Just over five years after it began offering rides in San Francisco, the Uber passenger service now operates in 342 cities spread across more than 60 countries. It retains some 327,000 freelance drivers in the U.S. and hundreds of thousands more around the world. In Uber’s most recent round of financing, investors assigned it a value of $51 billion—a milestone it reached faster than Facebook had before it. According to a recent report by Reuters, Uber has told prospective investors that it will reach $10.8 billion in global ride payments in 2015—giving it $2 billion in revenue when it takes its 20% cut. It projected those numbers, the Reuters report says, to more than double to $26.12 billion this year.
While it primarily offers car rides today, Uber is aiming to be much more. With its UberRush service, the company has experimented with delivery. Uber CEO Travis Kalanick has described Uber as a new platform to help replace inefficient 20th-century transportation systems.
But it’s not just CEO Kalanick that sees Uber through rose coloured glasses. Uber is viewed by many as the model for the 21st century corporation – a poster child of the so-called sharing economy. Implicit in this view of the company is that Uber’s success in “disrupting” existing industries (such as the taxi industry) is due to its innovative technology – particularly its app that connects drivers with potential passengers and expedites cashless payment.
But attributing Uber’s success to its app is a complete mis-reading of the Uber phenomenon. While the explosive growth of the company has been well documented, Uber’s relentless efforts to avoid the costs associated with different jurisdictions’ regulatory (including tax) regimes is less well known.
The truth of the matter is that Uber’s app is really not all that different from apps used by many established taxi companies. What gives Uber its competitive advantage is a business strategy that is as old fashioned as they come: Uber exploits regulatory grey areas and weak enforcement and in so doing, avoids the costs associated with having to comply with the regulatory regimes that govern its competitors.
To date, this strategy has been successful in most jurisdictions that Uber has entered. However, where governments have been nimble enough to close the relevant legal loopholes and vigorously enforce existing regulations, Uber has tended to close down its operations or not enter the market in the first place. In other words, the record suggests that when Uber is forced to comply with the existing regulatory regime in any given jurisdiction and incur the associated costs, it doesn’t try to compete on an even playing field with its competitors and simply pulls out (or never enters the market in the first place).
Uber in Germany
Before examining Uber’s tactics in Canada, it is useful to take a look at Uber’s experience in Germany.
Last October, Uber suspended services in Hamburg, Frankfurt and Duesseldorf, citing “a difficult regulatory environment”.
The “difficult regulatory environment” that Uber is referring to emanated from a Frankfurt regional court ban on Uber using unlicensed drivers which decreed that for each violation of the ban Uber would be subject to a €250,000 (C$375,000) fine. This legal challenge to Uber was driven by German taxi operator group Taxi Deutschland targeting the lower cost UberPop service.
Since then, Uber in Germany has limited itself to drivers that hold a passenger transport license, among other legal requirements, through its UberX and UberBlack smartphone apps, but it has run into a shortage of suppliers of ride services.
“For many prospective Uber partners the process of registering an independent rental car enterprise has proved too costly and time consuming,” Uber said in a statement.
But Germany isn’t the only European jurisdiction that is causing Uber problems. In fact, the company’s UberPOP service, which relies on non-professional drivers, has been outlawed in France, Italy, Spain, Belgium as well as Germany.
And its pattern of avoiding jurisdictions where it can’t find a way to exempt itself from existing regulatory regimes (and where enforcement of those regimes is strong), has repeated itself in Canada as well.
Uber in Vancouver and Toronto: Illegal in both but a stronger enforcement regime in Vancouver keeps UberX out.
UberX, Uber’s most popular service, is illegal in both Vancouver and Toronto for exactly the same reason: Uber refuses to apply for a licence to operate it as a taxi service under existing regulations. And it doesn’t apply for an operating licence because it doesn’t want to pay the same licencing fees, carry the same insurance, and operate under the same fare structure, as the rest of the taxi industry in those cities.
But then why has Uber decided to keep UberX out of Vancouver in contrast to Toronto where it is equally illegal but where it has a huge presence? In Toronto, the illegal UberX service now has about 18,000 local unlicensed drivers carrying passengers in unmarked, private cars instead of cabs.
According to observers, Uber decided against operating illegally in Vancouver because the B.C. Passenger Transportation Board (PTB) regulatory system has much more legal heft than the fragmented, municipally-based taxi licensing regimes in Ontario and other Canadian provinces.
