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Economic Issues

US: Why Innovation And Regulation Don’t Mix – by Larry Downes

At the end of a long trip last week, I took a taxi from a BART mass transit station in San Francisco’s East Bay back to my house a few miles away.

As the law requires, I could only choose the first cab in line at the taxi stand, which was filthy.  The driver begrudgingly popped the trunk, which was full of garbage, so I could stow my own suitcase inside.  Throughout the ride, the driver never stopped talking on a headset connected to his cell phone, blasting the radio in the back seat so I couldn’t overhear his private conversation.

The driver  had no idea where he was going, even though we weren’t leaving the city in which he picked me up, and asked repeatedly for me to tell him how to get there, directions he ignored, nearly missing every turn.  He said nothing when I paid him, and sped off before I’d made it to the curb.

The sad truth is that there’s nothing even slightly unusual about that experience, and certainly no point to complaining to the cab company or any regulator.  I got to my destination, I was charged what the meter said, and no one was killed.  In regulated industries, that constitutes success.

So it’s no wonder that in the bizarro world of licensed taxicabs and limousines, incumbents faced with the sudden arrival of disruptive technologies that could vastly improve their quality, efficiency and profitability but which also introduce new competitors and new supply chain partners, respond as if their very existence is threatened.  It is, of course.

Enter Uber.

Uber, which launched in 2009, allows users to arrange for limousines and, in some cities, taxicabs, using a smartphone app.  Uber doesn’t provide its own vehicles or operators, but works with existing licensed drivers to help keep already-rolling vehicles busy transporting customers. Riders can track the location of their dispatched drivers using GPS, and pay directly on their phones.  They can also rate the drivers.

These are all by now standard uses of off-the-shelf mobile technology.  There’s nothing especially novel, or proprietary, about the platform Uber has built.  Nothing, in any case, that couldn’t or shouldn’t have already been implemented by existing taxi and limo services.

Instead of responding to a new kind of virtual competitor with better products and services, however, the highly-regulated taxi and limousine companies in every city Uber has entered have instead gone the route of trying to ban Uber’s existence.

They’ve called on state and local regulators to declare the service in violation of decades-old laws outlawing unlicensed ride services, often based on technical definitions of “meters,” “dispatch,” and “taxi.”

At the annual meeting in Washington last month of the Congressional Internet Caucus, House Judiciary Committee Chairman Bob Goodlatte (R-Va.), who had just taken his first ride using Uber, interviewed company CEO Travis Kalanick on the regulatory barriers the company and other technology-enabled ride services face.

In some cities, Kalanick told the Congressman, pitting the regulators against the new services has worked, at least so far.

Uber can’t operate in Miami, for example, where existing laws were clearly drafted to protect taxicabs from competition even from other licensed services.  Limousines are prohibited from picking up passengers less than an hour after receiving a reservation, for example, and the minimum fare by law is $80.   The number of limousine licenses has long been limited to five hundred and fifty.

Indeed, according to Kalanick, the company has spent much of its young life fighting in courts, public utility commissions, and city councils for the ability to offer any service at all.  Uber has already fought charges, fines and bans in San Francisco, ChicagoMassachusettsNew York, Washington D.C, andrecently in Toronto, where city officials have charged the company with dispatching rides without a license.

In D.C. and San Francisco, however, Uber has successfully fought back, scoring dramatic reversals.   Regulatory bans and stiff penalties have transformed into promises to liberalize if not to rethink entirely the rationale behind tightly-regulating paid ride services.  The D.C. city council, for example, suddenly reversed an outright ban on the service, creating in December a new class of digitally-dispatched rides.

And in California last month, the state Public Utility Commission entered into an agreement with Uber that allows it to continue operating while a rulemaking is pending to revise existing regulations.

The PUC is also considering changes that would allow Uber and other mobile app-based services, such as Lyft and Sidecar, to facilitate consumer-to-consumer ride-sharing. Such services are  part of a growing new sharing economy in which ordinary people can make money using their personal assets to offer everything from sleeping space (e.g,, Airbnb) to parking to pet boarding and handyman services.

These new companies are already causing disruption to long-mature supply chains.  Avis recently paid $500 million for car-sharing service Zipcar, largely for access to its network of nearly 1 million members.

Oil and Vinegar:  Innovation and Regulation

From an economic standpoint, virtual asset managers and sharing services take advantage of ubiquitous mobile devices and increasingly high-speed broadband networks to maximize the use of skills and property that otherwise lies fallow.

