|by Nick Charney|
Last week Kent shared some thoughts on Uber's arrival in Ottawa. If you haven't heard of Uber, they are a peer-to-peer ride for fee service that directly connects available drivers with people seeking rides for a fee, levering their respective GPS phone coordinates, processing fares electronically and providing online reputation systems to rate riders and drivers. If you want more information on how Uber works, I suggest watching either Mashable's advertorial video or the Uber driver training video - it will give you a better sense of what Uber is all about.
Given that this is an area I'm interested in and have written about in the past (See: The Sharing Economy, Disruptive Innovation, and Regulatory Oversight) I thought it would be good to come back to it and give it a once over.
If you haven't yet read Kent's reflections (See: Why the Sharing Economy is Inevitable and We Need to Think Differently), I suggest you have a read-through and then circle back here as I'll be revisiting some of his arguments as well as some of my own; the goal of which is to highlight some concerns that policy makers and regulators ought to think about when they are considering how to handle disruptive innovation in established (and regulated) markets.
Just a heads up that this is a long wonkish post. Skip to the bottom for a TL;DR of key considerations.
On the inevitability of Uber and its ilk
While I agree with Kent's basic assertion that Uber and its ilk are inevitable (and that this inevitability ought to give us pause to rethink governance), I would further qualify that inevitability by saying that it is the larger phenomenon of disruptive innovation that is inevitable and not necessarily the peer-to-peer businesses of the sharing economy that are currently being built. While this nuance is likely to be overlooked, it is one of the most important things to keep in mind when examining the issue. Uber is simply à la mode right now. It is a part of the peer-to-peer trend that represents where businesses are right now, reflects where business have been already and hints at where businesses might go in the future. In other words, when considering Uber, it's important to remember that it is neither the first disruptive innovation the transportation industry has seen nor will it be the last.
Key lesson: If policy makers and regulators react to Uber instead of solving for the larger phenomenon of disruption they will find themselves in the same predicament they face today again five years from now.
On reducing information asymmetry and increasing supply
Kent rightly argued that peer-to-peer businesses correct market failures rooted in information asymmetry by more directly connecting supply and demand. People have historically paid a premium to use taxis because taxis minimize the asymmetry between sellers and buyers by signalling their availability: I'll wait in the taxi stand, you walk over and hop in. It is important to note that Uber doesn't just correct the information asymmetries in this particular market but it also boosts the overall supply of the good in the marketplace which in turn affects the overall dynamics at play in the market (including taxation, which must be dealt with).
Key lesson: Policy makers and regulators need to understand how the elimination of information asymmetries and the introduction of additional supply affect the market and whether or not those effects are a net positive or a net negative.
On the user experience
With the exception of perhaps walking out of a popular hotel or an airport in a major urban centre, grabbing a cab is literally demand physically LOOKING for supply. A rider needs to either find a taxi stand, call a dispatcher, or wave down a cab. The experience is often one categorized by waiting (when will the cab show up?), uncertainty (will the cab show up?) and competition (what happens if someone takes my cab or my cab takes someone else?). While the experience is functional, it is also opaque and lacking.
On the other hand, Uber has been actively designed around the users from the ground up to be seamless. Open up the app in your smart phone (which you love), request a ride by providing from-to coordinates, get a text message confirming your driver's details within minutes, watch the ETA countdown clock in real time as your driver's GPS coordinates approach your own. You know precisely when your Uber will arrive, you're assured they will arrive and you know they are coming specifically for you. I'm not sure you could ask for a better user experience.
That of course doesn't mean that the user experience once inside either a Taxi or an Uber is any different, at least not while in transit. The good (i.e. transportation from point A to point B) is essentially the same though the experience likely varies as much within the taxi and Uber ecosystems as it does across them - there are all kinds of dynamics at play that could affect your trip. The main points of divergence here seem to be cost, how the transaction is completed and the feedback loop between drivers and riders. On the whole, I'd give Uber the edge on all three of these elements. It's cheaper. It's automated. It's got feedback built in.
The supply side of the equation is a bit harder for me to parse, not ever having been a taxi or Uber driver (though I've spoken to many of the former while I was a doorman at an up-scale hotel and am actively considering exploring the latter). My understanding of the taxi industry is such that there are considerable start-up costs and barriers to entry (i.e. regulation): licenses, insurance, training, trade unions, etc. Whereas Uber provides a fairly straightforward sign up and validation process (which I tested); it has fewer barriers to entry and seemingly (in the US at least) has even done its homework on the issue of insurance.
