This is the second of four Canada Fact Check articles on Uber’s entry into Canada.

The main argument in Part 1 was that Uber’s flagship UberX service is unambiguously illegal in most cities in Canada because the law considers UberX a taxi service and Uber refuses to apply for a taxi licence. And it doesn’t apply for a taxi license for its UberX service for the simple reason that it does not want its UberX service to operate under the same rules as the rest of the taxi industry and incur the same licencing fee, insurance, and consumer safety costs that the rest of the industry pays. In other words, while Uber is competing for the exact same passenger dollars as the rest of the taxi industry, Uber wants to play by its own rules when it comes to fares and industry regulatory costs.

But Uber also knows that sooner or later the fact that its UberX service is operating illegally is going to catch up with it. In other words, it knows that UberX eventually has to operate under some sort of government sanctioned regulatory regime in Canada. And that’s why, long-term, it needs to have Canadian licensing jurisdictions implement separate sets of taxi rules tailored to its business model. Not tailored to its “innovative” technology as Uber and some of its boosters might claim, mind you, but tailored to the way Uber maximizes its profits.

To accomplish this, Uber has written its own taxi rules and hired well connected, high powered lobbyists with close ties to politicians such as Toronto’s Mayor Tory, to shop Uber written rules around to key Canadian licensing jurisdictions. And Edmonton is the first major Canadian city to make the Uber authored rules law.

To summarize: at the heart of Uber’s global business strategy is a political strategy. Because Uber doesn’t have the business smarts to compete with established taxi companies under existing industry rules, it has to operate either illegally or pressure local licensing authorities to create a separate set of taxi rules for its main service – UberX – to operate under.

How Uber enters a market

So that’s Uber’s strategy and more detail on that strategy is provided in Part 1. But what do Uber’s implementation tactics look like on the ground? How does it go about implementing its strategy?

From the point of view of municipal politicians and licensing officials, the Uber experience starts with introductions to Uber staff and after some back-and-forth, city hall officials agree to look at some of the transportation policy issues Uber has raised. The relationship goes well enough until one day, before any agreement is reached, Uber forces the issue by launching its UberX service without permission. Uber’s chief executive Travis Kalanick likes to call the move “principled confrontation.” Municipal lawyers prefer to say it’s illegal.

Regardless of the terminology, an illegal launch is Uber’s first serious shot at softening up the ground. This preemptive strike allows Uber to assess a city’s resolve (and capacity) to enforce its rules. If regulators waffle, then Uber knows it’s well on its way to winning.

When cities show more backbone, Uber’s illegal entry into the market allows it to build a customer base that it can unleash on city officials and elected politicians. By galvanizing public support through online petitions, Twitter campaigns, and other tactics, Uber manages to turn customers into lobbyists.

Uber has the most difficulty in jurisdictions with senior-level government taxi licensing regimes and/or centralized auto insurance bodies because these jurisdictions have the institutional capacity to push back if Uber enters their market illegally. As it turns out, British Columbia has both: taxis are licensed provincially through the provincial Passenger Transportation Board (PTB) and B.C.‘s public auto insurer, ICBC, is pretty much the sole auto insurer in the province with an ability to closely co-ordinate its insurance requirements with the licencing regime of the provincial government. Not surprisingly, despite having the perfect young, hip customer base for the San Francisco based Uber, the flagship UberX service does not operate in Vancouver.

Lesson to be learned from Vancouver? Even where there is the perfect demographic for a successful Uber market entry, Uber will stay out of that market if it anticipates effective regulatory push back to its bullying tactics. Again, Uber’s business strategy is, more than anything else, a political strategy designed to get its own taxi rules. Think Uber’s app and customer service are why Uber has been so successful world-wide? Uber head office in San Francisco doesn’t think so and that’s why UberX is not in Vancouver. It knows that its business model won’t work there without rule changes and it simply hasn’t found a way to bully provincial licensing officials and the provincial auto insurer, the ICBC, into accepting Uber friendly rules. And the centralized nature of the taxi regulatory regime in B.C. has meant that operating illegally in Vancouver – as UberX does on a massive scale in Toronto and many other Canadian cities – carries too great a risk for the company.

