Wharton's John Paul MacDuffie discusses Uber's regaining the right to operate in London.

Ride-hailing service Uber this week scored a big win by reclaiming the right to operate in London, but regulators will watch it closely to ensure that the scandal-tarred company has indeed changed its ways for the better. A British court granted a 15-month temporary license on Tuesday, reversing the denial of a five-year license renewal last September by Transport for London (TfL), the city’s transportation regulator. Although Uber and its 40,000 drivers could continue to operate in the city pending a court decision, the prospect of being kept out of one of its most profitable markets was daunting.

Uber won the temporary license on the strength of profuse apologies from its CEO, Dara Khosrowshahi, and a commitment to rebuild trust. It worked to fix the shortcomings TfL cited as reason for the denial last September, notably its failure to ensure passenger safety and do background checks on its drivers, and the use of software to dodge regulators. Uber also recast its London management including hiring former banker Laurel Powers-Freeling as its chair and agreeing to audits every six months. The most persuasive move was Khosrowshahi acknowledging that TfL was justified in revoking the license renewal, according to John Paul MacDuffie, Wharton management professor and director of the Program on Vehicle and Mobility Innovation at the school’s Mack Institute for Innovation Management.

The London reprieve has raised hopes for an initial public offering by Uber, which is valued at roughly $60 billion and counts Japan’s SoftBank as its biggest investor. If Uber is to capitalize on the momentum of its London license, it must demonstrate that the changes it has promised are real and ingrained; the company also must endear itself to hesitant regulators elsewhere in the world, said MacDuffie. “The real test will simply be: Do they actually start making money in the ways that were promised?” he noted. Much depends on how Uber stacks up against its rivals as the ride-hailing industry matures in the coming years. “I don’t expect that this is going to turn out to be a winner-take-all kind of service,” MacDuffie added, predicting “oligopolies with to two to three strong competitors in most markets.”

MacDuffie shared his insights on the road ahead for Uber on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Below are key takeaways from his interview.

“A lot of people are going to be closely monitoring Uber, and these victories are probably not going to make anyone relax that watchdog stance.”

Vote of Confidence

“It’s huge,” said MacDuffie of Uber’s license to get back on the market in London, noting that TfL’s revocation of its license in September 2017 was a major setback. “To have this reversed is a vote of confidence in [Khosrowshahi] and his efforts to convince the world that Uber has changed,” he added. He also commended Khosrowshahi’s readiness to mend Uber’s ways immediately after the license revocation and walking the talk thereafter. “He sounded a tone of ‘We made mistakes in the past. We are taking this very seriously. We are going to change.’ They made changes in personnel. They’ve agreed to this short license of only 15 months. They’ve agreed to audits every six months. On a variety of fronts, he’s making some big changes.”

The power of the apology was also evident in the Uber’s London win. “Acknowledging so strongly the legitimacy of the regulator taking the stance towards them is 180 degrees opposite from what Travis Kalanick, the founding CEO, would have taken as a position,” said MacDuffie. “Symbolically, that’s very powerful because saying ‘We’ll fix the mistakes,’ is one thing. Saying they plan to work proactively with regulators in cities because they acknowledge them as a legitimate party for us to negotiate with is actually pretty big.”

Refuting ‘Smoke Screen’ Concerns

MacDuffie noted that the judge in the case, Emma Arbuthnot, asked during pretrial hearings if Uber’s changes were a “smoke screen.” But Uber hiring people “with a lot of credibility in England” as part of an oversight committee “seemed to help convince the judge,” he said. Uber set up a non-executive oversight team to investigate some 2,500 offenses in its cabs in London as part of its makeover. Many of its drivers were found to have had criminal records, and some of them were cited for sexual harassment and other lapses; Uber was accused of withholding such information from the police. Now, Uber has agreed to proactively inform the police of any violations. “That’s probably the biggest kind of hot button issue for the public and for Transport for London,” MacDuffie said.