But what about the user experience of the drivers? Well again, (based on my experience) taxi drivers tend to either find a taxi stand and get in the queue, or wait for call. They move people from A to B often without knowing where the final destination is until that person enters the cab and at times become frustrated with riders taking short trips. They have to handle cash payments as well as debit and credit transactions and file financial records accordingly. They likely work a 12 hour shift and pass or rent their license to another driver who does the same for the remaining 12 hours of the day. Uber, on the other hand, allows you to work when you want, processes payments automatically and directly connects supply and demand when and where it makes sense to do so (for a 20% cut of the transaction, in case you were wondering).
Key lesson: Policy makers and regulators ought to expect disruptive innovation to occur wherever regulation distorts market forces and creates externalities and where technology can be deployed elegantly to more efficiently connect supply and demand and/or improve user experience.
On regulating disruption
Broadly speaking, regulation by its very nature distorts markets and in so doing creates favourable conditions for incumbents and creates barriers to new entry. While regulation can easily be adjusted to reflect sustaining innovations within their portfolio they struggle when asked to balance the potential benefits of disruptive innovation and the public interest. This likely happens for a number of reasons:
- Governments may fail to differentiate disruptive and sustaining innovations and if they do they decide to treat them in the interest of ‘fairness’ despite the regulation not making sense when applied.
- Governments may have vested interests in maintaining enforcement systems that validate and support their existing regulatory regimes (i.e. regulatory capture).
- Government interests may be better served by incumbents (at least in the short term) than by disruptive new entrants. Incumbents provide more steady employment, generate higher tax revenues and are already subject to regulation. Whereas disruptive firms often employee fewer people, generate fewer tax revenues (or create new economies that avoid taxation altogether) and view regulation as a barrier.
- Governments may have to contend with the concerted efforts of the incumbent lobby while new entrants who don’t have the resources to lobby are forced to try to amplify public support for their businesses.
- prices to riders and costs to operators
- licensing regimes / monopoly protections
- public safety
Perhaps it's an unfair question. While I don't think a simplistic online reputation system can effectively replace regulatory oversight as an effective means of ensuring public safety, within this specific context I'm not sure it has to. What are the actual incident rates for car accidents in the city? Is there any reason to suspect that the introduction of Uber will raise the number of incidents? What evidence can be brought to bear to support it?
Even if something does go horribly wrong – and invariably it will – ought we judge every Uber driver based on the actions of a single driver? I'm not sure that taxi drivers would want the same type of judgement thrust upon them given what happened last year. Besides, whether or not you are getting into a taxi or an Uber you are still getting into a car with someone who ostensibly amounts to a stranger. If nothing else, the adoption rates of Uber seem to suggest that people either don't differentiate the risk, don't perceive the risk, or are simply willing to accept the risk associated with using the service. Moreover, at a more fundamental level, you entrust your safety to strangers in cars everyday whenever you share the road with them on your commute into work in the morning and back home at night.
Key lesson: Policy makers and regulators should focus on maximizing the public good and think about how to best achieve that from a citizen centric position, not a government centric one.
On the politics of Uber
Bluntly, the arrival of Uber in Ottawa likely seems like a no-win situation for politicians having to wade through the policy options. Coming down hard on either side is likely to be met with negative political consequences, as is inaction and even compromise.
Key lesson: Policy makers and regulators ought to expect that politics will play heavily when negotiating government responses to disruptive innovation. Politics matter, to govern is to choose.
Recap: Lessons for Policy Makers and Regulators looking at Disruptive innovation
- If policy makers and regulators react to Uber instead of solving for the larger phenomenon of disruption they will find themselves in the same predicament they face today again five years from now.
- Policy makers and regulators need to understand how the elimination of information asymmetries and the introduction of additional and/or new supply affect the market and whether or not those effects are a net positive or a net negative.
- Policy makers and regulators ought to expect disruptive innovation to occur wherever regulation distorts market forces and creates externalities and where technology can be deployed elegantly to more efficiently connect supply and demand and/or improve user experience.
- Policy makers and regulators should focus on maximizing the public good and think about how to best achieve that from a citizen centric position, not a government centric one.
- Policy makers and regulators ought to expect that politics will play heavily when negotiating government responses to disruptive innovation. Politics matter, to govern is to choose.