Business May 2012

Why You Can’t Get a Taxi

And how an upstart company may change that
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Zohar Lazar

Where I live in Washington, D.C., about a mile and a half north of the Capitol, you can sometimes get a taxi in two minutes flat. And sometimes, after spending 20 minutes wistfully waving two fingers in the air while the traffic hurtles past, you have to give up and trudge to the train.

There’s no way to tell which will happen until it happens—and so, I rarely bother to try hailing a cab. Neither do my neighbors. And the paucity of potential fares in my part of town—a relatively low-income, low-density neighborhood—also makes it harder to get cabs back home from other neighborhoods. Technically, it’s illegal for D.C. cabdrivers to refuse a fare within the District, but then, technically, it’s also illegal to drive above the speed limit, jaywalk, or falsely claim to have been awarded the Medal of Honor. On a typical Saturday night in the District, as far as I can tell, all of these laws are mostly honored in the breach.

Like most urbanites, I’ve spent a lot of time voicing the standard complaints: Why are taxis dirty and uncomfortable and never there when you need them? Why is it that half the time, they don’t show up for those 6 a.m. airport runs? How come they all seem to disappear when you most need them—on New Year’s Eve, or during a rainy rush hour? Why must cabbies drive like PCP addicts? Women complain about scary drivers. Black men complain about drivers who won’t stop to pick them up.

The cabdrivers have their own litany. They drive long hours for little money: the average cabdriver earns $27,060 a year, before expenses. They are at high risk for traffic accidents and, because they carry a lot of cash, for robbery. When drivers turn down fares to neighborhoods like mine, it’s not because they don’t want to miss a second of The Diane Rehm Show while they take my cash and make change. Those trips, where they probably won’t get a return fare, and must instead burn time and gas while the meter’s off, can mean the difference between profit and loss for the day; cabbies can’t afford too many of them.

What I’m describing is a classic market failure: people who are willing to do business together can’t make it happen. If taxis and passengers only knew how to find each other, and could strike deals that would appeal to both, everyone would be better off. Why can’t we fix this?

As it turns out, a small but rapidly growing business is trying. One Friday night in December, my husband and I drove over to Adams Morgan for some karaoke with friends. “You drove?” a friend who lives near us asked incredulously. “I just used Uber.”

Travis Kalanick, who co-founded Uber, told me that he and his partner “wanted to be able to push a button and get a ride.” That’s a fair enough description of the service that they launched in San Francisco in 2010, and that is now available in nine major cities—including New York, Boston, and Paris—with plans for expansion to at least 25 more. Set up an account, plug in your credit-card number, and in less than five minutes Uber’s smartphone app will be showing you a map of your location, the nearest available cars, and how soon one can get to you. Click the screen a couple of times, and a sleek black sedan is on its way.

Unlike traditional limo services, which rent you a car and driver by the hour, and usually on no less than an hour’s notice, Uber charges time-and-mileage fares, just like taxis, and the cars it finds for you typically show up within 15 minutes of your request. That convenience and style is costly; in D.C., the price is usually at least 50 percent more than that of an equivalent cab ride. Uber’s critics frequently imply—perhaps with a grain of truth—that it’s a service for the affluent that takes fares from hardworking taxi drivers who are struggling to make rent. “Uber’s real defenders,” a D.C. blogger has written acidly, “comprise a mix of socialites, transportation fanatics, and libertarians.”

And yet, this analysis misses something important. Yes, Uber has created a higher-priced, higher-class service for people who can afford it—but it has also broadened the market to people who formerly couldn’t get cabs at all. For my husband and me, the appeal of Uber is simple: it’s there. A car that will actually show up to take me to the airport, or to my home, is worth considerably more than a cheaper, but unreliable, alternative.

As you dig deeper into Uber’s story, you find out that it’s about more than plush car service wherever and whenever you want—or even the innovative technology that powers it. Perhaps most of all, Uber’s story is about the ins and outs of regulation—and about why cab service is so unsatisfactory nearly everywhere in America.

In 1907, an innovation hit the streets of New York: 65 gasoline-powered vehicles were equipped with taximeters. Invented by Wilhelm Bruhn in 1891, the taximeter could record time spent on a journey and distance traveled in order to calculate fares.

The vehicle for hire is an old concept, of course, but horse-drawn cabs seem to have mostly escaped regulation. By the 1920s, America’s taxi regulations were proliferating, though they were still mostly limited to things like setting maximum fares and requiring cabbies to post their rates.

