Uber’s business is based on regulatory arbitrage

  • Uber has lost regulatory battles in dozens of
    cities.
  • Even if it had not been banned in London, Uber faced a
    licence fee increase up to £2.9 million.
  • The company lost a lobbying battle against a powerful
    union and its law firm.
  • It was also hurt by a change in control of the mayor’s
    office.
  • That’s a lot of political risk riding on the $12
    billion that investors have ploughed into Uber so
    far.
     



Uber CEO Dara Khosrowshahi


Uber
CEO Dara Khosrowshahi

REUTERS/Lucas
Jackson


LONDON — In the tech startup world, most people believe the basis
of Uber’s business is an ingenious map-based algorithm that
matches supply-and-demand for cars and passengers in a
localised area, via an app. 

But as the
ban on Uber in London
shows, in reality Uber’s business
is highly dependent on regulatory
arbitrage
: A bet that it won’t be subjected to government
rules that might put it out of business.

The current narrative about Uber is that although it might
cheekily enter a new city, country or region without fully
playing by the rules, once it is established it becomes so
popular that governments cave and find a way to let it operate.
It has been massively successful doing that so far.

That narrative took a bashing this week 

Uber’s London revenues could fall to zero in the next few months
if it cannot persuade the courts, and then Transport for London,
the city transport regulator, to undo the decision.


The disaster
is the latest of dozens of legal setbacks for
the company. Uber has been banned, restricted, curtailed, or lost
regulatory battles in the following markets, to name a few: 

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In some cities, like Edinburgh, Uber is hobbled by agreements
that restrict it to licensed drivers. In those markets, Uber
fails to deliver rides in 4 minutes the way it usually does,
because riders are simply using the app to hail a private-hire
cab — and those guys tend to always be 15 minutes away.

In London, it became obvious earlier this summer that the company
was in trouble.

Uber said its customers would be “astounded” at the decision but
the company itself should not have been surprised. The GMB
(a union that represents black cab taxi drivers) hired the law
firm Leigh Day to campaign to drive Uber out of business. That
lobbying was successful this week. (And yes, this ban is
about lobbying.) The
London Assembly voted unanimously against renewing Uber’s licence
in July
. The vote was symbolic but it shows how the
Labour-dominated council is beholden to unions whose main
interest is protecting the jobs of a minority of elite
workers. The decision came after the Conservatives lost the
mayoral election. Former Mayor Boris Johnson (Conservative) gave
way to Labour’s Sadiq Kahn. When that happened, Uber lost a
champion and gained a Luddite enemy.

Uber isn’t really a tech company

Even if TfL’s decision had gone the other way, Uber was facing a

£1 million rise in its licence fee to £2.9 million.

Uber’s big problem is that other cities and countries all over
the world will be watching the London fight closely. They, too,
will consider applying millions in licence fees to Uber’s fares.
Or maybe they will also conclude that their taxicab cartels
are too powerful to upset. (After all, ordinary people who just
need to get from A to B cheaply don’t have unions or lawyers to
campaign on their behalf.) 

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A change in politics can happen in any city, in any country.
There are thousands of jurisdictions on the planet where Uber
must fight this battle.

From that perspective, Uber isn’t really a tech company. Its
business is archaic: Taxis have been around since
the 1700s, when Hackney carriages — which give today’s black
cabs their name —  ferried passengers with horses and
carts. 

Rather, Uber is a bet that things will never change, that there
will always be a taxi business it can extract value from, and
that governments will sleep through the consequences. That’s
regulatory arbitrage. And it ought to focus the attention of
Uber’s investors, who have sunk $12 billion into
a company that will go public in the next two years
.

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