Hacks Get Hacked . . . and Fight Back
April 28, 2014 --
One of the most enduring features of economic growth is resistance from those threatened by innovation. “A man’s useful inventions,” wrote Benjamin Franklin, “subject him to insult, robbery, and abuse.” Historical examples abound. Perhaps most famously, 19th-century British artisans who came to be known as Luddites (allegedly in honor of one of their members, Ned Ludd) smashed power looms and other textile inventions of the Industrial Revolution that were threatening to substitute less-skilled machine operators for their skills. Even automobiles initially met with considerable resistance: Vermont once required a person “of mature age” to walk one-eighth of a mile ahead of any car in use and announce its impending arrival.
Per this automotive example, one of the most common forms of resistance has long been seeking—and often securing—government protection. Today, government officials throughout the world are targeting mobile apps that are bringing new competition to a long-sleepy industry: the taxi and car-for-hire sector.
For-hire transportation began in London in 1605 with the use of the hackney carriage. (Thus the label still attached to taxi drivers in some cities: “hacks.”) And while the modes of transportation have changed dramatically through the years, the industry has not. Characterized by “high prices, low service, and no accountability,” MIT economics professor David Autor told Bloomberg Businessweek, “It was ripe for entry [by startups] because everybody hates it.”
Enter Uber. Launched in San Francisco in 2009 and recipient last year of $258 million investment from Google Ventures and TPG (read the inspiring launch story here), Uber enables customers to request a ride via a smartphone app. They are then quoted a price and, upon accepting and providing their credit card information, a driver is dispatched to pick them up and take them to their destination. Passengers can rate their drivers and, intriguingly, drivers can rate their passengers. (You can find a lot more information about how Uber works here.) Uber has of late been spreading abroad—not surprising, given how protected this sector is around the world—and the intensity of political opposition to this spread speaks to the threat it poses to incumbent stakeholders.
Uber is now subject to restrictions, if not outright prohibitions, in many of countries—handicaps that are sparking strong debate. A Belgian court recently issued an order banning the use of Uber in Brussels, and fining offenders €10,000. A European Union commissioner, who has no doubt had to rely on the notoriously unreliable Brussels taxis, denounced the court order as “crazy” and “dangerous” in an interview: “This decision ... is not about protecting or helping passengers – it’s about protecting a taxi cartel.” In Miami, anyone calling for car service cannot be picked up for an hour—Uber’s average pickup time in big cities is 5-10 minutes—and must pay at least $70.
Restrictions on Uber are often being imposed by local taxicab commissions, which appear to be more interested in preserving local monopolies than opening the sector to competition. A former chairman of the New York City Taxi and Limousine Commission who fiercely opposes Uber cut, perhaps unwittingly, to the heart of the matter: “I’m hoping that people will now pay attention to what this actually is, which is an attempt to deregulate the taxi industry.” These actions are emblematic of what is known as “regulatory capture”—i.e., regulators reflecting the interests and biases of the industries they oversee. And while the Nobel laureate economist George Stigler first wrote about it in 1971, this phenomenon is clearly alive and well in 2014.
Like many other global companies facing ambivalence—or worse—from national governments, Uber has incorporated policy advocacy into its overall business strategy. The company fields a 12-person public-policy team staffed by “hustler wonks” who are “scrappy and lean” in circling the globe to address policy resistance to Uber when and where it arises. (Information about many of its regulatory battles can be found here.)
The global fight over Uber carries three important lessons about innovation and resistance thereto. First, innovations for which new products can be produced at near-zero cost—like so many innovations of the ongoing information-technology revolution—can proliferate stunningly fast. Barely five years old, Uber today is offered in 100 cities spanning 35 countries. Yes, robust demand has helped spur this growth—but contrast this with the generations it has taken for substantial global penetration of high-marginal-cost innovations in history, such as the automobile.
Second, older and established incumbents are rarely the companies that radically innovate—even though so often the market signals and know-how for such disruptive change spend years staring these incumbents in the face. The lull of protected rents is time and again a powerful spur to inertia, in taxis and in many other industries. This insight was so famously articulated by the strategy scholar Clay Christensen in his classic book, “The Innovator’s Dilemma.”
Third, the aggregate gains innovation brings to many—here consumers, some drivers, and Uber stakeholders—still entail losses to some, and those who are hurt so often exert great political effort to mitigate prevent these losses. The fight over Uber is a skirmish in a larger struggle that has spanned the globe and centuries over the ability of entrepreneurs to deliver breakthrough products absent unnecessary interference from regulators, the judiciary, and elected officials. Yes, innovations can dazzle. But those threatened can be determined to stifle the new ideas, dazzle be darned. If business and government leaders do not find ways to support those harmed by innovation without harming innovation itself then standards of living are at risk.
The ultimate outcome of this hacking of the hack industry remains very unclear. Even Uber cannot rest easy. Earlier this month competitor Lyft received $250 million in funding from investors including Andreessen Horowitz and Chinese Internet giant Alibaba. We’re clearly entering a new era in the taxi industry. And it’s about time.
Articles © 2014 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2014 Trustees of Dartmouth College. All rights reserved.