Change makes people uncomfortable. That’s an axiom of our self-help era. Business managers are no exception. When confronted with technology-driven change, managers face the unpalatable choice of 1) overhauling an existing, stable, profitable enterprise to conform to unpredictable, evolving
conditions, or 2) staying the course by doubling down defensively on the old business model. In either case, they run the risk of a catastrophic failure if they get it wrong. No wonder they feel
uncomfortable.
Business managers hate to lose control, and this tremendous change imposed by outside forces is beyond their control. To regain some semblance of control over their destiny, some business
managers choose to go on the attack. This urge is primal. It doesn’t matter if they will win or lose:
they just feel the urge to do something, anything, to strike back. They need someone to blame. That’s why leaders of technology companies are so frequently portrayed as ruthless villains by mainstream companies under siege.
“Complaining is not a strategy,” Jeff Bezos, Amazon’s chief executive officer, remarked when Charlie Rose of 60 Minutes asked about the publishers who vilified him. “Amazon is not happening to bookselling,” he continued. “The future is happening to bookselling.”
In Uber’s case, the future is happening to taxis, and those in the industry don’t like it. They are fighting back with every available weapon.
Uber is routinely hassled, sanctioned, or sued in nearly every city where the company does business. Traffic came to a standstill in Chicago, Washington DC, London, Paris, Madrid, Milan, Berlin, Moscow, Bogota, Rio de Janeiro, and many other cities around the world where taxi owners went on strike to protest the launch of the Uber app. In China, fistfights broke out when taxi drivers went on strike to protest Uber and similar apps. In Amsterdam, taxi drivers attacked Uber drivers with hammers and brass knuckles. But Uber’s most implacable foe is not the cab drivers: it’s the taxi owners.
In every major US city lives a powerful local cartel of fleet owners who have amassed hundreds, sometimes thousands, of taxi medallions. The medallion is a tin badge issued by the city and bolted to the hood of the car. It indicates that the vehicle is legally authorized to pick up passengers who hail it from the street. By law, the supply of medallions is severely limited. North America’s biggest taxi market is New York City, with more than 175 million paying trips each year. Six hundred thousand passengers per day are served by only 13,437 yellow cabs. That’s 3,000 fewer licensed taxis than in 1937 when the Haas Act was introduced to regulate the taxi industry and set the maximum number of cabs at 16,900.
Artificial scarcity is bad news for consumers because it sends prices soaring and makes it
impossible to find a cab at rush hour. But it’s a great deal for the fleet owners. In fact, medallions in New York City are worth a cool million dollars apiece. For decades, buying a taxi medallion was the best investment decision anyone could make. Medallions outperformed every asset class in America.
According to Professors Stewart Dompe and Adam C. Smith of Johnson & Wales University, the value of a New York taxi medallion doubles every four-and-a-half years. Annualized, that is a 15.5 percent rate of return.
The reason medallions grow in value is that the owner is able to rake in most of the profit each time the regulator permits fares to increase. Little of that increase is shared with the drivers, whose annual earnings of $30,000 have scarcely grown in the past decade. Nor does money get plowed back into better cars and better service. Instead, the taxi owners spend money lavishly on lobbying and litigation to preserve their cartel.
Since 2014, however, the price of taxi medallions has begun soften in New York, Chicago, and Boston. With so much unlicensed competition from Uber and Lyft, demand for medallions has begun to taper because the return on investment is no longer clear cut. That’s why the War on Uber really began. With so much value at stake, taxi owners in city after city have pushed their local governments and taxi commissions into legal battles against the insurgents by filing regulatory complaints and, if those didn’t goad their city officials into action, by filing lawsuits against the city. After all, the medallion owners paid dearly to buy into the regulated cartel, so they expect the government to step up and provide the enforcement they paid for.
Put bluntly, when the taxi cartels purchase a medallion, they are paying for monopoly pricing backed up by the state’s power of enforcement. Ride-sharing services jeopardize the cartels’
monopoly rent. To protect it, the owners are calling for a regulatory airstrike on Uber and its ilk.
Uber has been sued so many times it’s hard to keep track. In the US alone, Uber has been sued by the cities of Portland, Philadelphia, Chicago, Los Angeles, San Francisco, Columbus, Orlando, and more. Taxi drivers in Boston, Chicago, and other cities have also filed suits. Uber has been banned in Nevada, Thailand, Spain, and New Delhi. In Germany, Uber has been banned twice: both times the company continued to operate in defiance of the law. The South Korean government has found Uber’s
CEO Travis Kalanick guilty of breach of transport law.
All of this heavy-handed blowback has not stopped Uber so far. On the contrary, it seems to backfire, generating widespread awareness through media coverage and thereby creating new customers. Every time there is a taxi strike against Uber, the company sees a spike in the number of apps downloaded, sometimes doubling or tripling its customer base in a city within a matter of days.
The company actively courts the support of passengers in new target markets with email campaigns exhorting the public to sign petitions to allow Uber to move into their city. Its corporate growth
objectives are dressed up as a cause for public good, and then it uses its mobile app and social media tools to rally fans. This app-based populism cranks up the pressure on city government. The popular appeal of the Uber app, plus the fact that Uber provides transport services in distant reaches of the city where taxis are scarce, makes it very difficult for elected city managers to fight legal battles with much conviction. They are stuck between the rigid old top-down regulatory schemes of the industrial era and the fast-moving, bottom-up grassroots demands of a generation raised on smartphones.
