Uber’s new CEO Dara Khosrowshahi has a lot on his plate, trying to recover from a hellish year for the popular ride-sharing service. So he doesn’t need the crippling legal blow that the European Union just dealt to Uber’s global ambition to be the leading taxi-ish service for the digital age.
Uber has long claimed that it is not a taxi service or a transportation company, but a technology company acting as a mere online intermediary connecting drivers to potential customers. In fact, it changed its name in 2010 from UberCab to Uber Technologies as a way to burnish that reputation. This distinction is subtle yet important, because Uber’s core business model is designed around that quasi-legal positioning – refusing to follow local taxi laws, treating its drivers as independent contractors rather than employees, not following any medallion system or other restrictions on the number of ridesharing cars on the road. All of these have flowed from its mantra, “We are a technology company, not a transportation or taxi company. So we don't have to follow taxi laws.”
For the most part U.S. regulators have bought this smokescreen claim. But recently the European Union’s top court shot it down, wrecking Uber’s prospects in one of the world’s largest markets. The European Court of Justice (ECJ) has ruled that Uber is in fact a transportation company, not a technology company, and so it should be regulated like any other taxi operator.
“The service provided by Uber,” wrote the ECJ in its decision, “connecting individuals with nonprofessional drivers is covered by services in the field of transport. Member states can, therefore, regulate the conditions for providing that service.” The ECJ further noted that Uber “exercises decisive influence over the conditions under which the drivers provide their service.” That contention over the amount of control Uber exerts over its drivers has been a sticking point in various related lawsuits in the US.
Uber’s spurious claim has never been widely accepted outside the United States. After all, when traditional taxis added electronic meters to their vehicles in the 1970s, did that make them “technology” companies, and not subject to transportation laws? Hence, Uber had already been banned in many European countries — including Germany, France, Italy, Spain and Sweden — for refusing to follow taxi laws, including its illegal use of unlicensed drivers.
Making matters worse, Uber already has fled from China and Russia, beaten by local competitors, and is barely hanging on in India. It is dangling by a hair in London, one of its busiest overseas markets, since the city’s transportation authority, Transport for London (TfL), rejected Uber’s application to renew its license to operate. TfL's decision, backed by London mayor Sadiq Khan, was based on a finding that the ride-hailing giant demonstrates a "lack of corporate responsibility,” including not reporting serious criminal offenses and a failure to obtain medical certificates and conduct background checks for drivers. Uber has appealed this ruling, and its ejection from London is suspended during the appeal.
Uber had hoped that the ECJ might provide some relief from its ongoing year of nightmares, including having lost about $3 billion in 2016 and an estimated $5 billion for all of 2017. Instead, the high court has slammed the door even tighter.
Uber has unquestionably added value to the transportation grid, especially in the US, where public transportation outside New York City is sketchy and poorly funded, and taxi service has been inadequate. Uber added a lot more taxi-like vehicles on the roads to service demand, and provided consumers a transportation alternative with a seemingly magic button, i.e. an app for summoning the car.
But its service has always been dogged by controversy. Uber has refused to follow many transportation laws that regulated taxis, including for background checks for drivers, insurance liability, safety and inspection of vehicles, limits on the number of vehicles, using suspicious software to evade regulators, and whether its drivers are independent contractors or regular employees. The recent ruling by the European Court of Justice threatens all that. A spillover effect to the US seems inevitable.
Looking down the road a bit, here are likely implications of this ruling:
- Taxi services and ridesharing will merge over time, as more taxis start using apps and ridesharing companies start renting cars to drivers (the latter has already begun). That would be a good thing, since having these two different sectors, which provide the exact same service, regulated by two different sets of rules makes no sense and needs to end.
- Uber may find it to its advantage to treat a certain core of its drivers as regular livery employees rather than as independent contractors, supplemented by a reserve of part-time contractors. That will give it more predictability over its workforce and would make these better jobs for its drivers. As it is,at least half of its drivers last only a year on its platform and then move on to greener pastures, which is disruptive to its quality of service. This kind of employee churn is “disruptive” in the wrong kinds of ways.
