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Why Are There So Damn Many Ubers?

Taxi medallions were created to manage a Depression-era cab glut. Now rideshare companies have exploited a loophole to destroy their value.

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The story of the ride-sharing industry over the past decade — which is, more or less, the story of Uber, trailed by Lyft and a series of also-rans — is usually told like this: The hidebound taxi industry, shielded from competition and the traditional rules of supply and demand by a long-standing regulatory regime, was suddenly and swiftly #disrupted by Uber and its copycats, which allowed anyone with a car and a cellphone to act like a cab driver. Traditional cabbies called foul, but ride-sharing services immediately became so popular that most cities were helpless to stop them, and ended up having to make their peace with them.

The obvious question: If the taxicab industry was so heavily regulated, how did Uber, with its notorious disregard for rules, break into it? The answer is different depending on the jurisdiction. But the story of how Uber emerged victorious in New York City is an interesting and mostly forgotten one — and offers a look into the mechanics of how the Internet has allowed companies to remake the way the world works while technically playing by the rules.

The old order

The idea that New York cabs have been heavily regulated isn’t wrong. The process began during the Great Depression: Jobless New Yorkers turned to driving cabs because there was no other work, but so many people did it that streets were clogged and fares plummeted below living wages. The city government decided to intervene in the market. In 1930, Mayor Jimmy Walker floated the idea of granting a single company a monopoly on taxicab service, but this proposal collapsed when it turned out that one company that might be considered for this role had given Walker a sizable “gift” of stock. Battles between independent cab drivers and employees of fleets during a 1934 strike turned violent, demonstrating how broken the system was. In 1937 the City Council passed the Haas Ordinance, which created a system of taxi medallions. Only drivers with medallions could accept curbside hails, and the drivers and their cabs had to live up to fairly strict standards and charge fares that were set by the city.

The initial number of medallions issued was set at around 16,000. As the Depression ground on, many cabbies failed to pay the $10 renewal fee, so the number of medallions in use fell to 11,787. That number stopped going down as the economy began to expand again, but no new medallions were issued until 1996 — and even then, it only agreed to issue at most a few dozen per year. The number of cabs remained fixed, and a side effect was that drivers congregated almost exclusively in the best hunting grounds for fares: Midtown and Lower Manhattan.

The second tier

But, as all New Yorkers know, yellow cabs weren’t the only vehicle you could hire pre-Uber. There were also livery services, which the Taxi and Limousine Commission (TLC) began licensing in the 1950s. There are several tiers of service, probably the best-known of which is the upscale “black car” service long beloved by businesspeople with expense accounts.

The TLC regulated livery services relatively lightly compared to taxicabs: There were less stringent requirements on cars and drivers, companies were freer to set their own fares, and, crucially for our story, there was no citywide limit on the number of cars. The tradeoff was that livery service drivers had to be sent on their rounds by a centralized dispatcher and couldn’t pick up curbside hails — although, as a 1990 New York Times article noted, they sometimes did so anyway in the outer boroughs, where regulators turned a blind eye because livery cars were filling an unmet need left by the restricted number of yellow cabs.

At this point, it’s worth quoting verbatim how Bruce Schaller, a consultant on taxi and vehicle-for-hire regulatory policy, describes the TLC’s legal definition of a black car, which may ring some bells:

Under TLC rules, black cars are defined as FHVs [for-hire vehicles] that operated from bases organized as either a franchise or cooperative, and where at least 90% of customers pay by a method other than cash.

The Trojan horse

Uber launched in New York City in May 2011, a little more than two years into the company’s existence. What’s interesting about the press coverage at the time is how the service was presented: not as something that will completely upend the transportation market, but rather, as the Times put it, as “a cellphone application that is aimed at making using a car service quick and painless.” The Times‘ Jenna Wortham explained that “Uber operates as a dispatch service, working with local owners of licensed private car companies.”

So there’s the answer to how Uber got onto New York’s very regulated streets: It piggybacked onto an existing regulatory framework, presenting itself as an add-on to the service already offered by licensed livery car companies. Indeed, without livery cars to serve as the thin edge of the wedge, Uber couldn’t have launched at all. The rest of New York State, governed by state rules that didn’t accommodate livery cars, was among the last places in the country to permit ride-sharing services; you couldn’t call an Uber in Buffalo or Syracuse until 2017. When Lyft attempted to launch in New York City in 2014 without going through the TLC livery car process, it found itself subject to a restraining order from the attorney general. Uber founder Travis Kalanick, by contrast, had gone to the TLC in advance to talk things out.

The letter, not the spirit

As a result of all this, the process for becoming an Uber driver in New York City is actually significantly more regulated than it is in much of the rest of the country, where you need little more than a driver’s license and a car that meets Uber’s relatively liberal requirements compared to those imposed by TLC. The pool of Uber drivers in New York has now expanded far beyond full-time livery drivers (though many livery drivers still use the app); but people who want to sign up have to jump through the legal hoops to become livery drivers themselves, getting the proper licenses and plates from the TLC. Crucially, they also have to get a “base letter” from Uber, a certification that they are, as TLC regulations require, driving a car that’s “operated from [a] base.”