HOW MUCH REGULATION IS TOO MUCH?
The conflicts that peer-to-peer markets like Uber and Airbnb have encountered with municipal and state governments raise a timely question about government licensing and regulation in general. Some economists decry government intervention in markets. To these critics, taxi medallions, permits, and other forms of licensing are state-enforced schemes that create barriers to job seekers, fix prices, and reduce economic liberty in labor markets. Uber and other collaborative consumption ventures present governments with a challenge: how much regulation is necessary in our hyperconnected era, and how much is that regulation worth?
Nearly one-third of US workers must obtain a license from the state. The number of jobs that require a license has risen from 5 percent in the 1950s to 29 percent today, according to Morris Kleiner, an occupational licensure expert and University of Minnesota professor. Writing on the
website of the Cato Institute, a US libertarian think tank, Kleiner maintains: “Occupational licensing is an enforced labor market monopoly that uses the police powers of the state.” Licensing creates
barriers to entry for laborers and drives up cost for consumers. In his research, Kleiner also found that there is often no relationship between licensing and the quality of the work.
Most people would agree that medical and pharmacy jobs and other health care work should
probably be subject to a licensing requirement. But for many other professions it remains unclear why a license is even necessary, especially when the license is required in one state but not another.
“License To Work,” a 2012 report published by the Institute for Justice, a libertarian public interest law firm, cites a variety of such professions, ranging from interior designer, shampooer, and florist to home entertainment installer and funeral attendant, as “occupations with no self-evident rationale for licensure.” Even in occupations where there is some degree of public safety risk, the training burden bears no relation to the risk. For example, the Institute for Justice report notes that “66 occupations have greater average licensure burdens than emergency medical technicians. The average
cosmetologist spends 372 days in training; the average EMT only 33.” The training burden for some professions is hugely inconsistent from state to state: Alaska requires a manicurist to train for three days, but other states require four or more months of training. The irrational and inconsistent nature of the licensing burden raises doubt about the need for licenses. High barriers to entry suggest that
public health and safety may be less of a factor than the goal of limiting competition among practitioners.
To cynics, occupational licensing begins to resemble a protection racket run by local government, as in pay us fees, do what we say, and we’ll protect you from competition. This is the exact opposite outcome from the consumer protection intended when these laws were introduced in the Progressive Era. Worse, a license is no guarantee of satisfactory service. Just because workers have completed a training program and passed an inspection doesn’t automatically mean that customers will be happy with the service.
Perhaps in the 1930s the best way to inspire consumers’ confidence in the services provided by strangers was to hire an army of government inspectors. Today, however, those official endorsements carry less weight because the mobile phone provides any customer with the instant ability to write a glowing report or a scathing critique of any service. Mobile review apps provide on-the-go access to ratings, rankings, recommendations, and commentary for every conceivable urban service from
doctors to plumbers, from pet grooming to gastropubs. The public is just one click away from a social media rating services like Yelp, Urbanspoon, or Foursquare that provide more transparency,
accountability, and details of the quality of service than any government inspection.
Clearly, we aren’t going to do away with inspections entirely. Yelp can’t tell us whether an aircraft has met safety requirements or that a restaurant kitchen is sanitary and rodent-free. But are there some cases in which reputation markets might replace government licensing? Again, Uber provides a useful illustration. On one level, Uber is a classic two-sided marketplace where buyers and sellers are matched, agree swiftly on price, and the business gets done. No cash changes hands. No haggling, no bargaining, no worry about meters and overcharging. But on another level, Uber is a reputation market where information about the behavior of participants is exchanged before entering a transaction. Because the buyer and seller both rank and review each other, all participants in the service are transparent. A surly driver can’t hide on Uber. Neither can a reckless driver or a driver with a poorly maintained car. Passengers will report the negative experience using the app on their smartphone. Any driver consistently ranked below four stars is terminated by Uber.
As Mark J. Perry, an economics and finance professor at the University of Michigan, puts it in an article on the American Enterprise Institute’s website: “Uber and Lyft are already very heavily regulated ride-sharing services, and in some ways they are regulated even more intensely than traditional taxis by a very ruthless group of regulators—the consumers who use their services. The issue really isn’t regulated versus unregulated ride services; the issue really is who is the primary regulator: a) government bureaucrats and legislators who are often captured by the regulated taxi cartels or b) consumers. And there’s no question that captured regulators almost always put the
special interests of the well-organized, concentrated groups of regulated producers like the taxi cartel over the public interest of the dis-organized, dispersed thousands/millions of consumers.”
On the flip side, rude passengers can’t hide either in a two-way reputation market. If a fare pukes in a car after a raucous night of partying, it will be reflected in the score the driver gives. After each trip, drivers post passenger scores to their version of the Uber app so that other drivers can make an informed decision before they accept a fare. Anyone who gains a reputation as an undesirable
passenger might well find themselves stranded.
App-enabled P2P markets provide better information in real time to consumers and providers than industrial-era government regulations and licensing schemes. The reputation market provides a check- and-balance system to ensure quality and customer satisfaction. Every participant, buyer or seller, has a strong interest in maintaining a positive reputation, and this desire for high ratings naturally leads to an overall increase in quality and good behavior on both sides of the market. The system penalizes bad behavior and incentivizes the good.