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Ride-sharing problems

Jasper SkyDecember 10, 2014

Taxi companies - and some city governments - are using lawsuits to fight cheaper ride-sharing services like Uber, Lyft and Sidecar. Will they succeed in eliminating ride-sharing as a business model?

Apps: Uber und Taxi Berlin
Image: dpa

California prosecutors filed a lawsuit in San Francisco Superior Court on Tuesday against ride-sharing company Uber, over allegations that its background checks on drivers are inadequate.

"Uber continues to misrepresent and exaggerate background checks on drivers," Los Angeles District Attorney Jackie Lacey said.

"It's not our goal to shut them down," he added. "What we're saying is their advertising is false."

Lyft, a competitor to Uber, settled a similar California lawsuit this week, agreeing to drop claims that its background checks are "the best available" and "the gold standard." Lyft also agreed to pay half a million dollars and change some business practices, San Francisco District Attorney George Gascon said.

But that hardly means Uber, Lyft, Sidecar, Wingz, and the rest of the ride-sharing startups are at risk of being squeezed out of business. The lawsuits don't suggest their business model is fundamental flawed.

Taxi driver strike against ride-sharing apps, 11.06.2014, Berlin
Berlin taxi drivers staged a strike in June 2014 to demand a ban on ride-share apps like Uber or Lyft. They succeeded - for nowImage: Reuters

They do show, however, that when disruptive new business models come along and startups begin eating an older business model's lunch, a great deal of scuffling, shouting, and legal and political maneouvring inevitably takes place.

Disrupting an industry ruffles feathers

Silicon Valley prides itself on being the world's foremost launching pad for disruptive business models that shake up older, more established industries. Ride-sharing startups like Uber and Lyft present a classic example: Within just a couple of years of launching, it has become clear that they present an existential threat to the taxi-cab business.

Ride-sharing apps enable anyone with a good automobile and a clean driving record to set up a freelance business offering rides for a fee, using mobile apps to connect customers and drivers.

Ride-share drivers generally undercut taxi-cab prices by a wide margin. That's good for consumers' wallets, but the competitive challenge has inspired fear and anger in taxi drivers.

Traditional taxi-cab permits require drivers to pay heavy fees, undergo extensive screenings, and obtain commercial insurance. If those same requirements were imposed on ride-share drivers, the ride-sharing business model would hit a wall.

Conversely, if ride-sharing is allowed to continue without drivers having to pay the stiff licensing and insurance costs to which taxi companies have long been subjected, companies like Uber and Lyft may well eventually kill off the taxi business model.

Silicon Valley's historical and intellectual heart: Stanford University
Stanford University, in the heart of Silicon Valley, continues to churn out brilliant engineers who go on to launch world-beating startupsImage: picture-alliance/dpa

That's why, egged on by taxi companies and taxi drivers' associations, municipal, regional, and even some national governments around the world have mounted legal challenges against ride-sharing companies.

Teething problems of an infant industry

In the wake of fierce lobbying, some jurisdictions have even banned ride-share services altogether. The list of jurisdictions that have imposed bans - at least for the time being - include entire countries, like Thailand and Spain; US states Nevada and Virginia; and a growing list of major cities, including the German capital, Berlin.

New Delhi joined the cities banning ridesharing services after a woman client was allegedly raped by an Uber driver in New Delhi last week.

It's an indication of the ferocity of the lobbying battle that legal challenges against ride-sharing have been mounted even in California - the industry-disrupting companies' home turf, where robust innovation and aggressive business models have generally found acclamation and support rather than opprobium.

But not all cities or states are tilting against Uber, and the legal challenges and lobbying from taxi-cab companies are unlikely to kill the ride-sharing business model. Instead, the dominant trend is toward a new regulatory framework for ride-sharing that will allow it to survive and thrive.

Salt Lake City's new ride-sharing regulations provide a useful example.

A model to follow?

In a unanimous decision that came in the wake of several tense months during which the municipality temporarily banned ride-share companies from operating, the Salt Lake City Council legalized rideshare services in late November.

The city set up a regulatory framework that mandated vehicle inspections and background checks for drivers. David Everitt, the city government's chief of staff, said the goal was to make sure drivers operate safely.

The council rejected the idea of requiring individual rideshare drivers to buy commercial automobile insurance. Instead, the city accepted that the insurance purchased by the rideshare companies on behalf of all their drivers would suffice.

That was a crucial decision, since most rideshare drivers work part-time and would not be able to afford high-cost commercial insurance.

The rideshare companies themselves already run background checks on prospective drivers and require vehicle inspections. Drivers questioned whether a duplicate municipal requirement for the same checks made sense. However, Salt Lake City's new regulations are not onerous, and they're unlikely to present a serious barrier to entry for drivers.

Drivers will have to fill out an application form, pay a $65 fee, then undergo background checks and vehicle inspections. Everitt said the checks should take about half an hour. He warned that drivers who ignore the regulations and pick up passengers without first getting city approval face a fine - $6500 for repeat offenders.

Even if ride-sharing doesn't take hold everywhere, all at once; even if it remains banned, at least for now, from some jurisdictions, as a result of successful lobbying by taxi companies - in the long run, the remaining barriers to the ride-sharing business model seem likely to crumble.

Because of its early-adopter status, Salt Lake City's liberal ride-share regulatory regime may well be one of the examples other cities look to as they develop their own regulations.