Photo by Frank Gruber on Flickr.
DC Councilmember Mary Cheh (Ward 3) stepped into a firestorm yesterday when car service Uber claimed that the council was about to forbid lower prices for its service. This fight resembles so many policy debates around technology, because it’s a choice between two fundamental philosophies.
Should a market have a number of rules which define ahead of time what companies can do, or should it create space for companies to try innovative things, knowing that many will fall amid competition? From Uber to patents to telecom policy, this is perhaps the central debate in technology policy today.
Cheh thought she was helping Uber. The company and DC regulators are embroiled in a dispute about whether the service is legal. That’s because “black car” sedans can pick up passengers, but only to transport them for fixed fares deermined ahead of time. Want to charge a rider by time and distance at the end of the ride? Then you’re a taxi and have to charge set taxi rates, say DC regulators.
Uber claims their service is legal. Cheh’s amendments would have made it unambiguously legal, but only so long as the service charges 5 times the price of a taxi for the “flag drop,” the initial amount on the meter at the start of a ride. Perhaps not surprisingly, Uber’s flag drop charge was exactly 5 times the current taxi flag drop fee.
The political details have been reported widely in the press. Uber members flooded Council inboxes, and Jack Evans (Ward 2) claimed to have received 5,000 emails. A number of councilmembers, like David Catania (at-large), said they didn’t want to be setting policy around protecting the taxi industry, while Marion Barry (Ward 8) stood with taxi drivers.
Cheh decided to pull her amendments to give her a chance to rework them, likely in consultation with Uber. She said she did consult with Uber and thought they had a compromise; Uber’s CEO says they never agreed to this language.
This story is a classic case of Silicon Valley meets Washington, even more literally than usual. Many startup companies encounter the world of laws, lobbying and legislation and find the culture gap baffling. It’s not just Congress (which, for that matter, steps all over the District of Columbia government all the time); it’s state legislators too, like the California state senators who tried to ban Gmail when it came out.
Often in these kinds of cases, everyone means well. Cheh is one of the Council’s most thoughtful members and a strong supporter of transportation choices. She’s no enemy of innovation; her staff organized a ride in Google’s self-driving car and she raved about the experience.
The permission model or the innovation model?
But there is still a culture gap here. Specifically, there are two ways of thinking about how business meets law: the permission model and the innovation model. In one, there’s some gatekeeper that has set out a list of things you can do and things you can’t. If you want to do something different that nobody has done, you can get permission from that gatekeeper to allow it, if it has enough merit and/or you have enough influence. In the other, you can do what you want, unless it’s so harmful that someone takes action to stop you.
Neither model is really purer or more original than the other. Some businesses have always worked according to one type, others in another. Mercantile England gave charters to companies to settle and trade in the New World. And the gatekeeper is not always the government. For instance, food marketing has always been more of a permission model: in order to get anyone to sell your new food, you have to get grocery stores to give it space on shelves, which generally means paying them.
Television has also always been a permission model. The first television networks got the rights to broadcast on certain frequencies from the government, which was the gatekeeper deciding which companies could be broadcasters and which couldn’t. But when cable came along, the cable companies became the gatekeepers, and now they negotiate with channels about carrying their content or not; periodically, these negotiations spill out publicly when a channel runs ads saying that a cable company is going to cut off customers’ access to that content.
Zoning converted an innovation model—you could build whatever you wanted—into a permission model where you have to get the okay from a zoning board to build something outside set parameters. The early frontier was more of an innovation model, where land was just about free and you could go set up a farm without having to buy someone else’s land first.
The innovation model built Silicon Valley
Silicon Valley enjoyed the innovation model for a very long time. The Internet and protocols like TCP/IP and email, developed by academics, allowed anyone on one system to connect to any other system and share information. People could build websites that didn’t need to get permission from the equivalent of the cable company. AOL and similar services had a more cable-like online offering at first, but the open Internet won out because users preferred it.
That’s starting to change in a few ways. One is that fewer cable and phone companies control access to subscribers, and are starting to try giving some favored applications more privileges, especially to get around data caps, than others. A second is patents.
Patents turn an innovation system into a permission system by carving up the space of possible things you could do but haven’t yet, and giving them to anyone who comes along and pays a fee to grab that piece of idea land. Patents don’t stop someone from building a product, but they do force them to check with everyone who has patents in the area first and get their permission.
That impedes someone from building a better website that effectively competes with an existing one. It even stops organizations like transit agencies from doing the mostly-obvious, like letting riders track trains and buses in real time, because a “patent troll” has the patent and wants to extract money from anyone stepping nearby.
A number of technology/
economics writers, like Tim Lee, have been talking about the destructive effects of patents for some time, but running into resistance from an interesting quarter: lawyers. It seems that most lawyers, accustomed to the world of law where everything is set up with a rule, find the permission system of patents more familiar and comfortable than the innovation model. The problem is, familiar doesn’t mean good; patents are slowing down Silicon Valley and favoring large, established companies.
Uber brings the innovation model to permission-oriented taxi regulations
What does this have to do with Uber? The Cheh amendment seems to be a standard regulatory approach. Uber may be illegal now. Pass a law that lets them do what they are doing. But to minimize the impact, limit the law to only let them do what they do now, and not just anything; if they want to do something else, maybe there can be another law.
Uber is coming at this from the Silicon Valley angle. Just do something and see if people like it. If they do, grow it. They understandably chafe at being given a box that circumscribes their existing business model but also walls off potential future directions they might evolve.
Riders also don’t benefit from these rules. If Uber can compete with taxis, why not? Most people feel taxis could be a lot more comfortable, have better technology, and be safer. Giving riders more choices could mean some taxi companies thrive and others go out of business. That’s competition, and it’s healthy.
Cheh’s bill also tried to address these taxi problems. It included provisions to force taxis to upgrade their equipment, start taking credit cards, and more. But it went about that, again, in a regulatory way. Rather than setting some standards (or just encouraging competition), it gave an exclusive contract to one company to put one set of technology in all cabs. That doesn’t foster as much innovation as the alternative since the winner has the exclusive right to make the only product in this space.
The best way to improve taxis is to help riders find the best ones. Smartphone apps can start to do this and more and more people across the income spectrum are starting to have smartphones. As I recommended in a Post op-ed in January, let’s allow any company that meets certain minimum requirements to pick up customers who phone in or use a smartphone app. Hailing a cab on the street can keep working like it does today.
The one necessary element is to demand that each competing company publish its rates ahead of time in an open format. Then, riders can use one of many apps (which can themselves compete) to compare taxi rates and pick a cab company.
It’s not the regulatory, permission-based way of solving the problem, but it’s the one that will foster the most competition, innovation, and value for riders.
Update: 2 additional brief points.
First, some Council staffers say Cheh’s office really did believe they had an agreement from Uber. Uber’s email, which just said the Council was trying to set a price floor without mentioning that it was also trying to eliminate the legal gray area, wasn’t entirely forthcoming with all the facts.
It’s not yet clear that Uber didn’t just decide they didn’t like the result of negotiations and could use political muscle instead. That’s their right, of course, but something we should recognize.
Second, taxis are a regulated industry today. An innovation model might be better, but most taxis don’t operate on one. It is indeed unfair to put a lot of regulations on one group of businesses in a space (the traditional taxis) and none on others (Uber).
My preference would be to move the industry more away from regulation and toward an innovation model instead of vice versa, but it’s reasonable for taxis to ask to compete on a level playing field.