By improving overall social value with minimal transaction costs, they fulfill the nearly eighty year-old dream of Nobel prize-winning economist Ronald A. Coase, who first identified the possibilities of technology-driven efficiencies in his profound 1937 essay, “The Nature of the Firm.”

So why are incumbent regulated industries fighting these developments?  And why are the regulators who police them turning around instead to slap down the innovators before they’ve even had a chance to try new approaches to old businesses?

The short answer is that innovation and regulation simply don’t work together.  Regulated industries—including strictly licensed services from lawyers and doctors, public utilities such as power and water companies, and government-provided services including roads, bridges, and the post office—operate outside market-based systems. Competition is prohibited, even criminalized.  Since innovative technologies are a particularly ruthless kind of competitor, they are directly or indirectly banned.

But why do governments choose to displace the market in the first place?  In exchange for rules that sharply limit if not ban industry disruptors, companies in regulated industries agree to a wide range of public interest concessions, including price controls, guaranteed access, pre-approval on changing or eliminating services or offering new services, and extensive licensing requirements, oversight, and continuing education. That, at least, is the theory of regulation.

Taxi and limousine services operate in a non-market economy because cities and states long-ago determined that the benefits of eliminating competition outweighed the costs.  So it’s worth asking again what those costs and benefits are, and whether the balance, thanks to the availability of disruptive new technologies, has changed.

The benefits of closely overseeing ride services are obvious—or, at least, were obvious when rules went into widespread existence starting in the early 20thcentury.  They include ensuring that drivers and their vehicles are safe and adequately insured, that passengers are charged reasonable and predictable fares, and that limits are placed to protect drivers and riders alike from having so many vehicles for hire on city streets that no traffic can actually move.

The costs of removing competitive pressures from industries are also significant.  Chief among them:  in the absence of market dynamics, there are few if any incentives to innovate.  Why should the driver of my last cab ride spruce up his vehicle, when every taxi at the cab stand charges the same fare and goes whenever its turn comes up?  When price is controlled and new entrants are prohibited, only a fool would spend money to differentiate their product or service.

That’s surely the state of the taxicab business in most cities.  Drivers and companies can only charge what the local taxicab commission allows.  There’s no reason to improve their service, especially not by investing in technology that makes quality of service more transparent or which makes delivery of service more efficient.

And they don’t.  Look inside a typical taxicab today and you’ll find little in the way of technological sophistication.  Just a meter (introduced in 1897), a two-way radio (circa 1940), and maybe a GPS device (not likely–after all, getting lost earns you more money).

There is also the problem political scientists call“regulatory capture.”  Since regulators and the industries they oversee deal almost exclusively only with each other, they tend over time to develop a customer-provider relationship, in which both have a vested interest in continuing the regulatory system long after the public interest benefits have been vastly outweighed by the anti-innovation costs.

The regulator becomes the industry’s cheerleader, and regulations shift subtly from protecting the public interest to protecting the status quo.

So it’s only rational that when disruptive technologies enable new innovations, regulated industry incumbents run the other way, working to ban rather than embrace them.  Unfortunately, the only tool in their arsenal is to wake up the regulators and demand they use the full force of the state to put a stop to such things.

That tactic usually works, and would have worked to stop new ride-dispatching services cold if not for another disruptive technology:  social networks.  Uber and its kin have been saved not by spending equal amounts of money lobbying, litigating, and performing other unsavory acts, but by mobilizing a vocal army of  loyal customers, who Tweet, Facebook, blog and show up at city council meetings to shout down the illogic of traditional regulators.

When the D.C. City Council introduced an “Uber Amendment” that would have shut down the service last year, for example, Uber’s customers organized themselves both online and off, forcing council members to do their back room deals with taxi services in the open.  Courage quickly failed.

 The Lessons of Uber Go the the Heart of the Internet Itself

There’s a lesson there for all start-ups, regardless of the kind of disruption they have in mind.  Early users aren’t just your design team, they’re also your lobbyists.  And they can be remarkably effective.

But the bigger lesson is about the relationship between innovation and regulation generally.  I want to be clear here. Unlike Uber CEO Kalanick, who suggested to Rep. Goodlatte that Congress should consider stepping in to supersede all state and local car service rules, I don’t believe we should immediately eliminate all regulations.  Safety, predictable prices, and adequate insurance are still important public interest goals that could justify some level of continued government oversight.  If not for taxicabs, than certainly for doctors and power companies.  Maybe even banks.

Uber and its start-up peers are the darlings today of  consumers and innovation-minded politicians alike, but watch what happens the first time a passenger is assaulted by an inadequately-screen driver, or when a shared-ride vehicle gets into a serious accident without adequate insurance.

