Uber’s battle in Seattle highlights the irony of regulation hurting the consumers it was designed to help

March 24

To serve consumers around the world Uber has to fight dated regulations. (Junko Kimura-Matsumoto/Bloomberg)

On a recent trip to Los Angeles I conducted an experiment in disruptive innovation.  From Los Angeles International Airport to downtown, I took a metered taxicab.  From downtown to the airport the next day, I used UberX.

My taxi driver failed on every measure of quality.  His vehicle was dirty, he played loud music even when I asked him to turn it down, and he didn’t know how to get to one of the busiest streets in downtown Los Angeles.  I gave him the address three times before he was able to punch it into an awkwardly-mounted GPS navigation device near his dashboard.

Though I had been handed a form at the taxi stand that reminded both of us a trip downtown was a flat rate of $46.50, he insisted I pay the metered fare when I arrived, about $10 more.  Though his cab was outfitted with a credit card reader, he pleaded with me to pay him in cash, and when I told him I didn’t have that much cash, he muttered under his breath and simply popped the trunk so I could take my own luggage out.  (I had, after all, already tipped him on the credit card.)

On the way back, my UberX driver (who had a customer rating of 4.9 out of 5) arrived within a minute of my pressing the order button.  He drove a new, clean car, turned off the radio before I got in, and knew where I was going without my having to explain it.  Using the paid express lanes, he got me to the airport in record time.  As I left the car, my account was automatically charged the fare, which like a traditional taxi was based on time and distance.  But in this case, the total including tip was $29, about half the cost of the taxi.

This of course is just a single example, but if other riders consistently have similar experiences, traditional taxi and limo services have a big problem.  In short, the technology-enabled UberX is both better and cheaper than the traditional service. It’s a great example of a “Big Bang Disruptor.”

Big Bang Disruptors make innovative use of technology—in this case, the existing mobile broadband ecosystem, GPS services, payment processing and a little bit of custom software all wrapped up into a smartphone app—to beat incumbents on all of the traditional measures of competitive advantage.  They enter the market better right from the start on price, performance, and customer interaction.  It’s no wonder such innovations often spread like wildfire among consumers.

In many of the industries the entry of a Big Bang Disruption signals the end of business-as-usual for the incumbents, who have no time or expertise with which to respond to a thoroughly superior alternative.   It may not be too late for existing for-hire ride services to apply the same technologies, but after decades of cozy relations with regulators who keep supply artificially low to eliminate competition, the industry simply doesn’t know how to innovate.

So traditional taxi and limo services are responding the only way they know how to—by using legal challenges and regulatory obstacles to block or even ban the services.  In some cities, including Portland and Miami, they have so far been successful.  In other locations, including the District of Columbia the start-ups have managed to deploy their fanatical customers to help put pressure on local regulatory boards to reverse earlier bans.

What started out as a fight over price and quality has turned into a fight to win the hearts and minds of regulators.

That fight took an ugly turn this month when Seattle’s Committee on Taxi, For-Hire and Limousine Regulations voted to limit the number of vehicles UberX and two similar services could operate to 150 each, down from an estimated 2,000 that had been in service.

Explaining her rationale for the vote, city council member Sally Clark, who chairs the Taxi Committee, explained, “No, I don’t want to ‘temporarily’ kill innovation, but I do want to buy a year for the taxi world to adapt.”

Clark’s rambling blog post and a subsequent one written after the vote give all sorts of explanations as to why it is in consumers’ best interests for governments to protect taxi and limo services from market competition even when every other business large and small must compete on its own merits.  These include concerns over the training of drivers, adequate insurance, and protecting consumers from unfair pricing.

She also notes that most of Seattle’s drivers are immigrants.  And those immigrants may have had to pay as much as $150,000 on the “gray market” for the right to operate for-hire vehicles, because, Clark notes without irony, Seattle hasn’t issued new medallions for over twenty years.  (The City Council issued a moratorium in 1990).  And anyway, she concludes, companies such as Uber have raised millions in “massively successful” venture financing rounds, suggesting, I guess, that they are all run by fabulously rich people.

The incoherence of regulators such as Clark isn’t much of a surprise.  Like the taxi and limo drivers they oversee, the regulators haven’t had to deal with disruptive technological change for decades.  The committee was created to protect consumers, of course, but after all this time working exclusively with the industries they regulate, it’s not surprising to find something at work akin to what psychologists call Stockholm Syndrome.

In regulated industries, consumer protections have a nasty habit over time of turning into industry protections—in this case, artificially keeping supply lower than demand, so drivers don’t have to improve their price or performance to stay in business.  Everyone makes the same amount of money, but that means no one has any incentive to innovate.  Consumers, well, up until now, consumers haven’t had a real voice in considering the trade-offs.

Put another way, it’s certainly possible that twenty four years ago, Seattle’s City Council exhaustively studied road conditions, traffic patterns, commuting and travel behavior, mass transit ridership and environmental concerns, and reached the conclusion that the city had the optimal number of for-hire vehicles on the road.  And it’s possible that not a single one of these factors has changed in any significant way, or that every change was balanced in such a way that magically kept the optimal number of licenses at the number that was set in 1990.

But what seems more likely is that the incumbent license holders long ago convinced the regulators to eliminate the unpleasant side effects of a more competitive market, dressing up their arguments in high-minded principles of preserving the American Dream for drivers and keeping consumers safe from unregulated fly-by-night alternatives.  Everyone’s winking at everyone else, and ramping up the rhetoric.  Both the regulators and the regulated are caught in a deadly embrace of corruption, hypocrisy, and laziness.

Like the drivers, lawmakers can’t understand why they are being forced to change their ways.  “You’re doing so many things right. You have a lot to teach regulators about how to strip back over-weight and redundant regulatory constraints.  If only you would communicate and collaborate,” Clark lamented before the vote.  “How can you raise this much money, have what I imagine are battalions of lawyers and not have a better plan for how to engage with policymakers? It’s amazing how many simultaneous city and state-level wars you’re waging.”

But it’s the technology of services such as UberX, more than the entrepreneurs and venture capitalists who are unleashing them, that are waging war against the barnacled laws and rules that have simply lost their purpose.

And it may well be that the same technology that makes UberX possible has also become a far more effective regulator than out-of-touch regulators.  Consumers, not bureaucrats, rate the quality of the vehicles and the rides, and do so at the time of service, not at random checkpoints.  The smartphone calculates the cost of the ride and takes payment, reducing the opportunity for drivers to cheat the rules.  Constantly-updated data lets everyone know where traffic is worse, and when there are more drivers than passengers, or visa-versa, optimizing the number of vehicles on the road not once every twenty-four years but in real time.

That’s one reason I refer to the better and cheaper innovation as a big bang.  Once consumers embrace something that’s clearly superior, you never know who will be disrupted.

Downes is co-author with Paul Nunes of “Big Bang Disruption:  Strategy in the Age of Devastating Innovation” (Portfolio 2014).   

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