Why Tensions Between Uber and Cities Peaked in NYC
(Bloomberg) -- New York City dealt Uber Technologies Inc. a blow recently by halting new licenses in its largest U.S. market. It marked a turning point in the city’s relationship with digital ride-hailing services, which have flooded streets, compounded traffic and pushed taxi owners to a financial cliff. New York’s actions are the latest example of how city and national governments worldwide are trying to corral Uber after years of rules-be-damned growth under former managers. They also show how new Chief Executive Dara Khosrowshahi has tried to balance innovation with political diplomacy.
1. What did NYC do?
New York’s City Council in August passed legislation to freeze new ride-hailing licenses for a year while a task force figures out if more needs to be done to protect drivers and passengers. Wheelchair-accessible vehicles are exempt from the cap. The city’s Taxi & Limousine Commission can also set minimum pay standards for drivers of ride-hailing services. Requiring companies to make up the difference between that pay floor and a driver’s hourly earnings is intended to be an incentive for companies to keep the number of drivers down and balance the supply of ride services with demand.
2. What have other governments done?
Uber came close to being banned in London when regulators in 2017 didn’t renew Uber’s operating license, citing safety and governance shortcomings, such as failing to do proper background checks on drivers. Uber eventually won a 15-month probationary license in June after convincing a judge it had reset its management and culture. The European Union’s highest court also took action against Uber when it ruled in December that Uber is a transport company rather than a digital service provider, making it subject to each member nation’s own rules. Japan, Argentina and Germany have also made it difficult for the company to operate its ride-hailing business in those countries. In the U.S., Seattle passed a first-of-its-kind ordinance in 2015 allowing drivers-for-hire to collectively bargain, although that may now be in jeopardy: A U.S. appeals court in May let proceed an antitrust challenge brought by the U.S. Chamber of Commerce.
3. Why are they cracking down on Uber?
Consumers have embraced ride-hailing services such as Uber and Lyft Inc., leading to an explosion in drivers and vehicles that’s been tough on local governments. The sector has a history of trying to maneuver around regulations and entrenched taxi industries, making it ripe for a crackdown. In New York, app-based for-hire vehicles jumped to more than 80,000 from about 12,600 in January, 2015. The oversupply resulted in some 40 percent of cars traversing the city without passengers. The economic cost from traffic-choked midtown Manhattan streets has been calculated in the billions of dollars while competition has suppressed average pay to about $17 an hour. Six drivers committed suicide within seven months, citing their economic desperation and creating a public outcry that spurred the city council to act.
4. Is Uber as bad as some city officials say?
Uber and other app-based ride companies have won loyal users by offering inexpensive and convenient transportation, especially for people in areas ill-served by mass transit. The services represent a flexible gig for drivers. At the same time, Uber’s size and the allegations of misconduct against it have drawn plenty of scrutiny. Uber offices from Montreal to Hong Kong have been raided by authorities investigating various suspected wrongdoings by the company, employees, or both. It has also come under scrutiny by the U.S. Justice Department for possible violations of anti-bribery laws. Critics have pointed to these alleged misdeeds as evidence of a renegade corporate culture under co-founder and its former chief executive officer, Travis Kalanick, who was ousted amid allegations of discrimination and questionable business practices at the company.
5. Wasn’t Uber’s new CEO supposed to allay those fears?
Yes. After London officials moved to oust the company, he issued a contrite public apology that acknowledged the company had "got things wrong along the way." Soon after, the company voluntarily suspended its UberPop service in Oslo, avoiding a conflict while the Norwegian government wrote new rules for app-based ride services. A London judge’s decision to grant the company a 15-month license rewarded the contrite approach taken by Khosrowshahi, who flew in for talks with the city’s transport officials just weeks after assuming the CEO role. He followed a similar playbook in New York by huddling with politicians over concerns about congestion and driver suicides, and even supporting a fee on ride-hail trips to help city cab drivers in dire financial straits.
6. How have Uber and other ride-apps affected traditional cabs?
Taxi drivers from South Africa to Canada have staged mass protests of ride-hailing services, Uber in particular. In New York, Uber first affected traditional cab drivers. But as the company grew, all for-hire drivers including limousine services, liveries and Uber drivers themselves saw business decline. New York’s Yellow Cab industry has been capped since former Mayor Fiorello LaGuardia in 1937 created a limited number of medallions when taxi supply increased faster than passenger demand. That strategy survived for 50 years, during which medallions became worth hundreds of thousands of dollars until Uber, Lyft and Via cars created new competition and drove taxi services into a financial crisis. Now, there are so many for-hire cars competing for passengers, few drivers in any part of the industry say they can make a living.
7. Are government actions hurting Uber’s bottom line?
Government regulation has long been a powerful constraint on Uber’s revenue growth, which has already started to slow. Across the world, Uber operates in a highly regulated industry and governments have the power to shut it down altogether, raise taxes, or restrict its footprint. A renewed push to limit Uber’s size in cities would further hinder the company’s revenue growth. For now, it’s hard to tell if the regulatory backlash in New York is anomalous or if it could trigger regulatory contagion globally. Expanding in existing markets is essential to maintaining growth ahead of a public offering next year. The regulatory backlash in New York City was particularly worrying for the company because the city has long been one of Uber’s most profitable markets.
8. What about an Uber IPO?
Increased regulation could hamper Uber’s financial performance, but it’s unlikely to derail Uber’s plans for a public offering in the second half of 2019. The company faces intense investor pressure to deliver on a public offering. Some shareholders would be freed up to sell their shares if Uber doesn’t go public on schedule. Whether Uber can recruit a chief financial officer and the state of the public markets will likely play a bigger role in the company’s IPO timing than government restrictions.
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