Taxi Legal Mashup in Milwaukee

A lawsuit in Milwaukee combines a host of taxi-related issues, with taxi companies suing the City of Milwaukee over a new ordinance that clears the way for app-based services like Uber and the Institute for Justice taking the City's side, saying that the existing taxi system, predicated on licenses and medallions is a restraint of trade. 

The Milwaukee Business Journal reports: "Five taxi groups are suing the city of Milwaukee, hoping to block an ordinance recently signed into law that lifts a cap on taxi permits and provides a path to legalization for mobile ride-booking apps."

The taxi owners say that a 1991 that caps the number of permits creates a property right that the new law lifting the cap denies them due process and equal protection. They say the new law will destroy the value of existing permits, currently priced at $150,000. The suit is seeking a temporary or permanent injunction of the city's law, as well as potential monetary damages.

But the the Arlington, Va.-based Institute for Justice, which has already sued the city to require it to lift the cap on new medallions, calls the cab companies' suit "desperate [and] baseless and belies their true motivation of protecting their monopoly at all costs."

Lyft Drops Its Threat to Enter the New York Market

There has certainly been a lot of talk about taxi apps on smartphones, and with that talk there is much confusion.  An app is just a way of hailing a vehicle. The real question is what vehicle is being hailed and who is driving it. Some apps hails cars licensed as taxi driven by licensed taxi drivers. Others hail anyone but.

Lyft, a major player in the taxi app space (to borrow a word from the heyday of the tech bubble) calls itself a "ride sharing" company. Its drivers are not licensed as cabdrivers; they drive their own cars, which are also unlicensed, at least not licensed as taxis. Because they are not taxis, the don't need taxi licenses. It says its drivers take "donations," not fares.  That's the theory at least.

But when Lyft announced plans to launch in Gotham, the TLC had a cow.

Earlier this month, Lyft said it would move forward with its New York City launch despite threats from taxi regulators, not just the TLC, but state regulators. That assertion prompted the TLC to declare Lyft an “unauthorized service” in New York City.

“Lyft has not complied with T.L.C.’s safety requirements and other licensing criteria to verify the integrity and qualifications of the drivers or vehicles used in their service, and Lyft does not hold a license to dispatch cars to pick up passengers,” the TLC said in a statement.

“Unsuspecting drivers who sign up with Lyft are at risk of losing their vehicles to T.L.C. enforcement action, as well as being subject to fines of up to $2,000 upon conviction for unlicensed activity,” it added.

In short, the TLC said it would seize Lyft cars, which is not an idle threat because the TLC seizes close to 30 cars a day.

Later, Lyft backed down in the face of cease and desist letter from New York’s Department of Financial Services, joined by the NY attorney general.

Meanwhile, Uber, probably the richest of the taxi app companies, has already gained a foothold in new York by taking advantage of a pilot program that allows app-hailing of some yellow cabs. Uber and similar services can also be used to summon livery cabs, which, under New York rules, cannot accept street hails, but can be hired by "pre-arrangement" whether by a traditional phone call or a smartphone app.

Oops! -- TLC seizes hundreds of cars in error

The Taxi and Limousine Commission seizes more than 9000 cars per year-- all without a hearing and without a warrant. The TLC will give the car back to those who quickly plead guilty and pay $600. If you want to plead not guilty, you can get your car back if you pay $2000.

Now it has been revealed by reports in DNAInfo by James Fanelli and others and in the New York Post by Rebecca Harshbarger and Kathleen Cullito that the TLC lost almost 1,500 court hearings in 18 months in which TLC inspectors seized cars and falsely claimed they were illegal cabs. The TLC's own tribunal dismissed 20 percent of the 7,187 cases involving illegal-cab violations, according to a TLC tribunal spokeswoman. The 20 percent figure almost certainly overstates the true error rate because many drivers plead guilty because they are told that doing so is the quickest and easiest way to get their car back.

The increase in rogue seizures, the Post says, came about because chiefs and captains bullied officers to seize as many cabs as possible. Many examples of inspectors making bonehead plays under pressure have been in the news, as have reports of inspectors being hounded to seize cars often on flimsy evidence.

As DNAInfo notes, TLC inspectors often seize cars where the driver or the passenger doesn't speak English and the inspectors don't have a translator to help understand the situation. Often inspectors don't know or can't be bothered with the rules, such as those that allow New Jersey of Long Island cabs to make pick ups outside New York City for trips into the City. Another common mistake is to seize cabs driven by chauffeurs or cars serving a particular business, neither or which need TLC licenses.

Two takes on Uber

Two recent articles about Uber suggest that the car service and others like it might destroy the taxi driving profession, with one stating plainly that that would be a good thing.