- This ruling could help cities get a handle on the terrible increase in traffic congestion that Uber has contributed to, by creating momentum to limit the number of ridesharing cars on the streets.
The most ambitious study of ridesharing impacts yet conducted, from researchers at the University of California-Davis’ Institute of Transportation Studies, found strong evidence that ridesharing results in an aggressive rise in the number of trips made and miles driven in an auto, as well as a pronounced reduction in the use of mass transit, and an increase in carbon emissions. In New York City, there are now twice as many Uber and Lyft cars as yellow taxis, even as average speeds during business hours in Manhattan’s core dropped to a crawl in 2017—about six miles per hour, 15 percent slower than in 2010. In London, the number of private-hire vehicles like Uber has jumped 26 percent in the past few years, and is now triple the number of London’s famous black cabs.
The same story has prevailed in San Francisco, Uber’s birthplace, where there are about 1800 taxi cabs and 45,000 Uber and Lyft drivers. At any one time approximately 9000 of those ridesharing cars are on the road. In city after city, ridesharing has completely swamped traditional taxis, greatly contributing to the huge increase in traffic congestion. And contrary to Uber’s claims, ridesharing has not resulted in substantially fewer people driving their own private vehicles. Urban cores cannot add thousands of additional cars to already-crowded streets and not expect dramatic knock-on effects.
Too much of a good thing can be a bad thing: I like chocolate cake, but if I eat the whole cake I will get sick. There needs to be a reasonable limit established for the number of ridesharing taxis on the road, just as there has been for traditional taxis for many years. If we think of our streets as a “public utility,” we have to find the right mix of buses, personal autos, delivery trucks, taxis, bicycles and now ride-sharing vehicles. As congestion increases, other crucial environmental goals get steamrolled—such as reducing carbon emissions by encouraging greater use of mass transit and bicycling.
The reality is, if the US really wants to tackle its carbon emissions, people have to get out of their automobiles – whether those automobiles are theirs, someone else’s, or self-driving. Mass transit is still the key to a livable future — ridesharing doesn’t change that. And mass transit does not have to be completely a public system – in Vienna, they have an efficient public-private hybrid mass transit system called Wiener Linien. But it just so happens that government is the entity that usually has the financial resources, and is not limited by for-profit incentives, to invest in this badly needed infrastructure.
Yet Jarrett Walker, a public transit consultant, and others have demonstrated that If we aren’t careful, ridesharing could undermine mass transit. If companies begin offering a service that sprints up and down the busiest and most profitable routes, such passenger poaching could destroy revenue for public transportation. Uber already is attempting this with its UberPOOL service, and other private companies — including one called Chariot that is backed by Ford — is doing just that in San Francisco. Already ridership on mass transit is down in city after city, as many people reduce their use in favor of Uber’s low-cost, subsidized fares (most Uber users don’t realize that they only pay about half the cost of their actual fare – the rest is paid for by Uber’s venture capital funders as Uber seeks to drive out its competitors). These subsidies are unsustainable, as eventually the private investors want to make a profit and Uber will have to dramatically increase fares to reach profitability. But in the meantime, subsidized fares and poaching of passengers on the profitable routes will eat away at the viability of the public transportation system.
More than anything, what the increased use of ridesharing shows is that if you don’t offer people good transportation options, they will take bad ones. Unlike in Europe, so far the arcane regulatory approach in the US has led to more problems than solutions. One of the most senseless aspects of it is that, according to a forthcoming study from the National Employment Law Project, approximately 40 states have passed ridesharing laws that have preempted cities from reining in Uber and Lyft at the local level. Now that cities have discovered all the problems that ridesharing is causing, and have expressed desires to limit the number of ridesharing vehicles, they are discovering that their hands are tied by oppressive state laws.
The U.S. should follow the lead of the European Court of Justice and regulate ridesharing like a transportation service. Ridesharing has proven its worth, and should be incorporated with existing modes of transportation into the overall transportation grid. But it has to be done in a way that minimizes all the impacts we are seeing now. It can’t be left strictly to the free market. Nor can it be left to companies that are seeking monopolies and market share and will flood the streets with their cars if we let them.
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