Economic surplus

Economic surplus

Uber may ‘do a Napster’, but ride-sharing is here to stay

Uber is a great innovation. It allows individuals to find better, more convenient ways to travel around our cities. It will reduce congestion, save people money, and create new jobs. So why is it illegal?

In case you have just emerged from a few years wandering around the desert, Uber is a company that uses a smartphone app to bring drivers and riders together. Broadly, in Australia, there are two products. Uber Black allows customers to book licensed hire cars through the app on an ‘immediate ride’ basis. UberX allows customers to contact (otherwise) private drivers who are registered with Uber in order to ride-share (for a price).

The losers from Uber are traditional taxi licence holders. And the taxi cartel is fighting back.

Uber Black is broadly legal. The cars are licensed hire cars. The innovation is that, rather than having to book the car in advance, Uber allows ‘as need’ bookings. This is a great benefit, but makes hire cars more like taxis.

The taxi industry has fought back to limit this legal competition – usually by trying to get the law changed in ways that hurt customers. For example, in Germany, the taxi industry was able to convince the courts to require Uber drivers to return to a depot after each job, preventing them from being conveniently located around the city. In France, the government tried to make Uber cars wait for 15 minutes between receiving a request for a pick-up and making the pick-up. This bizarre restriction was overturned by the courts.

The UberX ride-share service is more problematic.

Under current state laws, UberX is clearly illegal. The drivers do not have the legal licences, vehicle checks and insurance cover. But UberX is continuing to operate in Australia and in a range of other countries where it is illegal. It is doing this to force inflexible, out-of-date laws to change.

It is doing a Napster. And Napster went bankrupt!

Starting in June 1999, Napster was the original peer-to-peer file sharing service. It enabled internet users to share music, both legally and illegally. Needless to say, it quickly ran into legal problems. In late 1999 it was sued by the Recording Industry Association of America. This was followed by Metallica and Dr Dre who sued Napster in 2000 for piracy of their music. Napster lost its legal cases, was closed down in July 2001 and was in bankruptcy by 2002.

Napster didn’t change the law. But technology won anyway. Don’t believe me? Ask anyone under 20 how much they pay for the movies they watch and the music they listen to.

The parallels between Uber and Napster are strong. Napster fought the entrenched interests of the recording industry. Uber is fighting the entrenched interests of the taxi industry.

Both businesses used leading edge technology to tackle the entrenched interests.

Consumers loved both technologies and both technologies benefited from the publicity caused by their opponents. Recent UK protests against Uber led to an eight-fold increase in the number of people registering with the app. The court cases against Napster led to it becoming a household name.

But there are also differences. Despite some dubious practices (such as the infamous ‘mickey mouse’ amendment) recording companies and music artists are legitimately trying to protect their creative work. They deserve to be paid for it.

In contrast, the taxi industry is simply an outdated government-created cartel. Taxi plates are transferred for hundreds of thousands of dollars in many Australian states. The value of these plates reflects the loss to customers. Taxi plate numbers are restricted and fares are kept high. And you are stuffed if you want a taxi during peak periods.

The taxi drivers do not get the benefit of the cartel profits. Plate owners are investors, not drivers. The drivers lose out and are paid ridiculously low wages by the plate owners. Services like Uber would free up the drivers because they would be able to run their own cars.

Governments have two options when facing Uber. First, they can side with the vested interests of the taxi plate owners against the public. They can try to restrict the Uber services by vigorously enforcing the existing laws.

Alternatively, government can be proactive and change the laws to become more flexible and accommodate new forms of competition. This may mean that UberX drivers have to go through a police check and that their vehicles must meet minimum standards. Uber would claim that they already check drivers and vehicles but that is not the point. The new laws would apply to all ride-sharing apps, not just Uber.

The flexible approach would embrace Uber, Lyft and the many alternatives that copy them. It will benefit the public.

The rigid policy of enforcing current laws will inevitably fail. It will force ride-sharing services into the black economy. Just as file sharing continues today, ride-sharing will also continue. Just as Napster was the first of many peer-to-peer services, Uber is just the first of many ride-sharing services in Australia. The government can either adapt the laws so we gain by sensible regulation of these services. Or the government can fail. But even if Uber, like Napster, goes bankrupt, ride-sharing is not going to go away.