In "Will Uber Destroy the Driving Profession?" New Yorker writer Eric Goldwyn suggests that Uber's employment of "semi-professional drivers" may ultimately force traditional taxis out of business. If this happens, Goldwyn quotes New York Taxi Worker's Alliance chief Bhairavi Desai as saying that  the emergence of Uber is part of a long term undermining of labor:

 “Forty years ago, drivers went from laborers to independent contractors,” Desai explained. In the seventies, corporations lowered costs by hiring contract labor and leasing medallioned cabs to drivers. As contractors, drivers lost basic labor protections, like health insurance and paid vacations. 

Ed Rogoff, a professor at Baruch College’s Zicklin School of Business (and a former New York City cab driver), tells Goldwyn, “The independent-contractor taxi model is like sharecropping. Previously, cabbies and garage owners split proceeds fifty-fifty, with drivers keeping tips. The new system totally changed the structure of the industry by shifting all of the risk to the drivers.”  

This discussion, like many concerning Uber, omits that taxi apps are used to summon both traditional taxi and, in other cases, non-taxis, with unlicensed drivers (that is, unlicensed to drive a taxi) driving their own cars rather than vehicles dedicated as cabs.

A few days earlier, the Boston Globe ran an opinion piece by John Sununu, "Uber isn’t the problem; taxi regulations are," arguing that "In most big American and European cities today, taxi services look more like a bureaucratic conspiracy than the product of a competitive marketplace. In London, regulators consider use of a taxi meter to be a privilege and have erected exorbitant barriers to protect that status."

Sununu, a former U.S. senator from New Hampshire, continues that Uber "operates more like an information broker than a transportation company. They own no vehicles or medallions, but vet local operators, manage the application connecting drivers with users, and provide a rating system for both."

This view is close to how Uber sees itself, as technology or information company, not  a taxi company subject to taxi regulations.  Many in the industry, including regulators, have disagreed at least in part. So does Sununu, who says: 

Uber’s success and popularity should inspire legislators to take a hard look at the wasteful mass of ancient taxi regulations already on the books. Ostensibly, they were intended to protect consumers. But now they block access to faster, more reliable service.

TLC Inspectors Cry Foul about TLC Car Seizures

The TLC seizes more than 9000 private cars annually, but apparently that's not enough. According to an article in the New York Post. "TLC chiefs are threatening inspectors with summons quotas and other stiff punishments if they don’t take enough illegal cabs off the road." The Post also says it has roll-call recordings to back up the inspector's claims.

The chiefs of the TLC inspection unit pressure their officers by issuing a target number of summonses a day.

“You are going to be doing 15 summonses a day . . . I’ll ride you for a week. If you see that you’re not getting the seizures, you see you’re not getting enforcement . . . then start with the street hails,” one chief says to an office on one of the tapes. The chiefs also threaten other subtle punishments, such as assigning an officer a day-shift just after a night shift.

TLC officers have already charged that "many seizures [are] bogus" in that the officers don’t have reasonable cause, and grab the cars done to fend off pressure from higher-ups.

Just this month, there have been allegations that the TLC seized the car of a black man who was driving his white wife, the car of a Turkish-American who was taking his neighbors to the airport, and that of a driver who gives free rides to cancer patients.

TLC inspectors are being backed by their union, the Teamsters. Randy Klein, of Teamsters Local 237, told the Post: “The ideal situation is they treat them like human beings, they are trained well, and have the tools to protect themselves and the public.”

That would be ideal, too, for the drivers whose cars are nabbed by the TLC.

Uber $3 billion, but how much uber?

Early this month, taxi hailing app Uber completed its latest round of funding and was said to have a valuation of $17 billion. Following that news, New York Times business columnist Andrew Sorkin suggested that the $17 billion figure might be too low, that Uber could be worth more. Sorkin's take can be summarized:

Think about the basic math. There are a lot of numbers floating around about the global revenue for taxis, but here are the basics: In the United States, the taxi business generates $11 billion annually, according to IBISWorld.

In big cities like New York and London, The Financial Times reports that the average person spends $238 a year on taxis. If you extrapolate that Uber could one day control a quarter of the current global taxi market, the investment would turn out to be a home run.

The business is currently in 128 cities in 37 countries and says it is doubling its revenue every six months. (TechCrunch reported Uber’s revenue last year was $213 million on more than $1 billion of bookings; Uber takes a 20 percent cut of all driver’s receipts.)
If Uber were to take just half of the taxi market in the United States — and nowhere else — it would generate more than $1 billion in revenue a year.

The problem with this math that that Uber only gets something like 20% of the fares of the rides that it arranges. So even if Uber arranged a quarter of all the taxi rides in the U.S. -- which is a huge 'if'-- it would get 20% of 25%, or 5%. If the taxi market in the U.S. if $11 billion, Uber's share of that gross would be $550 million. No one believes that Uber grosses this much now-- Techcrunch says the revenue is less than half that-- but it might in the not-too-distant future. Whether it makes a profit now, or is likely to see any profit soon, is anyone's guess. 

