Why municipalities are so upset about Uber.

Uber bills itself as a peer-to-peer ride sharing service. That sounds lovely. Like, friends giving friends rides and stuff. Nice. How does it work? 

The first peer (we will call her the customer) calls Uber, except that it’s not the dark ages so instead of calling, the customer simply fires up the Uber smartphone app. Then the second peer (we will call him the driver) arrives and transports the customer to her destination. Upon conclusion, the customer pays the driver and the peer-to-peer ride sharing is complete.

Oh. So… Uber is a taxi company? 

Yes. Uber is a taxi company pretending it's not a taxi company.

Cities limit the number of cabs by issuing a limited number of taxi licenses. In New York City, for example, there are 63 cabs per 10,000 people. Recently, New York taxi licenses have traded privately for $1 million each. After all expenses, a New York cab license will profit $50,000 per year which is a five-percent annual return on investment. Although this is much better than my energy stocks have done lately, it’s a pretty tight margin. It’s fragile. Decrease profits and value will decrease. Quickly.

Uber is not part of this system. Uber drivers are in addition to the 63 per 10,000 now on the road in New York because, remember, Uber is peer-to-peer ride sharing so they don't have to sully themselves with those ugly city taxi licenses. But, what happens if Uber doubles the number of rides on the road?

There is a price war. The consumer pays less for the same service. And, there is greater availability. The consumer doesn’t have to wait as long to get a ride. Awesome. Go Uber! And this is the crux of the problem. Consumers (we will call them voters) want Uber.

If Uber is permitted to flourish, the profitability of owning a traditional taxi franchise goes down. Way down. It costs next to nothing to be an Uber driver. Who would pay $1 million for the privilege when you can be a peer-to-peer driver at no cost? Suddenly, law abiding local business owners see the value of their business plummet and all they did was follow the rules. Toronto, apparently, has taxi franchises worth a total of $1.4 billion. There is a lot at stake. Thus, there is a lot of pressure on cities to ensure the value of the limited number of taxi license. After all, they made a promise – follow the rules and you, taxi license owner, will have an asset of substantial value.

Cities like to claim it's about safety and liability. It's not. Liability, in particular, is often cited as a last resort argument when one can't figure out anything else to say. If there are safety issues they are easily dealt with through proper administration. The real issue for cities is the failure of their promise -- follow the rules, pay your money, drive a cab.

Something has to give.

My money is on the consumer. Look forward ten years into the future. Taxis will not be the same. That much is clear. Cities will continue to regulate licenses because they want the revenue. Existing companies will adapt – perhaps licensing Uber like tech from a new start up. And, unless consumer demand is met by city licensed services, peer-to-peer services will continue – perhaps driven further into the grey market.