In Vancouver, Uber has been given a stern warning that any attempt to set up shop in B.C. without licensing from the provincial PTB could result in immediate undercover enforcement and legal action.
Observers also point to B.C.‘s public auto insurer, ICBC, as another hurdle for Uber in B.C.
The ICBC has been very clear that anyone who wants to operate a ride-sharing service requires commercial insurance. And being pretty much the sole auto insurer in the province – with a unique ability to closely co-ordinate its insurance requirements with the licencing requirements of the provincial government – ICBC has the heft to enforce its insurance rules.
Contrast that with Ontario where over 100 private insurance companies with limited working relationships with municipal taxi licencing authorities (auto insurance is regulated through the Government of Ontario’s Financial Services Commission of Ontario), provide auto insurance coverage to the province’s drivers. There is simply no way to replicate in any Ontario municipality the combined regulatory clout that the provincial PTB and the ICBC have in B.C. And Uber knows it and that is why it has pushed its UberX service so hard in Toronto and stayed out of Vancouver.
Again, it is important to emphasize that despite having over 18,000 unlicensed drivers at its disposal, UberX’s Toronto operations are unambiguously illegal. While a July 3, 2015 Ontario Superior Court decision dismissed the City of Toronto’s attempt to shut down the ride-sharing service on the grounds that the city’s narrow definition of “taxicab service” and “taxi broker” don’t technically apply to UberX, the relevant taxi bylaws were amended at a subsequent September 30th City Council meeting and now clearly apply to the company’s UberX service.
However, since the by-law change that removed any and all ambiguity regarding UberX’s legal status, Uber has made it clear that while it fully appreciates that its UberX service is now operating illegally in Toronto, it still intends to ignore the by-law licensing requirement and continue to operate its UberX service unlicensed. As a result, Uber is racking up tickets from the City of Toronto’s Licensing department on its UberX service (Uber operates its much smaller Uber Taxi legally in Toronto). In fact, since Oct. 22, Toronto licensing enforcement officers have laid 120 charges against Uber and its drivers for alleged bylaw violations related to UberX. A further 180 to 210 charges are being processed.
Of the charges, 96 were laid against five different Uber corporate entities. The companies charged are: Uber Canada Inc., Uber International B.V., Uber B.V., Uber Technologies Inc., and Rasier Operations B.V. Three of the ticketed Uber owned companies are based in the Netherlands (ergo the B.V.), a key element of Uber’s sophisticated tax avoidance strategy (see Part 2 of this post).
The five Uber owned companies ticketed are subject to one or both of the following charges:
- Operating a taxicab brokerage without a licence.
- Entering into an arrangement or agreement with an unlicensed taxi driver and/or unlicensed taxicab owner to connect the driver with passengers seeking taxicab services.
In addition to the 96 City of Toronto charges against Uber proper, 12 vehicle owners were served with a total of 24 charges (two charges per owner). The first charge is for operating a taxicab without a licence and the second is for using or allowing the use of a vehicle that hasn’t been approved by licensing staff.
Why does Uber think it’s in its interest to ignore the Toronto licensing requirements when it is sure to be ticketed? Simple, a first time cab driver’s licencing fee is $362 plus $225 for the course and another $75.70 CPR fee for a total of $662. And then there is the renewal fee of $338. And you can’t operate a car without an Owner’s License. In Toronto, the owner’s license costs $4,983 on issuance, plus a renewal fee of $1,279.32. Bottom line: paying the tickets simply costs far less than licencing as a taxi driver/owner and for UberX’s huge Toronto operations, tickets have just become a very small factor in the price of doing business in the city.
UberX drivers are also seriously deficient when it comes to meeting the insurance requirements for cabs in Toronto.
Toronto taxicabs are required to have $2M in commercial automobile insurance. The City of Toronto verifies that licensed taxicabs have the appropriate insurance but since UberX cars are unlicensed, the city has no mechanism to enforce the requirement. Commercial policies with this amount of coverage can cost in the range of $4,000 to $10,000 annually. The exact cost depends on driving record, the model, and if the vehicle is on the road 24-7.
