16 August 2015
by Martin McKenzie-Murray

Inside controversial rideshare firm Uber’s radical model

Rideshare company Uber’s aggressive fight against the taxi industry and the tax office has caught governments off guard.

In a government office in Perth there is a stack of documents – tender bids from private investigators seeking a contract with the West Australia Department of Transport. Officially such investigators are known as inquiry agents, and their brief is simple: catch Uber rides, retain transaction receipts and record observations afterwards. The successful bidders must also be available to provide evidence in court.

So disruptive is Uber – and so aggressively persistent – that state governments are now surreptitiously monitoring it with private contractors. Many government compliance officers have been barred from using the Uber application, and fines have had little effect on discouraging drivers – the deep pockets of the Google-backed company cover those. “In investigating offences under [the Taxi Act] it is sometimes necessary to undertake covert investigative operations,” the Department of Transport document said. “Some operators are actively evasive and may actively block investigators. In particular from accessing applications relating to their booking systems on electronic devices.”

Kalanick ignored local regulations, confident he could mobilise Uber customers into an effective political force.

Last year in Victoria, taxi commission officers posed as customers and served 15 drivers from the UberX service with a summons. The charge was operating a commercial vehicle without a licence, and it’s unprecedented – the Melbourne Magistrates’ Court will determine this test case, effectively ruling on the legality of the service in the state. A decision is expected next month. But it is just one front of the astounding disruption – or “principled confrontation”, as Uber founder Travis Kalanick has it – inspired by Uber. Currently, the service is in conflict with state governments, the taxi industry, the Australian Taxation Office and, increasingly, its own drivers. It is the same all over the world. Parisian taxi drivers rioted last month in protest against Uber. In New York, the city’s mayor has just emerged embarrassed by a protracted – and very public – fight with the company.

A simple concept
The concept was awesomely simple – to create an app that connected commuters to people with cars. Quick, reliable and personal, it would make taxis superfluous. No more waiting at cab ranks, or hailing ineffectually on street corners. And it would be cashless – simply enter your credit card information and the app would do the rest. “You should just push a button to get a ride,” Kalanick said, reflecting his belief in the profitability of instant gratification.

It began in San Francisco in 2010 with a modest fleet of cars. Unlike its current controversial service – UberX, the subject of the pending court decision and undercover stings – the drivers were accredited chauffeurs, even if the company wasn’t properly licensed. Not long after it began, the Californian government issued a cease-and-desist order.

Regardless, investment money poured in and the service expanded to other US cities. Kalanick began picking fights with local governments and the taxi industry, dismissing them as mediocrities operating mutually beneficial cartels. “What we maybe should’ve realised sooner was that we are running a political campaign and the candidate is Uber,” Kalanick later said of the early days.

His expansion was swift and certain. Uber launched in multiple cities, plush with capital, and breezily dismissed opposition as cronyism or the bleating of Luddites. But Kalanick’s ruthlessness was becoming apparent. His rhetoric was contemptuous and aggrandising. He sought to sabotage rival services, Lyft and Sidecar. He ignored local regulations, confident he could mobilise Uber customers into an effective political force. In the US city of Portland, the local council considered running a 120-day trial for the service. Councillor Nick Fish, desirous for the local taxi industry to face competition, still voted against it. “I don’t like bullies,” he said. “A valet once told Winston Churchill he was rude, and he replied, ‘Yes, but I am a great man.’ Unfortunately, that is Uber’s business model.”

In Kalanick, Fish had found the Napoleon of Silicon Valley.

Exponential growth
Uber’s growth has been exponential. From a base of “near zero” in mid-2012, Uber had 160,000 drivers in the US by the end of 2014. In the final three months of last year alone, it received $656 million in payments and the company’s estimated value is now $US50 billion.

Its growth in Australia has been similarly impressive. Having launched here in 2012, there are currently 15,000 drivers serving the four states in which two Uber services are available – WA, New South Wales, Victoria and Queensland – with the trend suggesting an additional 5000 by year’s end. For comparison, there are approximately 68,000 taxi drivers in Australia sharing a fleet of vehicles roughly a third of that number. By far the most popular service is the cheaper option, UberX – unaccredited drivers using their personal cars to collect fares, which Uber refers to as “ridesharing”. The other service, Uber Black, uses licensed chauffeurs, and as such is not legally ambiguous.

