prevent entrants from using smaller, more fuel-efficient vehicles.

Commissioner Wright of the FTC recalled in his opinion in Washington Post that advocacy letters are not the only tools at the disposal of the FTC to protect consumers. For example, the FTC brought lawsuits against the cities of Minneapolis and New Orleans alleging that regulatory agents had unfairly combined with operators to impose regulations increasing taxi fares, limiting the number of taxi licenses and engaging in other methods of unfair competition.

More lawsuits in the pipeline

In addition to the legal disputes attacking the core of Uber’s business model, there are other procedures providing work for the company’s legal counsellors. A consumer protection class action lawsuit was filed at a federal court challenging its gratuity 20% surcharge policy in April 2014. Uber retains "a substantial portion" of the gratuity rather than giving it to drivers, according to a complaint by an Illinois resident who accused the ride-share company of misleading customers about the true cost of its service. Caren Ehret proposed to represent a class of everyone who has arranged for a ride through Uber and paid the company's gratuity in a revised complaint filed. In another lawsuit filed in January 2013 in Chicago, Uber drivers request compensation for their tips.

Uber also faces a dozen of state insurance agencies over its insurance policy. Insurance experts say the only way to provide coverage for driving commercially is obtaining commercial coverage. Yet Uber believes it complies with all laws and regulations and maintains that claimants are motivated to deprive the public of this safe and convenient transportation option. Uber is also wrestling with a wrongful death lawsuit following an Uber driver struck a girl during the New Year’s Eve of 2013 in San Francisco.

Uber is fighting not only with taxi groups and city councils. One of its competitor, Lyft, is claiming in a lawsuit that its former chief operating officer took proprietary information on Lyft’s international plans with him to his new job at Uber.

Interim conclusions

Rivalry can hurt. Competition may take the form of “creative destruction” whereby mavericks using a new technology or business model transform an industry and question prevailing regulation. Regulation protecting the position of incumbents and hindering or at least postponing the effects that newcomers bring with relying on new technologies and apps often distort competition and hurt consumer interests. It is also true, though, that if not everyone is playing according to the rules, unfair competition may hurt law obeying companies.

The appearance of ridesharing companies will have two immediate consequences. First, the need and depth of regulation of the taxi industry is to be revisited. It’s beyond doubt that the rules of the game should be the same for individuals or companies providing personal transport services in towns. But, do we need rules on tariffs, car specifications, colors, special insurance, etc.? Importantly, by “we”, I mean consumers, not incumbent operators. Second, traditional taxi companies should compete as much as they are lobbying against newcomers. They should also introduce similar or even better applications to comfort their drivers and clients. Why should I choose an Uber car if my reliable, inexpensive taxi company could tell me what time I can expect my car to arrive? One example can be Curb, a new version of Taxi Magic, one of several mobile apps that work with local cab and driver companies to “e-hail”. Driving apps like this can identify the passenger’s position, showing what cabs are nearby and allows you to enter the requested destination for a fare estimate. Furthermore, users have the option to store their credit-card information in the app.

All in all, the response to technology based market entrance should be better services provided by incumbents and the revision of the regulatory framework to abolish unnecessary, non-consumer protection sort of rules.

Company facts

Uber was founded as "UberCab" by Garett Camp and Travis Kalanick in 2009 in San Francisco. As of December 4, 2014, the service is available in 51 countries, about 250 cities, mostly in the U.S.. One of the latest international additions is Budapest. The start-up closed a new $1.2 billion round of financing in December 2014, with investors valuing the company at $40 billion. Known as the market leader in the ridesharing segment, the company has also signaled its ambitions to be a one-stop shop platform for delivering anything, anytime, anywhere based on its smart phone application.

Sources

http://bits.blogs.nytimes.com/2012/07/10/uber-vs-washington-dc/?_r=0

http://www.buzzfeed.com/jacobfischler/dc-just-passed-a-law-that-uber-says-could-serve-as-a-model-f

http://www.freep.com/story/money/cars/2014/09/19/uber-must-face-lawsuit-gratuity-surcharge/15848761/

http://venturebeat.com/2014/05/08/as-uber-battles-13-lawsuits-cabbies-state-agencies-are-out-for-blood/

http://techcrunch.com/2012/04/18/uber-experiments-with-lower-priced-taxis-in-chicago-through-newly-launched-labs-group-garage/

http://www.washingtonpost.com/opinions/has-the-dc-cab-commission-forgotten-who-it-serves/2013/09/06/cb3d0c18-15a6-11e3-be6e-dc6ae8a5b3a8_story.html

http://www.forbes.com/sites/timworstall/2014/06/12/european-taxi-drivers-rediscover-streisand-effect-with-uber-protest/

http://www.buzzfeed.com/bensmith/uber-executive-suggests-digging-up-dirt-on-journalists

http://seattletimes.com/html/businesstechnology/2025020036_uberlyftxml.html

http://www.washingtonpost.com/business/a-new-app-lets-riders-hail-taxis-virtually/2014/09/04/10a7a176-32f9-11e4-9e92-0899b306bbea_story.html

http://www.theguardian.com/technology/2014/sep/02/car-sharing-uber-ban-taxi-germany

http://welovebudapest.com/shops.and.services.1/a.new.transport.service.has.arrived.in.budapest.uber

http://www.bbc.com/news/technology-27617079

http://www.chicagobusiness.com/article/20140421/NEWS02/140429966/ftc-warns-chicago-dont-let-ride-sharing-regs-hurt-competition

http://www.ftc.gov/system/files/documents/advocacy_documents/ftc-staff-comment-honorable-brendan-reilly-concerning-chicago-proposed-ordinance-o2014-1367/140421chicagoridesharing.pdf