Then came the Great Depression. Desperate new drivers flooded the market, escalating the fare wars that had begun in the ’20s. Meanwhile, the nation’s governing ideology was shifting radically. Parts of the New Deal were explicitly anticompetitive—merchants and manufacturers who wanted to display the blue eagle of the National Recovery Administration, for instance, were expected to sign on to an industry “Code of Fair Competition,” which typically contained a price-fixing agreement. In the taxi industry, local governments began setting minimum as well as maximum fares, and controlling the number of cabs that could enter the market. In 1937, New York City’s Haas Act introduced its famous medallion system, limiting the number of taxis to 13,566—about where it remains today.

Many defenders of regulation argue that restrictions are necessary because cabdrivers make so little money as it is. But there’s very little evidence that restricting the number of cabs improves the lot of the people who drive them, rather than the lot of the companies that, by and large, own the licenses. It’s simply too easy for new would-be drivers to show up at a taxi service and compete cabbies’ earnings down—in these days of GPS, you don’t even need to be familiar with the area. So any excess profits from restricting entry tend to accrue not to the drivers, but to the people who own the right to drive. Last October, two New York City taxi medallions sold for $1 million apiece.

“In New Haven, nearly every taxi is owned or controlled by [the same] person,” Robert McNamara, an attorney at the Institute for Justice, which litigates against these sorts of rules, told me. Restricting entry “hasn’t made the drivers better off.”

Nonetheless, the public fights usually get framed as consumers-against-drivers. And regulators respond with a patchwork of policies to pay off various constituencies—entry restrictions in exchange for lower fares, “fuel surcharges” in exchange for laws requiring drivers to take you anywhere in the city.

Almost all the everyday complaints about cabs trace back to this regulatory cocktail. Drivers won’t take you to the outer reaches of your metropolitan area? The regulated fares won’t let them charge you more to recover the cost of dead-heading back without a return customer. Cabs are poorly maintained? Blame restricted competition, and the inability to charge for better quality. Cabbies drive like maniacs? With high fixed costs for cars and gas, and no way to increase their earnings except by finding another fare, is it any wonder that they try to get from place to place as fast as possible?

Uber makes its money at least in part by alleviating these inefficiencies. In most places, “black car” or livery services are regulated differently, and more lightly, than taxis are. Though Uber has good reason not to say so, it’s basically turning livery services into cabs. The company is one step further removed from regulation, because it doesn’t run cars itself; it funnels passengers to existing services. “We’re sort of like an efficient lead-generation system for limo companies,” says Kalanick, “but with math involved.”

A substantial portion of Uber’s employees are statisticians and engineers who work in its “math department,” using the data the company gathers from customers to develop ever more sophisticated algorithms that can predict demand. The mass of data that Uber collects has generated some surprising insights—Kalanick says, for instance, that by looking at demand on days when the San Francisco Giants play at home, his statisticians can predict wins with a slight edge over the Vegas odds. Whether or not you’d be willing to put money behind this claim, relentless data crunching has clearly allowed the company to continuously improve the speed with which passengers can find cars—or cars can find passengers—by providing increasingly fine-tuned forecasts of demand, neighborhood by neighborhood.

The data and the ability to set fares are what let the company patch the holes in the current system. A car is always available (because at peak times, such as New Year’s Eve, the company raises prices until supply matches demand). The car is well maintained. And as long as you’re willing to pay the fare, that car will take you wherever you want to go, without regard to race, ethnicity, or ZIP code.

The drivers are also much better off. For starters, they don’t have to pay kickbacks to dispatchers (seemingly a ubiquitous problem with traditional black-car services). “You need to set it up so that drivers make a lot of money,” Kalanick told me. “Whenever we start in a city, we see mostly traffic from drivers who are using us as a yield-management system—they’re filling up their dead time. Ultimately, that predictable cash flow allows them to expand their business.”

Uber also protects the drivers from passengers. You can’t jump out of the car without paying the fare, as some taxi passengers do, because Uber has your credit-card number—and for the same reason, the drivers are not at risk of being robbed. And while Uber allows you to rate your driver, it also allows the driver to rate you. “So if a customer is yelling racial epithets at a driver,” says Kalanick, “their account would probably be suspended.”

But just because Uber is good for its passengers and drivers doesn’t mean that it’s good for everyone. Taxi drivers are a powerful political constituency in many cities. And as Robert McNamara noted drily, “Like any other business, taxi drivers think it would be great if no one could compete with them.” In some cities, including San Francisco and Washington, D.C., a regulatory backlash has hit the company hard.

In early February, I drove out to Anacostia, to one of those grim municipal buildings whose very exteriors suggest footsore queues and the smell of industrial-strength disinfectant. This is the home of D.C.’s Taxicab Commission.

