A different approach to an Uber problem

It seems there’s no end to the Uber drama in Canada. Major urban centres across the country continue to debate how best to deal with the supposed ride-‘sharing’ service. Vancouver is leaning toward regulating the service, in a similar manner to taxis; Calgary’s already proceeded to do so. Montréal has banned the service until it can decide how to deal with it. Edmonton, Ottawa and now Toronto have passed bylaws to legalise the service, with conditions.

One possible approach that has received little consideration to date is co-optation. Given what appear to be the company’s future designs, that could prove a critical oversight.

An Uber Canada general manager recently opined that “Toronto introducing regulations that would potentially disallow the ride-sharing model would really be a step backwards from a public-transportation point of view.” “It really is an integral part of the transportation network now,” he went on to add.

To its credit, Uber has been conducting a successful public relations campaign. In Edmonton, it positioned its service as a complement to the city’s limited rapid transit network. Despite not meeting the legal definition of ‘car pool’, in Toronto it recently rolled out uberPOOL (after a 2-week trial period during last summer’s PanAm Games), positioning it as a way to help reduce the number of cars on the road.

But perhaps its most advantageous move is one that’s received practically no media coverage to date: Recently, Uber service was stealthily integrated into transit systems in major urban centres across Canada. UberX is now offered as an option in transit trip planning results on Google Maps, the map and trip-planning app that’s installed on practically every mobile phone and tablet sold today, on most by default.

To appreciate the significance of this move, it’s worth noting the average Canadian household in 2014 supposedly spent three times as much on public transit as it did on taxi service (according to Statcan’s Survey of Household Spending).

While Uber may not be directly competing with public transit today, that will likely change in the near future. The “sharing economy” debate is yet another Uber PR success, as it’s effectively deflected attention from the company’s publicly stated objective: Replacing all of its drivers with a fleet of autonomous vehicles as soon as it can technically and legally do so – possibly starting as early as 2020. It’s speculated this could reduce Uber’s costs by 60 percent while maintaining gross profit.

With the potential increase in revenue that could be attained from directly competing with public transit, the company could choose to cut its fares and still see profits soar from increased demand.

On the other hand, public transit fares in major urban centres, like Montréal for example, have risen 34% over the last decade, twice the supposed rate of inflation (according to Statscan’s Consumer Price Index). That increase is largely  attributable to infrastructure, salary and benefit expenses. Even if major urban transit systems were to become fully automated in the coming years, the cost of maintaining their expansive, aging infrastructure as well, pension/retirement/post-employment benefit funds and perpetual municipal and provincial budget deficits will ensure transit fares continue to rise into the foreseeable future.

Uber has no such financial obligations; it doesn’t even deem its drivers to be employees (an ongoing point of legal contention).

In short, technological change along with Uber’s business model will not only continue to disrupt the taxi industry, but has the potential to seriously disrupt public transit as well. In the company’s own words, it sees itself as an integral part of the public transportation network going forward.

Once it gets a foothold, a company like Uber could choose to move from complementing to co-opting a public transit system. Given a virtual zero marginal cost in the near future, Uber could afford to undercut public transit operators in key areas or on key routes until those services are reduced or eliminated, then proceed to jack up its rates without worrying about reprisal. After all, this is a company that has no issue with flexing its market power. Its CFO allegedly responded to a recent question about why his company would chose to slash its drivers’ earnings by saying, “because we can.” His company went on to more than double its cut of drivers’ fares, from 15 to 35 percent – while concurrently slashing said fares by 20 percent.

Uber’s drive to slash fares is a result of its escalating price war with aspiring competitors. An important point rarely mentioned is there’s nothing proprietary about what Uber does. The company just happened to be the first mover and uses its market power to curtail competition.

Despite its detractors (including yours truly), public sector monopolies – with proper oversight – have one advantage over their private sector counterparts that’s rarely mentioned: Public sector monopolies exist to maximise public good and service delivery while minimizing marginal cost. On the other hand , private sector monopolies and oligopolies are effectively money printing machines, which is why they tend to be so effective at evading or co-opting oversight (think Canada’s big 3 telcos), and for this reason should be avoided as primary providers of public goods and services.

Since there’s no stopping progress, the only alternative is adapting.

