Rob Cox: Uber gets a pass on its Wall Street habit

By Rob Cox
June 30, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

If it hadn’t been for Courtney Love’s Twitter account, demonstrations against Uber by taxi drivers in Paris might never have made international headlines last week. Even detractors of the American punk singer-turned-fashionista found common cause in her complaints that the anti-Uber brigade was clogging the boulevards of Paris.

Finding much public sympathy for taxi drivers rising up against the upstart anywhere is a difficult task. For many customers, Uber has revolutionized the business of finding a ride. The company’s smartphone application is convenient, and the prices drivers charge are typically competitive. What’s not to like?

The customer love, and the investor faith that has brought the company a private market valuation of $50 billion, are obscuring the fact that Uber is breaking more than just the barriers surrounding traditional taxi business models. The firm and its drivers are knowingly breaking the laws of many of the 300 cities in which Uber does business.

Big banks violate rules and pay fines, traditionally considering the penalties just a cost of doing business. Uber does something similar, paying fines when drivers breach regulations that impede its business model. Nowadays the banks’ behavior attracts widespread outrage. Uber, though, often gets a pass in the name of technological disruption.

That’s why the ongoing kerfuffle in Paris is noteworthy, beyond the unfortunate delay it caused to Love’s journey. Uber’s fight in France may be its most intense yet. Last week, Interior Minister Bernard Cazeneuve issued a decree forbidding activity by drivers of UberPOP, the French equivalent of UberX, the company’s most popular type of ride. Police can now seize UberPOP vehicles. And French authorities on Tuesday ordered two Uber executives to stand trial on charges of operating an illegal taxi service.

Most normal businesses would probably shut down pretty swiftly pending a later agreement on what they can and can’t do. Uber works differently. In most cases, its drivers are able to continue operating because the company picks up fines levied against its front-line troops. As Uber puts it: “We always stand by our drivers.”

This is a corporate policy that gets awfully close to encouraging its contractors – call them employees, if they happen to be in the state of California – to break the law. Sure, it’s just $30 here and there, like the levy for illegally picking up a passenger at San Jose International Airport. But it can add up. Not long after barging into Portland last December, Uber itself was hit with $67,750 in fines for operating an illegal taxi company.

It’s not as if Uber is condoning violence, and many of the rules Uber is taking on are probably coddling licensed old-school taxi services at the expense of passengers. That’s not always the case, though. Upgraded vehicle inspection standards and driver background checks, for instance, sound like safeguards for consumers. These were just two elements of a bill passed in April by Broward County, Florida that Uber opposed.

Uber, founded by Travis Kalanick – ironically after struggling to hail a taxi one night in Paris in 2008 – doesn’t disclose how much of the $5 billion or so it has raised has gone to paying off violations for drivers. The company’s bet is that with perseverance and help from the 250 lobbyists and two dozen lobbying firms on its payroll, including President Barack Obama’s former adviser David Plouffe, it can change the law in the cities where it does business. That means that, in Uber’s model, these shouldn’t be recurring costs.

Giant banks have made similar arguments to justify the billions of dollars they have paid since the financial crisis to settle allegations of misdeeds. And while the numbers reached in settlements are staggering in absolute terms, they are small in relation to the overall scope of their activities.

Take JPMorgan, which has handed over $39 billion to enforcers since 2008 for misdeeds including selling dodgy mortgages, the London whale affair and manipulation of currency and interest rate markets. That’s just 6 percent of its revenue over the period. Even Bank of America, the mother of all financial fine-payers with $80 billion since 2008, dedicated a bit less than 12 percent of its top line to fines.

If Uber is paying out the same kind of percentage in lawbreaking costs the tally in 2014, when it made $400 million in revenue according to the Wall Street Journal, would have been somewhere in the $25 million to $50 million range. And if the figure were public, many investors and users might cheer.

But the principle is not all that different from the banks’ approach. Uber doesn’t respect the established rules of the marketplace, so it absorbs the cost of violating them and supplements that with aggressive marketing and lobbying to change them.

The banks have mostly conceded defeat in that battle since the crisis, though some are still fighting it. They were persuaded, partly, by popular and political opprobrium. For now Uber has much of the public on its side. If people ever conclude Kalanick’s firm is pushing too hard, though, he might need to brace for an uber-backlash.

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