Of course, very few of Uber’s drivers carry this sort of commercial auto insurance and the company has indicated that its business model simply can’t accommodate the $2M in commercial insurance requirement (Uber officials have said that every Uber ride is backed by $5 million of contingent auto liability insurance covering bodily injury and property damage but they refuse to release the details of the coverage). And while a number of Ontario insurers have made it clear to drivers that they are in danger of having their personal auto insurance pulled if they drive for UberX, there is no equivalent to the combined enforcement clout of B.C.’s province-wide licensing regime and its provincially run public auto insurer, ICBC.
A win for the Uber strategy in Canada: Edmonton implements Uber written rules
To summarize things, Uber refuses to apply for a taxi licence for its UberX service because Uber does not want to operate under the same rules as the rest of the taxi industry. And it doesn’t want to operate under the same rules as the rest of the taxi industry because it doesn’t want to incur the licencing fee, insurance, and consumer safety costs associated with the existing regulatory framework.
But perhaps more importantly, Uber most emphatically does not want to be subject to the same flat fare structure as its competitors in the taxi industry. That’s because in order to make its business model work, it needs to have absolute freedom to implement its “surge” price fares when passenger demand is high. Surge pricing kicks in when the number of available Uber cars falls below a certain threshold. Once the surge starts, the app warns users that the normal rate will be multiplied by a certain amount. In a much reported incident in Montreal on New Year’s Eve, a multiplier of 8.9 times was added to a rider’s $125 base fare resulting in a $1,115 charge for a 60-minute ride that covered 63 kilometres.
The bottom line is this: while Uber is competing for the exact same passenger dollars as the rest of the taxi industry, Uber wants to play by its own rules when it comes to fares and industry regulatory costs. To accomplish this, Uber has written its own rules and hired high powered lobbyists to shop them around to key Canadian licensing jurisdictions – including Toronto and British Columbia. And on January 27, Uber had its first big Canadian political success when Edmonton became the first Canadian municipality to implement an Uber dictated regulatory framework.
What does an Uber dictated regulatory framework look like? First, it makes a clear distinction between services such as the UberX service and the existing taxi industry. Edmonton’s new rules set the existing taxi industry up as a “public transportation provider.” People taking a traditional, marked cab would have the certainty of a price calculated by a city-issued taxi meter whenever they hail a cab on the street, find one at a taxi stand or use a phone to call a dispatcher.
In contrast, UberX and similar services would be considered a “private transportation provider”. Uber drivers could only take rides through an app but Uber could set its own rates, as long as they’re more than $3.25 per trip. Drivers must also have provincially approved insurance, a Class 4 driver’s licence, a criminal record check and a vehicle safety inspection before they get a city-issued licence.
Under the Edmonton rules, the existing taxi industry could compete in the “private transportation provider” space as well and set its own rates for pre-arranged fares booked by app or pre-contracted with a corporate package.
But Uber’s big wins in Edmonton are that its UberX service pays a significantly lower licensing fee per car than the existing taxi industry and more importantly, it gets to operate its “surge pricing” fare structure. Neither of these, of course, have anything to do with what is supposed to be the source of its competitive advantage and “disruptive” power: its innovative app. But Uber has little interest in operating its “world-beating” app within the existing regulatory framework because, well, the app doesn’t make it any money unless Uber can play by its own fare and licensing fee rules.
So the truth of the matter is that where Uber has been successful it has been able to either re-write the taxi rules to its advantage or, as in the case of Toronto, has simply ignored the existing rules on taxi fares and licensing and operated according to its own rules illegally. Where it hasn’t been able to change the rules and/or where the enforcement of existing rules has been rigorous, Uber has either pulled out (a number of German cities) or not entered the local market in the first place (Vancouver).
But there are two other major areas where Uber plays by different rules that give it an additional competitive advantage: its (apparently legal) international tax avoidance strategy and its (legally contested) claim that Uber drivers are independent contractors as opposed to employees. These issues, of course, are not regulated within municipal (or provincial) taxi licensing regimes but are central to Uber’s global growth strategy.
Uber’s global tax avoidance and labour strategies will be dealt with in detail in a subsequent article to be posted here in the next few days.
Note: This is the first of a 4-part series on Uber in Canada. Click here for Part 2, The secret strategy behind the Uber invasion of Canada; click here for Part 3, Uber in Canada – cutting corners on taxes and employee benefits; and click here for Part 4, Uber in Canada and the public interest.