The other big test for Uber is in how cooperative it is with regulators in the audits. “The Uber philosophy in the past was that regulators were only out to protect the existing taxi industry and therefore they were essentially the enemy to be ignored or to be overcome by any means,” MacDuffie said. He noted that the company used its so-called Greyball software “to explicitly fool regulators to give them inaccurate data about what was actually going on.”

“Uber’s lessons will be passed on to many startups that realize that maybe this Wild West era of being able to just jump in and operate, completely flaunting regulation, is perhaps passing.”

Contours of a New Business Terrain

MacDuffie pointed to London Mayor Sadiq Khan’s op-ed article in the Independent newspaper, where he said that Khosrowshahi’s acknowledgment of Uber’s mistakes vindicated his defense of TfL’s license revocation last year. “That’s going to embolden other cities to request the same kinds of conditions, and it may really permanently shift the relationship between Uber and cities around the world,” he said.

Uber is banned or faces blocks in several countries. In some countries, it has pulled out because of strong competition, but taken significant equity stakes in local operators. “Interestingly, while Uber clearly hopes to get into monopoly or near monopoly positions in a lot of its markets, it may be these places where they pulled out and their local competitor is super strong and is now partly owned by Uber where you get closer to monopoly conditions,” said MacDuffie.

Meanwhile, Uber’s chief competitor, Lyft, “has gained tremendous market share in the U.S. by saying ‘Hey, we’re not Uber, we treat our drivers better, we treat our customers better and we’re not deceptive when we deal with cities,’” said MacDuffie.

Notwithstanding claims that it is profitable in certain cities where it has been operating the longest, “overall, Uber is still not profitable,” said MacDuffie. “The network effects are obviously strong, but it’s clearly not rocket science to start a program or an application like [Uber’s] because you see all these successful competitors. If Uber’s investors were counting on them having monopoly power to completely set prices wherever they needed to be to be profitable, they’ll be disappointed.”

The Gaze of Watchful Eyes

“A lot of people are going to be closely monitoring Uber, and these victories are probably not going to make anyone relax that watchdog stance,” MacDuffie said. Uber will be closely scrutinized in the agreed-upon audits and in the time up to the renewal deadline after 15 months, he added.

MacDuffie agreed with the statement made in February by Uber’s London chair Powers-Freeling to a British court in February 2018: “Trust, including the trust of regulators, has to be won and it is a marathon not a sprint.”

Monitoring is a key feature Uber agreed to when it settled a lawsuit with Google’s sister firm Waymo earlier this year, over allegations that it poached a Waymo employee with expertise in the LIDAR sensing technology for driverless cars.

“Google/Waymo settled with Uber for a lower financial amount, which made some people think that their case wasn’t as strong,” MacDuffie said. “But if you look at the details, what they got for that lower financial settlement was an agreement to be able to monitor Uber’s LIDAR development for an [unspecified number of] years. Rather than get that money, they wanted to keep a very close eye on Uber and make sure that they actually weren’t continuing to use that proprietary LIDAR design.”

Lessons for Other Startups

MacDuffie recalled a senior TfL official saying at a conference in London organized by the Program on Vehicle and Mobility Innovation that he was frustrated at “startups that think that their business model can be tested fully without paying any attention to regulations, and [while using] public streets.” As more and more startups emerge with offerings of electric bikes, one-way bike rentals and e-scooters, Uber’s experience will temper them, he said. “Uber’s lessons will be passed to many startups that realize that maybe this Wild West era of being able to just jump in and operate, completely flaunting regulation, is perhaps passing.”

On the other hand, Uber with its London victory may have also won the argument supporting its business strategies. “The London experience also shows us that when you have built that strong a base of riders who have now started to rely on Uber for part of their transportation, you can’t so easily ignore that,” said MacDuffie. “You might say it’s a bit of vindication of Travis Kalanick’s original insight that if you rush in and ignore regulation and build a customer base, that does give you a safety net against later trouble.”