While there is no detailed research into Australian Uber drivers, a recent paper examined the labour force in the US. The research was undertaken by Alan Krueger – the former head of President Barack Obama’s economic advisory panel – and Uber’s head of research, Jonathan Hall. The demographics were striking. Uber drivers were much younger than their cabbie counterparts, and much more educated – 48 per cent had a college degree, compared with 18 per cent of taxi drivers. They earned as much – if not more – than taxi drivers, and they comprised nearly twice as many women.

The research also affirmed what I have heard repeatedly from Australian Uber drivers – their attraction to the job is the flexibility. “I work whenever I like, for as long as I like,” a driver told me recently. “I have a young child and this means I can spend more time with him, helping at home. My wife and I can make arrangements. I am my own boss.”

Krueger and Hall heard the same refrain.

Uber ‘white paper’
In 2013, Kalanick released an Uber “white paper” – a document outlining their ambitions and principles, which explained the development of the controversial UberX “ridesharing” service. It wasn’t long until it was contradicted. “With Uber’s approach, our partners [the company’s preferred term for their drivers] have to buy cars, purchase commercial insurance, and spend thousands of dollars in order to get commercially licensed after going through mounds of red tape,” the paper said. “In the ridesharing model, a driver can walk into their offices and be up and running in 24 hours, no extra commercial insurance, no thousands of dollars in fees to get licensed, and without months of wading through bureaucratic red tape.

“So over the last year we’ve stayed out of the ridesharing fray due to perceived regulatory risk and watched two competitors roll out in a few cities in which we already operate, without nearly the same level of constraints or costs, offering a far cheaper product.”

The paper then outlines its intentions – in weasel words. “Uber will roll out ridesharing on its existing platform in any market where the regulators have tacitly approved doing so.”

The word “tacitly” is crucial here. In many jurisdictions – in the US or Australia – legislation simply doesn’t exist to reflect or regulate new technologies. By deploying the word “tacitly”, Uber was reserving its right to interpret the law’s silence as endorsement. However, a few paragraphs later, it seems to make a contradictorily firmer stance. “We look forward to ridesharing spreading across the country but look to do so only after first getting a read from regulators on this new relaxed approach to transportation licensing and enforcement.”

Regardless, a dramatic domestic and international expansion of UberX is precisely what happened.

Regulatory ambiguity
Australian governments have been hopelessly outclassed by Uber. The company has exploited regulatory ambiguity, leveraged customer loyalty and exposed the inconstancy of the political parties. While governments scratch their heads, Uber has expanded with a ruthless determination. In WA, premier Colin Barnett endorsed the company, saying he would have “no hesitation” using the service. “The taxi industry has to change,” Barnett said. “The competition Uber is bringing will result in a higher standard across the industry.”

Unfortunately, it jarred with the far more circumspect comments of his transport minister.

In Victoria, Liberal opposition leader Matthew Guy wholeheartedly supports the service – in contrast with the near-muteness of the premier, Daniel Andrews, who is presumably bound by his election pledges to the taxi industry. Andrews has, however, authorised a report into ridesharing. Its findings are due soon.

In NSW it is also the opposition leader who is most supportive, even if Luke Foley leads a different party to Guy. Evidently, there is little philosophical consistency in any of the messages.

Compounding the political bewilderment is the regulatory confusion, both in transport legislation and taxation. Essentially, state laws have not caught up with the so-called “sharing economy” and this has created ambiguity. Uber asserts its rights to operate within this ambiguity; the taxi industry asserts that this is illegal. In none of the states where it is currently operating is UberX legally recognised.

Then there’s taxation. Recently, the ATO ruled that Uber must collect and pay GST for its UberX drivers. Uber has insisted the ruling is wrong, and will challenge it in the Federal Court. Instinctively, it may seem that Uber is trying to elude an inarguable responsibility. But Uber says that its drivers – their term is “driver-partners” – are in fact independent contractors, and should be classified as such for taxation purposes. Practically, this means the drivers would be required to register for GST once they earn more than $75,000 a year – freeing the company itself from burden. “[The ATO] are suggesting that Uber’s driver-partners must register and remit this tax from the first dollar earned,” the company said.