No doubt city councils and limousine commissions will over-react to that too.  And at that point it will be too late to ask if technology-based monitoring tools—including user ratings, credit card payments, and GPS tracking—can do a better if not perfect job of minimizing such harms than continued government oversight, and at a lower price.

That’s the real lesson to take from the continuing saga of Uber and other new services that expose the wildly unbalanced cost-benefit equation in today’s regulated industries, public utilities, and government services.

It’s a lesson that goes far beyond the stagnant, putrefied world of taxicabs and directly to the heart of the technologies that make services such as Uber possible.  Consider another story from this week.  Following a wildly inaccurate report earlier this week in The Washington Post that claimed incorrectly that the FCC was planning to build free nationwide “Super WiFi” networks, otherwise reasonable people were heard to suggest that doing so would be a good idea.

This fantasy fits nicely—perhaps accidentally on purpose—with the narrative of an extreme group of Washington insiders, who argue that Silicon Valley has done such a poor job of deploying Internet technologies that we have no choice but to turn the job over to the federal government.

Selectively abusing speed, price, and adoption data (when they bother with data at all), this “America-last” crowd compares U.S. broadband progress to that of countries with small geographies, concentrated urban populations, and a long history of government-owned and/or subsidized telecommunications industries.

No doubt city councils and limousine commissions will over-react to that too.  And at that point it will be too late to ask if technology-based monitoring tools—including user ratings, credit card payments, and GPS tracking—can do a better if not perfect job of minimizing such harms than continued government oversight, and at a lower price.

That’s the real lesson to take from the continuing saga of Uber and other new services that expose the wildly unbalanced cost-benefit equation in today’s regulated industries, public utilities, and government services.

It’s a lesson that goes far beyond the stagnant, putrefied world of taxicabs and directly to the heart of the technologies that make services such as Uber possible.  Consider another story from this week.  Following a wildly inaccurate report earlier this week in The Washington Post that claimed incorrectly that the FCC was planning to build free nationwide “Super WiFi” networks, otherwise reasonable people were heard to suggest that doing so would be a good idea.

This fantasy fits nicely—perhaps accidentally on purpose—with the narrative of an extreme group of Washington insiders, who argue that Silicon Valley has done such a poor job of deploying Internet technologies that we have no choice but to turn the job over to the federal government.

Selectively abusing speed, price, and adoption data (when they bother with data at all), this “America-last” crowd compares U.S. broadband progress to that of countries with small geographies, concentrated urban populations, and a long history of government-owned and/or subsidized telecommunications industries.

Somehow, contrary to what every consumer with an Android phone, iPad or unfathomable access to diverse programming content experiences every day, they find nothing but misery and despair.  Strangely, some of the very same people who fought against last year’s attempted takeover by the U.N. of Internet governance are now calling for the U.S. government to regulate if not nationalize broadband network providers.  All in the name of the public interest.

But how about the cost-benefit data they don’t bother with?  One would think that anyone who argues the government would do better as the provider of broadband Internet would start by looking at our track record in building, operating and maintaining other public infrastructure.  You know, like roads, bridges, the electrical grid, and drinking water.

The results are, not surprisingly, poor.  As recently as 2009, the American Society of Civil Engineers gave our existing, largely government operated, funded, or closely regulated infrastructure an overall grade of “D.” They estimated that poor planning, bureaucracy and a total failure of maintenance would cost over $2 trillion just to rehabilitate.  But you don’t even need the data to know that—just get on the road.

It’s hard to understand the logic or the analysis of those who think the way to accelerate Internet deployment and adoption is to treat it like a public utility or, in some extremists’ view, to make it a government program.  We can’t even maintain the last generation of infrastructure.  Why on earth would we want to nationalize the private networks that are actually working?  And then expect the government to do the innovating thereafter?

Who besides legal academics and self-styled consumer advocates could imagine that having the federal government build the next generation of broadband network infrastructure—or any other new infrastructure—would magically end up with something better than our crumbling roads, bridges and schools?

With no incentive to innovate, our regulated industries may offer something approaching universal access and consistently (mediocre) performance.  But they have not only failed to keep up with technologies every 13 year-old takes for granted, they have failed to maintain even a minimal level of quality.  And their captured regulators can hardly be expected to do more than regulate to the status quo.

So let’s get real.  Let’s not expand our failed, lumbering regulatory state, whether in taxi and limousine services, broadband Internet, or anywhere else where today’s technologies have the potential to enable exponential improvements in quality, price, and efficiency.

Instead, let’s give innovation a try.

Source: Forbes.com

 

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