This last requirement seems like the flimsiest part of the enterprise. Traditional black cars operate out of real, physical garages and are dispatched by a person who fields phone calls. An Uber “base” is entirely theoretical from the driver’s point of view. In that first Times article on Uber, Dan Ackman, a New York lawyer who works for many cabbies, says that the city could challenge Uber for failing to relay booking requests from a central office. But that’s a hammer that never fell — at least, not at first.

Rise of the machines

One of the interesting things about those initial reviews of Uber in New York is that it wasn’t clear whether the service would go beyond serving a niche clientele. Reviewers still saw it as a (costly) add-on to a black car service, a category whose position they thought they understood. For those who wanted to grab a ride in New York’s densest neighborhoods (and were lucky enough not to be racially profiled by drivers), livery cars had always been less desirable than yellow cabs, because you could get into a cab just by waving your arm, whereas you needed to call up a livery service to request a car.That’s why livery cars had never been limited by the TLC the way cabs had: Their relative undesirability meant the market kept the number of livery drivers to a reasonable level without government intervention.

A terribly overused buzzword that internet companies like to use is “frictionless,” but it’s a decent term to describe what happened next. Stripped down to its essence, the process of using Uber was the way black car services had always worked: You used a phone to make a car come to you, and you paid by credit card. As Ackman told the Times, “It’s not that different from using Google or a directory to find a car service.”

But the app made everything easier for both the driver and the passenger; GPS in particular meant the driver could home right in on you rather than having to work out where exactly you were via conversation with a dispatcher. Having your credit card on file meant you didn’t have to think about payment on every trip. Drivers didn’t hang out at the virtual “bases” like livery drivers; they cruised the streets like yellow cabs would, meaning that they were never more than a few minutes away. And as the supply of drivers expanded beyond full-time livery drivers, the Uber fares, which weren’t regulated the way yellow cab fares were, dropped. The upshot was that getting a ride with this newfangled livery service was suddenly more convenient than hailing a cab, not less.

The genie out of the bottle

The TLC’s loose regulations for livery services had endured for decades because they worked fine for the scale of the industry as it had been. That changed very swiftly in the early ’10s thanks to Uber and other ride-hailing apps, and that’s what makes Uber in New York a typical internet story. It was only able to come onto the scene due to the existence of a system regulated by a specific set of rules; but once it arrived, it upended that system and proved that the rules were inadequate for the new order.

In recent years, the number of “livery cars” — which is what, technically, Uber and Lyft and the like are in New York City — has exploded: There are now more than 100,000 in the city, twice the number in 2013. As most people know, this has resulted in a huge pinch for traditional cabbies, who were already in a precarious situation before Uber arrived. Changes in TLC regulations in the 1970s shifted most cab drivers from being salaried employees of cab companies to being independent contractors, with predicable results for their financial stability. And the prices of medallions had been in a bubble, partly driven by financialization, rising from $250,000 at the turn of the century to more than $1 million by the early ’10s; prices have collapsed since, leading to financial ruin for many drivers and a troubling rash of suicides. Traditional black car drivers have similarly been devastated in the Uber era. And then there’s all the extra traffic, especially in the same parts of Manhattan where yellow cabs had traditionally ruled. Other than taxi-on-taxi violence, the same set of elements that had prompted the regulation of yellow cabs seemed to be back.

In 2015, Mayor de Blasio announced his intention to roll out new regulations that would specifically target ridesharing cars — which by this time were clearly a different animal from traditional livery services and needed a different set of rules. Perhaps the most important new regulation the mayor suggested was that for-hire companies with bases that handled more than 500 cars would only be able to increase their fleets by 1 percent annually.

But America in 2015 was no longer the land of FDR and the New Deal. Uber fought back, hard, deploying politically connected (and liberal) surrogates like David Plouffe and Al Sharpton, and showing customers a “de Blasio mode” on their phones where their rides would take 25 minutes to arrive if the regulation became law. De Blasio’s perennial antagonist Governor Cuomo also weighed in against him, and City Hall eventually gave up, settling for a toothless agreement for Uber to share data with the city about traffic and restrict its growth to its existing level (which was a heady 3 percent a month).

Still, the city is making another go at it today. Uber’s string of bad press over the past few years perhaps makes it more vulnerable and less sympathetic. Studies have shown that average car speeds in Manhattan are dropping, with increased traffic from ridesharing services to blame; particularly problematic is time drivers spend “deadheading,” driving around town looking for fares. The latest proposals, being pushed by Councilmember Ruben Diaz Sr., involve charging drivers a $2,000 annual fee, and — in a move that might make Uber’s entire model unworkable — restricting each virtual base to 250 cars. There will be resistance, as free marketeers are already inveighing against the proposals. We’ll see how it goes.

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