“So on Friday we filed an application with the Federal Court to challenge the ATO’s position, which we believe clearly and unfairly targets Uber’s driver-partners. In our view, the ATO’s guidance should not have been issued when a federal tax review is under way and as the ATO has agreed that this is ‘an uncertain point of the law’.

“To be very clear, we believe all our driver-partners should pay their appropriate share of tax and meet their tax obligations. However, we feel they have been unjustly singled out by the ATO for different tax treatment than truck drivers, bike messengers, Airbnb hosts or any other participant of the sharing economy.”

That’s the hinge for Uber’s dispute – that it is being treated differently from other services in the sharing economy. “It’s weird that a taxi driver making under $75,000 a year has to register to pay GST when another small business with that revenue doesn’t,” economist Jason Murphy tells me. “But if that’s the rule, then treating Uber drivers the same is fair, too… I do think Uber have a point and the law has some way to go here. Perhaps that $75,000 threshold needs to be adapted for the sharing economy era.

“That said, getting the law out in front of technological developments would be impossible. We’re doomed to be forever playing catch-up. To the extent that it means novel services might run tax-free for a while, well, that helps incubate them. It’s not all bad.”

Slick marketing
Renowned for slick campaigns and publicity stunts, Uber recently announced a partnership with the ice-cream manufacturer Gelato Messina. A tub of Italian gelato could be delivered to your door for just $15, and to promote the service Uber drivers handed out free ice-creams in the city. Taxi drivers were not impressed, and there were rumours a violent confrontation was percolating. It hardly seemed fair – Uber had better cars, better advertising, better margins. Now the rogues were seducing the city with ice-cream.

“I am angry. They are not legal. They are illegal,” a taxi driver tells me, slapping his steering wheel in disgust. “They do not do our training. They do not know streets.” The mere mention of Uber has sent him apoplectic. “We pay our dues. We pay for training. We are regulated. Who watches them?”

I have heard this from many taxi drivers in the past two months. But the real anxiety is not mentioned until afterwards. It’s a sense their profession is doomed – and their investment wasted. “This is my profession,” the cabbie says to me. “My living. You understand?”

But the taxi industry has been closed for some time. Cars are outdated and dirty. Drivers jaded and unprofessional. The cherrypicking of fares – outlawed in all states – still continues. The taxi industry is also serviced by outdated infrastructure – the call centres, communications equipment and GPS units can be replaced with a simple smartphone, as Uber has done. A taxi licence plate – which only three years ago cost half a million dollars in Victoria – can be effectively acquired by merely owning a car. Notoriously, Cabcharge had exploited its monopoly on taxi cards – that is, non-cash payments for taxis – by charging an additional 10 per cent fee. The Australian Competition and Consumer Commission fined it millions of dollars for predatory pricing.

But taxi profits are not all concentrated in a few hands. A Perth cab driver tells me: “There are many battlers who have saved a long time to get a plate. And these owners will also be the drivers, too. That’s their big investment. And they’re not cheap. In WA, the two taxi providers don’t own the cabs – they just provide the jobs. And now these battlers have near-worthless plates. This was the government’s system they bought into, so I think they should pay back the cost of the plates in the future.”

Economist Jason Murphy says: “The taxi industry has a regulated monopoly on picking up fares in Australia. That has had predictable effects on price and quality. Cabcharge was the epitome of how an unchallenged system accumulates wasteful practices. [As for investors in taxi licences] the economist in me says those people should have known the risks of investing in an asset that held value only by legislative fiat. And many of them were wealthy people who held them as part of a diversified portfolio. But there are probably a small number of drivers whose life’s work is bundled up in the value of a taxi licence, and it’s hard not to feel like compensating them.”

Uber’s chutzpah is undiminished by hostile taxi drivers or skirmishes with the government. In fact, the company seems to thrive on conflict, and the regulatory and political muddle has only emboldened it. Uber may well believe itself smarter than any Australian government: its software team comprises astrophysicists and computational biologists; its vice-president of policy is David Plouffe, former senior adviser to Barack Obama. Regardless, government is going to have to catch up, and quickly – currently, few can confidently articulate our new and disruptive economies.

In the meantime, there will be Uber’s disputation of the ATO’s ruling. As important is the Melbourne Magistrates’ Court’s decision in less than a month. It will be a landmark case, but if it decides against Uber, do not expect that to be the end of it.