But Uber being Uber, it’s not giving up on B.C. Uber has hired two former staffers from B.C. Premier Christy Clark’s office to lobby B.C.’s transportation minister Todd Stone for a new special licensing scheme that would differentiate its UberX service from traditional taxis. Dimitri Pantazopoulos, Clark’s former principal secretary, and Carling Dick, Clark’s former events coordinator, are both registered lobbyists for Uber, records show.

And David Plouffe, a former senior adviser to Barak Obama, oversees the Uber political strategy from San Francisco headquarters as Uber’s Senior Vice President of Policy and Strategy.

What Uber wants in new rules

Again, Uber’s long term strategy is to relentlessly pressure licensing officials into creating new sets of rules that play to Uber’s business model’s strengths. But exactly what, from Uber’s perspective, are the deal breaker issues for Uber to stay in/enter a particular market? What must it get in the new licensing rules for it to agree to apply for a license and operate its UberX service in a market legally?

Simple: 1) the new rules must allow Uber to charge “surge pricing” with no maximum cap (think New Year’s Eve, an 8.9 times multiplier, and a $1,115 charge for a 60-minute ride in Montreal) while its competitors must continue to charge fixed-rate fares; 2) the new rules must exempt Uber from the commercial insurance coverage that is mandatory for licensed taxis so Uber drivers can carry a new, less comprehensive kind of “hybrid” insurance policy that is cheaper than commercial coverage; 3) Uber must be exempted from the existing licensing fees that govern both cab owners and drivers – and be given its own licensing fee regime with much lower fees; and 4) the background safety check rules for Uber drivers should not be so onerous as to scare off potential drivers. For Uber this usually means that it objects to rules requiring that driver safety checks be done through local police departments (see below).

This is essentially what Uber got in Edmonton and this is what Uber is pushing for in Toronto and in municipal and provincial licensing offices across the country.

Note that even if the new set of rules wind up being pretty close to the rules that Uber is pushing for, Uber does not want these rules to apply to the entire taxi sector. In fact, a revised set of rules that applied to all taxi operators (including the UberX service) would defeat the whole purpose of Uber’s lobbying efforts and undermine its long-term strategy. No, what Uber wants is for the legacy taxi industry to continue to operate under the existing, more expensive cost structure while it provides its UberX service under a new regulatory regime that costs it less and plays to its business model’s strengths. In other words, what Uber wants are two separate playing fields. And it wants to start off as the dominant – if not only – player on the low-cost field with its tech savvy, credit worthy, customer base.

Uber and the public interest

And what are the consequences if Uber is successful in changing the rules in its favour across Canada?

First, there is no evidence that Uber’s entry into a regional taxi market increases the overall size of that market. So what Uber’s lobbying efforts essentially achieve is to hive off a part of the existing taxi market by creating new rules that favour Uber. That leaves the traditional taxi companies – and more importantly, their drivers – to compete amongst themselves under the old rules in a much shrunken “legacy” market.

So the basic question is this: is it really in the public interest to create a completely new set of licensing rules for a business model that overwhelmingly retains part-time drivers, pays them no benefits, refuses to accept a broader social mandate, and takes tech savvy, credit worthy passengers away from the established industry. Is it really in the public interest that Canada-wide, tens of thousands of hard-working, licensed taxi drivers and owners who each fork over thousands of dollars in municipal taxi ownership and operating fees annually, are seeing their already modest incomes significantly eroded.

And under a two-tier licensing system in which Uber has significantly lower costs, how long will it be until the taxi industry disappears entirely leaving the elderly, lower income families, the disabled and those without credit cards or smart phones, without a viable means of transportation. Uber advocates such as Toronto Mayor John Tory and former Ontario Conservative leader Tim Hudak often speak of consumer choice. But what a two-tier licensing system really does is deny Canadians choice by undermining the economic viability of the existing taxi industry leaving Uber pretty much the only player. And how long will Uber fares remain low if Uber is the only taxi game in town?

Secondly, it’s not just the existing taxi industry and its drivers that are hurt by Uber, the broader public interest is also undermined when Uber comes to town.

