Can Uber Overcome Its Regulatory Obstacles?

Uber’s latest skirmish with London regulators, which cost the company its license to operate in one of its most lucrative markets, is the result of a flawed culture, Wharton experts say.
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December 07, 2019 21:19 EDT

Uber has lost its license to operate in London — one of its biggest markets globally – for the second time in two years. On November 25, Transport for London (TfL), the regulator of taxi and private hire services in the city, stated that it has “identified a pattern of failures by the company including several breaches that placed passengers and their safety at risk.” TfL noted that even as Uber has taken some steps to address safety issues, it “does not have confidence that similar issues will not reoccur in the future, which has led it to conclude that the company is not fit and proper at this time.”

Uber has attempted to retain customer trust under Dara Khosrowshahi, who took charge as CEO in August 2017 to overhaul a flawed culture that developed under its former CEO and cofounder, Travis Kalanick. It also has grown at a scorching pace to now command a worldwide customer base of 110 million and a 68% market share in its industry in the US. Khosrowshahi has also taken steps to improve passenger safety and work with regulators.

If it could fix its processes, strive to be profitable and act less like an experimenting startup, Uber could potentially not just regain its London license, but also help shape the next phase of its industry, Wharton experts say.

What a Repeat Offense Means

The second denial of Uber’s license in London is “definitely a bad sign” for the ride-hailing pioneer, said Wharton Management Professor John Paul MacDuffie, who is also director of the Program on Vehicle and Mobility Innovation at Wharton’s Mack Institute for Innovation Management. “It shows that new CEO Dara Khosrowshahi’s efforts to bring about change at Uber in order to regain trust with customers, drivers, regulators and the public have not yet been successful,” said MacDuffie. “Not dealing more seriously with public concerns about safety appears to fall into the larger category of Uber’s resistance to any conditions placed upon it by regulators in cities, regions and countries.”

Uber had been denied a license renewal in September 2017, but it won a court reprieve to secure a provisional license for 15 months. TfL granted Uber a two-month probation in September 2019 to allow it to submit information on its actions to meet the 20 conditions it had set for the ride-hailing company to ensure that passenger safety was protected. Uber has said it would appeal the decision; it has 21 days to do so. Khosrowshahi tweeted that the TfL decision “was wrong,” but he pledged to “keep going, for the millions of drivers and riders who rely on us.”

In its latest action, TfL had identified a loophole in Uber’s systems called “account sharing,” which allowed unauthorized and unidentified drivers to upload their photos onto other drivers’ accounts. This allowed those drivers to pick up passengers as though they were the booked driver, which occurred in at least 14,000 trips, “putting passenger safety and security at risk,” the regulator stated.

Uber may have been able to prevent such a practice from creeping into its systems, MacDuffie suggested. “[The loophole] is something one imagines Uber, with its technological sophistication and skilled staff, could solve if it wished.”

Testing Technology’s Reach

For a company that touts its technology platform as its core strength, Uber ought to do “a better job,” according to Gad Allon, Wharton professor of operations, information and decisions, who is also director of the Jerome Fisher Program in Management & Technology. If Uber falls short on providing guardrails for its customers, that has to do with its culture, Allon noted during a recent interview on the Wharton Business Daily radio show on Sirius XM. “Their culture has been: ‘We’ll do things and then we’ll see the best way to do them and potentially ask for forgiveness.” He noted that Uber has already once asked for forgiveness in London. “Now they’re going to ask for the second time and we’ll see what happens.”

But Uber has also brandished its technology platform to keep regulators at bay. “There appears to be a deep belief that, as a technology platform that simply brings drivers and customers together, Uber and its business model exist outside all past transportation business models and rules,” said MacDuffie. He noted that Uber has taken such a stance taken toward attempts to regulate its business model in New York City and in California.

Two months ago, when California passed a bill that could have forced Uber to classify its drivers as employees, the company was defiant. The company’s “drivers’ work is outside the usual course of Uber’s business, which is serving as a technology platform for several different types of digital marketplaces,” Tony West, Uber’s chief legal officer, said at the time. “We will continue to defend the innovation that makes that kind of choice, flexibility and independence a reality for over 200,000 drivers in California.”

Challenges to the Business Model

According to MacDuffie, Uber’s regulatory face-off in California regarding whether drivers should be regarded as employees rather than independent contractors represents the most fundamental challenge to the company’s business model. While that issue is not at the center of the London dispute, it may play out first in the US, in states like California and New Jersey or in cities like New York, he said.

Uber’s approach to regulators is also significantly different from those of others in its industry. Uber’s competitors often differentiate by working more closely with cities, sharing more information and negotiating rather than defying conditions, said MacDuffie. “Uber, as the original ‘move-fast-and-break-things’ provocateur, still has that reputation,” he added. “Perhaps that tendency is embedded deep in its culture. It will have to work harder to win back trust of its various constituencies.”

Uber chiefly has to fix two issues to straighten out its culture, said Allon. One is for it to become profitable. “They’re not profitable yet. It’s very clear that to be able to sustain themselves they will need to be profitable,” he said. The second aspect has to do with its “culture of being a startup,” which has to change. “You want to keep an entrepreneurial culture as much as you can, but this notion that you can get into a city, just do things and then see how they evolve later on, in terms of also having casualties, potentially, and having issues around harassment of [individuals], definitely cannot be sustained.”

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Further, with diversifications such as Uber Freight, Uber Eats and Uber Works, “it’s not clear that they’re actually investing heavily in making this market more efficient,” said Allon. “The feeling is that Uber is playing a catch-up game with regulation, and making sure they appease regulators, rather than innovate on the safety side.”

