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How Lyft Taught Uber to Break the Rules

 

 

Published on Medium.com on March 7, 2016

 

Written by: Lisa Rayle and Onesimo Flores Dewey

Perhaps more than any other company, Uber has embodied the Silicon Valley axiom that breaking the rules is a proven formula for success. In city after city, it has fought regulators, and so far has largely won.

So it may be a surprise that in its early days Uber was much more of a law-abider than a law-breaker. Uber’s maiden app, launched in 2009, relied exclusively on licensed black cars. It was not until late 2012 that Uber openly disregarded existing regulations by opening its platform to non-professional drivers of private vehicles. Uber did so in order to compete against emerging ride-sharing companies Lyft and Sidecar, which initially faced little regulatory pushback despite breaking the rules.

Earlier this year, we conducted dozens of interviews to research how ride-hailing became legalized in San Francisco. Our interviewees reminded us that ride-hailing companies not only battled local and state regulators, but also each other. Uber did not steamroll regulators in California. It simply read and reacted to the signals: authorities were open to crafting a new regulatory framework to accommodate Lyft and Sidecar.

 

UberCab: a mostly legal service

Uber did not initially need to sidestep regulations. In 2009, when Travis Kalanick and Garrett Camp launched UberCab in San Francisco, the product — which enabled a closed membership to summon licensed black cars via smartphone — was legal.

In California, black cars (also known as limousines) and taxis face different sets of rules. Black cars fall under state jurisdiction and providers are required to be licensed and meet minimum safety standards. Taxis, however, fall under local jurisdiction and in San Francisco face stricter regulations, including supply limits and regulated fares. The main difference between them is that taxis can be hailed on the street, whereas black car rides must be “pre-arranged.”

UberCab simply connected passengers with black cars already permitted by the state of California. The app greatly simplified and sped up the process of “pre-arrangement,” enabling black cars to compete with taxis without breaking the rules. The app brought luxury car service to a wider customer base, and became popular among professionals who were fed up with San Francisco’s scarce and unreliable taxis. Now that “pre-arrangement” took only a few minutes, UberCab made black cars virtually as accessible as taxis. Though controversial, Uber’s service increased vehicle supply through legal means.

Despite growling from established taxi interests, regulators had little grounds for stopping UberCab. In October 2010, the taxi division at the San Francisco Municipal Transportation Agency (SFMTA), ordered UberCab to cease operations, objecting to the use of the word “cab” in the name. If UberCab was a taxicab company, the SFMTA argued, it would have to abide by taxi, not black car, rules. The company responded by simply dropping “cab” from its name.

The state regulator, the California Public Utilities Commission (CPUC) charged that UberCab had failed to register with the state. Uber responded by arguing that it was not directly supplying transportation services, and that all vehicles were properly licensed. At this time, the CPUC, short on enforcement staff, viewed Uber as a minor issue. It never pressed on with its demands.

 

Lyft and Sidecar, rule-breakers

Two years later, Lyft and Sidecar introduced a new, truly innovative model that challenged the existing industry and put regulators to a test. These companies were the ones to seriously “disrupt” the status quo — and to set the stage for Uber’s tremendous growth.

Both Lyft and Sidecar shared a similar vision for urban transport: capitalize on unused space in private cars by allowing drivers to rent out seats to paying customers. However, that business model was impossible under existing regulations. To legally rent out seats, drivers would have to obtain either black car or taxi licenses, which would be too expensive and time-consuming for casual or part-time drivers. Under California’s ridesharing rules, drivers could offer seats to travelers having the same destination, but could only charge a nominal fee to recoup costs. Few would bother to pick up strangers without a profit motive.

Lyft and Sidecar launched anyway, in blatant disregard of the regulations. Rather than using commercially licensed vehicles and drivers, Lyft and Sidecar enlisted “ordinary” people driving their own cars.

Using non-professional drivers introduced two big advantages. For one, it meant dramatically lower costs. By avoiding licensing and insurance costs, Lyft and Sidecar could charge much less than a taxi or black car. The lower price meant a larger pool of potential users. Second, recruiting car owners gave ride companies access to a practically unlimited supply of drivers and vehicles, without having to make any hires or invest in medallions or in the vehicles themselves. By avoiding these barriers, Lyft and Sidecar scaled supply quickly.

However, the founders of these companies lived in constant fear of being shut down. Their survival depended on the willingness of authorities to interpret existing regulations generously. Lyft and Sidecar designed their platforms to fit the legal definition of ridesharing. Yet, California rules clearly stated that “ridesharing” referred to sharing a trip to thedriver’sdestination. Drivers could not serve destinations at the request of the passenger, as Lyft and Sidecar were doing. Further, ride payments could only cover travel expenses like vehicle upkeep and gas. Thus Lyft and Sidecar collected “donations” instead of payments, and Sidecar forced passengers to type in their destination before pick-up. Both were artifices designed to claim they were “ridesharing” platforms.

Founders lobbied local authorities, pitching their companies as environmentally sensitive representatives of the “sharing economy.” Whereas Uber’s black cars offered an exclusive, luxury service, Lyft suggested their “community partners” were just “your friend with a car.” If given enough time, they argued, ride “sharing” would benefit the environment, reduce traffic, and generate income for thousands of residents. Many authorities were sympathetic — even though everyone understood the services went against the rules.

The lobbying did not prevent an initial regulatory crackdown. Almost immediately after launching in 2012, regulators at both the SFMTA and the CPUC ordered Lyft and Sidecar to cease and desist operations, threatening them with severe fines. Interestingly, their orders went unenforced, and Lyft and Sidecar exploded in popularity.

 

Uber’s counter-attack

In August 2012, Kalanick and his team marched into the CPUC offices demanding laws be enforced against newcomers Lyft and Sidecar. As an official at the CPUC told us:

“The head of Uber… came here along with a slew of his lawyers and lobbyists and he said, ‘I’m here to ask you to shut down Lyft. They are illegal and you guys have to shut them down.’”

The CPUC was noncommittal. Agency authorities were pondering the appropriate course of action, and wanted to study options that would protect the public without stifling innovation. Rather than cracking down on the companies, regulators announced a rule-making proceeding to revise and to potentially replace the existing regulatory framework. Critically, this time window allowed Lyft and Sidecar to continue to operate in the interim.

The implicit authorization of the ride-hailing business model in California allowed Lyft and Sidecar to expand. Uber, worried about the competition, hedged its bets by adding a new service option to its app. In addition to UberBlack, the original model that complied with California’s black car regulations, users could now access UberX, a low-cost option designed to mimic and compete against Lyft and Sidecar.

The following year the CPUC passed new statewide regulations legalizing ride-hailing. Lyft, Sidecar and Uber could officially recruit as many private vehicles to the network as the market in California would bear.

In April 2013, just as the CPUC finalized its rulemaking, Uber announced a new company-wide policy on its blog. It would subsequently copy Sidecar and Lyft’s strategy of ignoring existing rules at the slightest indication that government would not shut them down. UberX would be made available in any market where authorities gave “tacit approval” to operate.

Uber’s strategy has clearly paid off. Today, Uber employs an army of lobbyists to smooth its regulatory path. It’s worth remembering, though, that the company didn’t initially set out to topple regulations. It simply paid attention to the competition — and, as we’ll explore in a later post, it found itself in a favorable political environment.

Lisa Rayle is a Ph.D. candidate at the University of California, Berkeley. Onesimo Flores has a Ph.D. in urban planning from MIT and now works in Mexico City. The research on which this article is based was conducted as part of the Transforming Urban Transportation project at the Harvard Graduate School of Design and funded by the Volvo Research and Education Foundation.

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