So if a service like Uber is the future of public transportation, as public interest and demand suggests it will be, and there’s nothing proprietary about its business model, as its ever-increasing number of aspiring competitors demonstrates, the best option for public transit authorities would be to integrate ride-sharing into their transit networks going forward.

It’s worth clarifying that the reason Uber is encountering resistance in most major urban markets is not that ride-sharing is illegal; it’s that the company is operating a commercial service without commercial licensing or insurance.

Ride-sharing is in fact legal in all but one (Alberta) of the provinces where Uber is currently encountering opposition. The only major caveat is that the ride-sharing / carpooling service cannot be conducted for profit, and drivers in ride-shares / carpools must have the same general destination as their passengers, i.e. not simply there as a chauffeur (how that part would be enforced, if it indeed could be, is not clear). See ride-sharing / carpooling exemptions in the Québec Transport Act (s.36), Ontario Public Vehicle Act (s.1.(2)) and British Columbia Passenger Transportation Regulation (s.1.(1)).

In fact, the three largest urban centres where Uber has faced the greatest opposition, all currently have in place ride-sharing / carpooling services affiliated with the public transit operators: Covoiturage AMT in Montréal, Metrolinx Smart Commute in Toronto and the TransLink-affiliated Jack Bell Ride-Share in Vancouver.

Unfortunately, few commuters make use of these services. That’s because unlike Uber, the ride-sharing services affiliated with the public transit operators are little more than electronic bulletin boards where drivers and passengers can find one another; rides can’t be booked and fees can’t be paid through their web sites / apps. As anyone who’s ever participated in a ride-share / carpool arrangement (including yours truly) can attest, it’s the hassle and haggle that often discourages ride-sharing / carpooling.

Public transit operators, reluctant to explain the apparent limitation of their ride-sharing services, did nevertheless provide two interesting insights:

The first is that they frankly did not foresee the interest in ride-sharing; their half-baked efforts seem to reinforce this view.

The second, more interesting – and seemingly contradictory – rationale is that they view ride-sharing as potentially cannibalising what they see as their primary service offering: mass transit, by which they mean trains and buses.

But what if the future of mass transit isn’t – at least not exclusively – centered around large vehicles transporting many passengers at a time along a limited number of fixed routes on fixed, limited schedules?

As previously discussed, even in an urban centre with arguably the best transit network in Canada (Montréal – biased opinion), two in three commuters regularly drive alone to work, while only one in five take public transit; barely one in twenty shared a ride to work (mode of transportation to work, CMA Montréal, 2006 Census).

A concerted effort by urban transit authorities to integrate ride-sharing into their transit networks could help significantly reduce traffic congestion caused by the majority of commuters who simply refuse to take public transit. As the reduction in traffic congestion would reduce all commute times, it could paradoxically encourage public transit usage in the near term.

If/when the technology evolves to the point where a single large mass transit vehicles can be replaced with several smaller, autonomous pods – allowing for much more flexibility in terms of routing and scheduling – that changeover could be more easily implemented by a transit operator that had already integrated ride-sharing into its network.

On the other hand, allowing Uber unfettered license to operate in Canada’s urban centres will lead to tens of thousands of additional vehicles on the roads, most either in or about the urban cores, snarling traffic even further in the near term. (One of the upsides of cities tightly controlling taxi licensing is the ability to manage the number of such vehicles in the urban core.)

If/when autonomous vehicle technology evolves, a company with a dominant position like Uber (or Google or Apple) could, as discussed, co-opt transit operators by competing directly on the higher-traffic (and more lucrative) routes in and around the urban core. Another possibility is that such a company could end up licensing its technology to public transit operators for integration into their networks, thus diverting public funds to private sector profits. Once directly integrated into public transit networks, who knows what a company like Uber would do, just because it can.

Given its remarkable pre-IPO valuation (supposedly now up to $68 Billion – more than the market cap of General Motors, Ford or Honda) and the company’s designs on becoming an integral part of the public transportation network going forward, there’s little doubt that such speculation is at least in part fueling Uber investor enthusiasm.

Given the current and potential upside of having public transit operators integrate ride-sharing into their networks and the current and potential downside of granting Uber’s service unfettered access to large Canadian urban markets, municipal and provincial governments may wish to reconsider their public transportation strategies going forward.