Regulators, too, are playing catch-up with evolving technologies such as those used by Uber, and that situation could unfold over the next two decades, or maybe longer, said Allon. Ride-hailing firms, for instance, “are playing a waiting game until we see what happens with autonomous cars,” he added. The advent of autonomous cars would raise multiple issues for regulators such as validating algorithms or ascertaining that driver attention is not sacrificed, he noted. “I don’t think the types of regulations we have are ready to [handle that].”

How the Market Would Readjust

Even as London’s regulator has turned off Uber’s ignition key, the setback “is not fatal to the future of ride-hailing services” in the city, said MacDuffie. He noted that several ride-hailing firms are active in London, including Bolt, ViaVan (a pooled service from the US company), and Kapten (a French firm with funding from BMW and Daimler); Ola from India is weeks away from launching its service in London after it recently secured a license. “This is the story in many parts of the world — Grab in Singapore, Didi in China, Lyft in the US – challenging the idea that ride-hailing is a winner-take-all market,” he added.

MacDuffie offered a glimpse into how the ride-hailing market could change in the foreseeable future as Uber appeals the TfL ruling. It could continue to operate in London until a decision is available on its appeal, which could take several months. “During that time, Uber has the opportunity to make further reforms to address public fears that it is not sufficiently careful about safety,” he said. “Its competitors will attempt to gain ground, and they may or may not succeed because they face the same daunting economics that have kept Uber and all the other ride-hailing services unprofitable since their founding. Meanwhile, additional challenges to Uber and other ride-hailing services will continue to mount around the world.”

According to a report in CityAM, on the day of TfL’s Uber suspension, Bolt’s daily downloads nearly doubled from 5,778 to 10,894 and have stayed around that mark since. French ride-hailing app Kapten saw a similar increase in daily downloads, going from 3,274 to 8,901 on November 25.

In any event, Allon expected to see Uber back on London roads at some point in time. “I cannot see a solution where [Uber’s license] is not going to be renegotiated,” he said. “I think it will be renegotiated in a way where Uber will have to strengthen its processes, and will potentially have to give up something in terms of controlling hours [that drivers work], maybe like in New York.” (Under new rules that took effect last April in New York City, Uber is not permitted to dispatch trips to drivers who have completed 10 hours of “passenger time” in a 24-hour period or 60 hours a week.)

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According to Allon, the regulator’s action is not aimed at banishing Uber from London, but more at ensuring that it improves its safety processes. “The solution is not going to be to take Uber out of the city. I don’t think that’s what’s going to be at stake here,” he said. “It’s just another point in negotiation requiring Uber to demonstrate that their drivers are, indeed, safer — that they’re doing a better job on background checks. That they’re doing a better job in moderating some of that. And maybe potentially some of that will also be about taking care of their drivers better.” He noted that Khosrowshahi has steered Uber to improve its safety processes with its safety toolkit and a “bike lane alerts” feature that lets its drivers know if their passengers are exiting on a bike lane.

In London, specifically, Uber has to carefully manage the improvement of its safety processes in order to avoid collateral damage, Allon said. “There is a constant balance between people and processes. At the initial stage, you rely a lot on people. And as you start growing, you need to start adding more processes,” he added. “But you don’t want these additional processes to become a bureaucracy where you start alienating people. And since they are competing on drivers, if you’re going to make it hard for any driver to join by creating a lot of red tape, ultimately, you’re going to stifle the market that you’re building on.”

What Works in Uber’s Favor?

While the London debacle may have affected the safety perception of Uber, it still enjoys a fair amount of consumer trust, said Allon. “Think about how much trust Uber managed to garner in a very short amount of time,” he noted. “I go to a random city, anywhere in the world, and I take out my phone and get into a random stranger’s car — all because the name Uber is associated with it.”

In fact, Uber could use improved safety processes as an entry barrier to stave off competition. “Once you set up [a process where] every driver will have a background check run by the firm with a process that has, say, 15 different steps, you’ve basically solidified Uber as the monopoly in this market,” said Allon. “There is no way that a new entrant could then withstand this type of regulation.”

Customers themselves would like to see Uber continue to grow, Allon noted. “Uber solved a problem in most cities,” he said. “In New York City, for example, if you went to take a cab during rush hour, good luck. And so, we like their presence.”

The Road Ahead for Uber

MacDuffie offered several scenarios that could unfold over the long run: “Will Uber only fight these challenges, in court and by expensive campaigns to influence public opinion? Or will it engage its critics, stop seeing governments and regulators as enemies, and seek compromise? Will Uber’s critics seek to punish it for past sins, possibly removing an important source of transportation in locations and at times of days when many people have no good alternatives and eliminating a flexible-hours job that many have found helpful when extra income is needed? Or will they work towards a multi-mode mobility system in which Uber and ride-hailing make up an important piece but just one piece – of solving the puzzle of moving people and goods around?”

Those factors could either leave the ride-hailing industry permanently shackled or bring solutions to recurring problems it faces. “The next few years will be a time when a growing backlash against ride-hailing could become politically powerful and lead to lasting constraints for its business model,” said MacDuffie. “Or, instead, it could be a time when skillful strategizing and abundant communication between parties on both sides of the dispute lead to creative solutions and a better process for moving forward on the crucial mobility challenges of the early-to-mid 21st century.”

*[This article was originally published Knowledge@Wharton, a partner institution of Fair Observer.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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