Still, a half a billion in gross revenue is quite a bit for a four-year-old company, and Uber is international. But there are also many other Uber-like companies, some big, like Hailo. I have heard that some of the the car services, like Carmel, have their own app. So the technology part seems ubiquitous and not proprietary. Thus a 25% share would seem hard to maintain in an industry with so many small companies, widely dispersed. 

Writing today on Nate Silver's fivethirtyeight.com, Aswath Damodaran, a finance professor at New York University’s Stern School of Business, argues that Uber is actually worth something like $5.9 billion, which is still nearly double what valued at before its latest round of financing. Of course, the "correct" valuation varies wildly depending on what one assumes to be the future size of the taxi market and Uber's share of that market.

Damodaran is skeptical of Uber, or any taxi company's ability to obtain a large share of such a disintegrated market:

The bad news is that the market will be tough to dominate. Unlike technology companies in other businesses, like Google, Facebook and eBay, the network effect and winner-take-all benefits are limited. Having a global network of tens of thousands of cabs doesn’t make a difference to a customer looking for a cab in New York City. That, along with the regulatory restrictions protecting the status quo and the competition Uber faces from Lyft, Hailo and others, lead me to estimate a market share of 10 percent.

Increased competition has already forced Uber to cut its take of gross receipts in some cities. My instincts tell me that Uber’s slice will decrease over time, but I’m going to make the optimistic assumption that the company will find a way to differentiate itself and continue to claim 20 percent of gross receipts.

But even if Uber does get a 20% share of a global $100 billion market, Damodoran doesn't think the valuation makes sense.

The market would have to be three times my estimate — about $300 billion — or Uber’s market share would have to be more than double my base case estimate — more than 20 percent — to justify a $17 billion valuation. The former may hold if you see Uber’s market more expansively than I do, and the latter may come to fruition if you believe Uber will have an easier time overcoming the competition and the regulatory constraints on its growth.

Of course, the money backing Uber is said to be smart money-- Fidelity Investments, BlackRock, Kleiner Perkins Caufield & Byers, Google Ventures, Menlo Ventures and Wellington Management and Summit Partners. Everyone assumes that they must know something that makes their investment make sense. And maybe they do. But even the most successful venture capitalists lose more often than they win. The profit comes from winning big when they do win. Thus Damodoran says, "I wouldn’t be that quick to conclude that smart investors always make smart investment judgments."

A few have made small and even large fortunes in the taxi business, usually after a generation or two of accumulating licenses. But there is no taxi billionaire. It remains to be seen whether Uber's backers become the first.

---

In an addendum to the Uber valuation story, the Wall Street Journal today ran an article suggesting a way for investors to profit from Uber even if they are not venture capitalists who have access to Uber shares.  The Journal's idea: Sell Medallion Financial short:

Medallion is a specialty finance company that services loans used to purchase city-issued “medallions” that are required to operate yellow cabs. Shares of the company have slumped more than 18% this year and on Thursday fell to the lowest level since December 2012. The company sports a market capitalization of about $300 million, according to FactSet.

After peaking at $17.85 in November, Medallion shares lost about 1/3 of their value, a decline that has coincided with a rush of short sellers betting that the stock will keep falling.

The Journal figures that shares in the company that lends on medallions is indicative of the decline of the traditional taxi business as it loses out to Uber and its ilk. 

Canceling Tomorrow Could Cost Big Bucks

Mayor Bill de Blasio has he indicated he might cancel the Taxi of Tomorrow program even if the city continues to prevail in court. But doing so could cost the city as much as $100 million, according to a capitalnewyork.com report
Following a lengthy competition, in 2011 Mayor Michael Bloomberg agreed to give Nissan near-exclusive rights to supply yellow taxis for New York City Streets. Its winning design was the big and ugly, but feature-rich NV200, which sports amenities like back-seat airbags, moon roofs, phone-charging ports and passenger reading lights.
Nissan apparently claims that developing the vehicle cost Nissan about $100 million, and that the city would be on the hook for that sum. 
De Blasio, as public advocate, opposed the Taxi of Tomorrow on the grounds that Nissan had investments in Iran and that the vehicle was not wheelchair-accessible-- which is now even more awkward nowadays in that the city has also promised to make half of the city's taxis wheelchair friendly. 
Taxi fleet owners, who gave hundreds of thousands of dollars to the mayor's campaign have battled the program in court, first successfully, but lately unsuccessfully.  That battle could continue if the mayor decides to proceed with the program. Presumably, if the NY Court of Appeals, which may have the last word, decides that the program was unlawful after all, the city would no longer own Nissan for canceling the deal.