Why is this? Let’s start with training. Typically, formal training for taxi drivers in Canada takes between two days and four weeks. Toronto has a three-week taxi driver course and is a good place to look at the “public interest” that is built into the regulatory regime that governs the existing taxi industry. In Toronto, that regime is outlined in detail as part of Toronto Municipal Code Chapter 545 and the provisions and sub-provisions of the taxi segments of Chapter 545 comprise 50 pages’ worth of social obligations tied to being a taxi driver in Toronto.

What’s in those 50 pages? Well, for starters there is the obligation to display the taxi Bill of Rights in a cab – if a driver doesn’t, there’s a $300 fine. A driver must also retain operator logs for at least twelve months. Another rule, drivers can’t trade rides for sex. In fact, if a driver breaks any of the rules in those 50 pages, he/she could end up before the Toronto licensing tribunal, which sits weekly.

Uber, in contrast, provides a sixteen minute online training tutorial that makes no reference to the larger social obligations of an Uber driver and can be summed up simply as: do whatever needs to be done to keep the customer coming back. UberX drivers have no public-interest mandate. They pick up only those with smartphones and available credit—and they are assisted in discriminating against iffy passeners through the five-star rating system in which drivers rate passengers.

And then there is the question of background checks on drivers.

On February 12, Uber proposed to pay $28.5 million to roughly 25 million customers to settle two class action lawsuits related to the way the company represented its background checks on drivers.

The terms of the proposed settlement were revealed in a court filing in the United States District Court in the Northern District of California. As of publication date, the presiding judge had not indicated whether the proposal would be accepted.

In the lawsuit, Uber passengers had contended that Uber’s marketing materials related to the company’s background checks were misleading and not “industry leading,” as Uber had previously claimed. The lawsuits also cited “unfortunate incidents” that have happened to passengers during Uber rides.

The lawsuit also claimed that Uber’s promotion of its background check process was not “industry leading” because the checks did not include driver fingerprinting or the requirement that the driver applicant appear in person.

On February 20, Uber driver Jason B. Dalton, 45, of Kalamazoo, Michigan fired at victims apparently selected at random. In three separate episodes over more than four hours on a Saturday night, Dalton killed six people and critically wounded two others.

The shooting spree allegedly took place while Dalton was picking up and dropping off passengers for Uber. Dalton had a 4.73 driver rating (out of 5) from passengers since passing the Uber driver screening process a month earlier.

On February 22, Calgary City Council amended its bylaws in response to Uber lobbying and created a separate category for ridesharing services. However, Ramit Kar, Uber’s general manager for Alberta, said that Uber “just can’t operate” under the new bylaw as written and that as a result, Uber won’t be operating in Calgary. Kar described Calgary’s $220 in annual per-driver licensing fees and relatively stringent requirements for background checks and vehicle inspections, as “unworkable” for Uber drivers.

The “unworkable” $220 annual licensing fee for ride-sharing services such as Uber compares to the following fees for Calgary taxi drivers: an annual Licence Fee for Taxi Plates of $877, an initial Taxi Drivers Licence Training Fee of $745, and an annual driver’s renewal fee of $135.

And what does Uber find unacceptable in the Calgary by-law’s approach to background checks for ride-sharing drivers? Simple, that just like Calgary taxi drivers, the background check for Uber drivers would have to be completed through the Calgary Police Department (CPS).

Thats’ right, Uber doesn’t want background checks on its potential drivers to be completed through the Calgary Police Department. This, just two days after Uber driver Jason B. Dalton gunned down 6 people in Kalamazoo, Michigan and left two others critically wounded.

Part 3: Uber’s tax avoidance schemes and labour strategy

There are two other major areas where Uber plays by different rules that give it an additional advantage over its competitors: its (apparently legal) international tax avoidance strategy and its (legally contested) claim that Uber drivers are independent contractors as opposed to employees. These issues, of course, are not regulated within municipal (or provincial) taxi licensing regimes but are central to Uber’s global growth strategy.

Note: This is the second of a 4-part series on Uber in Canada. Click here for Part 3, Uber in Canada – cutting corners on taxes and employee benefits; and click here for Part 4, Uber in Canada and the public interest.