I entered a little warily; two reporters were arrested last June for attempting to record a commission meeting.

I wanted to see what would happen if I applied for a license to drive a limousine in the District of Columbia. D.C.’s limo and taxi regulations seem to require that a license be issued to anyone who can meet fairly minimal standards: “The Office shall issue a license to each applicant who has complied with the requirements of this chapter,” says Section 1209.1 of the District’s municipal regulations. However, since 2008, the commission has apparently been ignoring this straightforward language.

The offices, located on the second floor, have a narrow entrance blocked by a security guard at his desk; you cannot see the bureaucrats unless he lets you past. “What do you want?” he asked me, not unkindly.

“I want to get a license to drive a limo,” I told him.

“There’s a moratorium,” he said, and pointed to a memo posted on the wall.

I’d like to tell you exactly what the memo said, but the commission wasn’t giving out copies—“We had some, but we ran out,” said the security guard, and no wonder, given that the “temporary” moratorium has been going on for years. The gist was that there would be no new limo licenses until the commission decided to hand them out.

“Take a picture with your phone,” suggested a nice driver who was waiting for an appointment in front of the desk.

“No pictures!” said the guard.

“Why not?,” I asked. He shrugged. I gazed wistfully at the counter beyond, but decided against trying to charge through. After a moment, like numberless aspiring cab and limo drivers before me, I left empty-handed. The D.C. Council is considering a bill that could essentially make the moratorium permanent: entry into the city’s limo market might then be nearly impossible.

The commission has also launched a public fight against Uber. In January, Chairman Ron Linton declared that the service was “operating illegally” and personally led a “sting” operation, impounding the car of the unlucky driver who had dropped him off at the Mayflower hotel in front of a waiting reporter. Linton followed up with an op-ed in The Washington Post, insisting that Uber was unlawfully charging for time and distance. Uber’s defenders pointed out that D.C. limo regulations define “sedans” as “for-hire” cars that charge for service “on the basis of time and mileage.” Linton now says that Uber’s service is illegal because its drivers do not give passengers a receipt as they exit.

Uber is a great idea. But a great idea doesn’t guarantee a company’s success. Others are bound to try to copy it—variations such as Cabulous, an iPhone app that lets you hail a nearby cab, are already becoming popular (although Uber should have a first-mover advantage over more-direct competitors, resulting from its network of drivers and its continually improving demand-prediction algorithms).

The real threat to the company is the promulgation of new regulations that would make business expansion impossible by cutting off the supply of licensed limos, and other regulations designed to shut down Uber entirely—that is, just the sort of measures being proposed in D.C. Uber’s executives are well aware of these obstacles. Regulation, Kalanick told me, is “an issue we have to deal with in every city.” So far, they’ve been surprisingly skillful at fighting back.

Shortly after Chairman Linton’s sting, for instance, Uber began rallying its fans on Twitter, using the hashtag #UberDCLove. In late January, I attended an event the company set up at a sleek downtown club, which was crammed to the gills with Uber’s neatly dressed fans, chatting animatedly while they enjoyed free pizza and drinks.

Kalanick, a short man with spiky black hair and a genial smile tattooed on his face, somehow got the entire crowd to watch an Uber PowerPoint presentation, which he narrated double-time, dropping the company’s apparent motto—“A convenient, classy ride” roughly every 30 seconds.

The result was, incredibly, the nation’s first populist limo movement. Whenever Kalanick mentioned Ron Linton’s name, the crowd booed—one particularly enthusiastic fan kept shouting “Fuck that guy!” Kalanick’s smile never wavered. He finished by telling the crowd: “I need you guys. So, one, stay on Facebook, stay on Twitter. Two, hearings—go to hearings. Go to political events.” For the first time in 20 minutes, he paused. “The bigger we get, the harder it is to take us out.” The crowd roared.

As I made my way toward the door, I bumped into Robert McNamara, the attorney fighting against many taxi regulations, who was there as an interested observer. “I’m impressed by how professional this is,” he told me.

I must have raised an eyebrow, for he hastened to explain: “When you have an issue like this, the first thing you do is, you have a town hall. You find an excuse to get people in a room, and then you make them angry.” For the moment, Uber’s angry fans seem to be carrying the day. Though the D.C. Taxicab Commission has not recanted its position on Uber, it also hasn’t made any further moves against the company.

That may change, of course. But every customer Uber gains in D.C. (and even out of it) makes the company harder to attack. Uber set out to change the taxi market. In enlisting scattered consumers against well-entrenched interest groups, it may end up doing something more revolutionary.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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