Uber puts cab companies on regulatory edge

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It's a blustery, rainy day at rush hour and hailing a cab seems futile. It's time like these that have made an innovative mobile app a focus of attention in Toronto and a dozen big U.S. cities where it's launched.

But not everyone is excited by the market entry of car-service dispatch startup Uber Inc. The San Francisco-based company has fought and won pitched battles against regulators in Boston and Washington. And since its launch in Toronto earlier this year, cab companies have filed complaints with the city and the licencing board has been threatening to lay charges against the company for operating without a licence.

It's all part of the challenge of trying to carve a niche in one of the world's most entrenched industries, says Andrew Macdonald, general manager of Uber in Toronto.

The company uses mobile technology to bypass a cab dispatch system that's still rooted in the era of operators and pay phones. Uber members see a graphic representation on their smart phones of the independently owned cabs and limos in their area that have signed on with the service. A touch of the screen or a text message places an order with the closest driver.

The app then gives the customer a readout of how long it will take for the car to arrive. Once the ride starts, the trip is logged and the fare is calculated based on time and mileage, plus a 20 per cent charge that covers tip for the driver and a fee to Uber. The total is billed electronically so no money changes hands.

In principle, it should be a win for everyone, Mr. Macdonald says. For consumers, there's convenience, dependability and transparency. For drivers, it saves fuel, they know the name of the customers they're picking up, and the service also increases cab ridership where it's available. "When you speak to drivers the issues that plague them are earning more money and safety. With no cash involved it makes them feel more secure," Mr. Macdonald notes.

But cab companies who haven't signed on with the system, as well as regulators at the City of Toronto, don't see it that way.

"City staff are actively investigating Uber's activities and charges against the company are forthcoming," Toronto director of licensing Bruce Robertson says. "The City's bylaws require businesses that accept calls and arrange for transportation by for-hire vehicles, taxicabs and limousines, to obtain a business licence from the City. Uber has not applied for or obtained the required licence."

Complaints have also been received from several Toronto taxicab and limousine services, Mr. Robertson adds. They revolve around whether Uber is under-cutting the prescribed taxi and limo rates and about whether the vehicles Uber uses are properly insured and that drivers are properly licensed, Mr. Robertson explains.

The Maryland-based Taxicab, Limousine and Paratransit Association issued a brief this month on behalf of its North American members saying that, while it supports using new technologies for dispatching, it believes apps such as Uber's represent "a danger to public safety." Its brief argues that they "operate in violation of community standards for taxi and limousine transportation in terms of passenger safety, access, non-discrimination and regulated fares."

For Uber's part, Mr. Macdonald explains, "We have not licensed for the same reason Expedia is not licensed as an airline. We're finding available limos the way that Expedia finds available air seats or hotel rooms.

"We do not employ drivers. We do not own cars. We're a technology company that helps limousine and taxi drivers and companies connect with their customers through our mobile application."

Uber has won battles against regulators trying to shut it down since it launched in San Francisco in 2010 as a venture-capital-funded startup.

In Washington, the district government tried to impose an initial fare for Uber cabs that was five times higher than the starting cost of a cab hailed on the street. But there was such an outpouring of support from customers that the government backed down, Mr. Macdonald says. In Boston, legislation to ban the app was also dropped after consumers protested.

The Uber saga has become a case study for students at the University of Toronto's Rotman School of Business this fall. "It's a case of technology shaking up an industry with very entrenched interests," says Joshua Gans, professor of strategic management, who teaches a course in innovation and entrepreneurship using technology.

An analogy of a similar paradigm-shifting application is the automobile, he adds. "When early cars started appearing on roads, the first thing local councils did was pass rules that said they couldn't drive faster than a horse or that people had to walk in front of them with flags," Prof. Gans said. The rules were prompted by the lobbying of entrenched interests in the carriage and horse businesses, which saw cars as a threat. But the opposition faded as it became clear cars offered an advantage. The people who used to shoe horses and fix buggies adapted by switching to maintaining horseless carriages.

"There are always concerns about change, but ultimately old industries have to adapt to innovations," Prof. Gans explains. "It's not even clear that Uber is doing anything that threatens the status quo."

Offering an easier way to order limos could create a bigger market of riders, so it isn't necessarily something owners should be resisting. "But the taxi industry is one of the most protected by legislation and it always fights competition," Prof. Gans continues.

A more modern example of a game-changing business model is Sir Richard Branson's brash efforts to shake up the airline industry with Virgin Atlantic Airways Ltd., says Brian Anderson, assistant professor of entrepreneurship at the University of Western Ontario's Ivey School of Business, who teaches business model innovation. But it required deep pockets that most startups don't have.

"The lesson of Uber is when you're facing entrenched interests it's important to map out the 'value drivers' of all the stakeholders involved and focus attention on the one group that can affect most of the others," Prof. Anderson argues. "If you try to meet the needs of all stakeholder groups, that's a very high bar."

But if you can determine which group has the most power to sway the others and meet their expectations, they'll exert pressure to bring others to their way of thinking, he says.

"When dealing with entrenced interests it comes down to a power relationship," Prof. Anderson states. "It's often not that the new player is making a direct threat, but that the existing infrastructure is in control and it wants to stay in control of their boundaries. With them, you have to show that they are not losing revenues and the drivers are better off because of it.

"A new app wouldn't need to exist if the system was working as effectively as it should."