Wednesday, 8 July 2015

Uber-disruptive technology is irreversible

“In capitalist reality as distinguished from the textbook picture, it is not [so-called perfect]
competition that counts but the competition from the new commodity, the new technology, the
new source of
supply, the new type of organization ... competition which ... strikes not at the
margins of the
profits and the outputs of the existing firms but at their foundations and their very lives.”
- Joseph Schumpeter on capitalism’s creative destruction

Guest post by Jason Krupp

Rapid technological change is more often than not a painful thing, littered with the bodies of those firms and industries that failed to adapt - just ask Kodak, Betamax and former mobile phone giant Nokia.

That painful change is brewing again, this time in the form of the next generation of transport technologies, such as Uber. For those unfamiliar with the firm, it effectively lets anyone become a taxi driver using their own car through a proprietary mobile payment and passenger matching system.

It is a disruptive change that threatens taxi industries across the globe, and has been greeted by protests and anger from the incumbents. French taxi unions and drivers, for example, recently brought Paris and much of France to a standstill to demonstrate against Uber by blocking roads, tipping cars, burning tires [and scaring Courtney Love, not an easy thing to do – Ed.].

To some degree, the rage is understandable when you consider that the protestors have made significant investments in taxi medallions, vehicles and businesses in the belief that the revenue model is stable and they could earn a profit. Readers might also feel inclined to topple cars in the streets of Paris if they had paid NZ$385,000 for a taxi licence, only to have their lunch stolen by some uppity tech firm from California.

But equally understandable is the rage of customers, who have had to bear the brunt of ever rising taxi fares. New Zealand is no exception, with the unenviable distinction of being the most expensive place in the world to catch a taxi, despite being partially deregulated in 1989. Indeed, Christchurch, Queenstown, Wellington and Auckland all rank in the world’s top 10 for least-affordable taxi fares. These fares compare poorly with ridesharing, according to an admittedly limited comparative test by Consumer NZ, which showed Uber rides in Wellington were significantly cheaper than taxis.

The price differential is explained to some degree by over-regulation, such as the one introduced by then-Transport Minister Steven Joyce that taxis must have a camera installed to prevent crime. Another is the requirement that metered taxi operators have 24-hour despatchers. The effect of both these rules and others had been to limit competition by tipping the market in favour of large well-capitalised taxi operators and against smaller incumbents, to the detriment of passengers.

This safety issue is an important one because the industry is likely to argue it vociferously, as the New Zealand Taxi Federation has done with the use of smart phones as a metering device. (Under New Zealand law, Uber drivers must now offer a fixed price for a trip). Industry groups are likely to push the case that if taxis need to install cameras by law, then Uber drivers must do so too.

Yet this line of attack fails to consider the nature of the Uber service.

Passengers have to pre-register to make use of the service, as do drivers, since Uber is the financial intermediary between the two.

imageIf a driver assaults a passenger, or vice versa, Uber knows who both of them are and can pass this information on to the police as appropriate. And since all payments are electronic and no cash changes hands, it greatly diminishes the chance of drivers picking up passengers who plan to do a runner, or whose motivation is to rob the driver. As such, the requirement to install a camera is unlikely to significantly boost safety, but it will raise the barrier to entry for Uber drivers. [The primary motivation for existing industry groups to push for this – Ed.]

The Cato Institute recently published a paper that looked into whether ridesharing apps like Uber and competitor Lyft are safe in the US. The paper found that while there were legitimate safety concerns for passengers, they applied to the industry as a whole; the vetting procedures used by Uber and Lyft were found to be superior to those of the taxi firms. Likewise, Uber and Lyft drivers enjoyed significant advantages over their taxi compatriots as far as crime was concerned because they operated on a cashless-basis.

Should the safety argument fail, the next line of attack against Uber is likely to focus on the nature of employment. Uber’s opponents and labour groups argue that the firm flouts labour laws, and avoid paying employee entitlements by classing drivers as independent contractors. Political commentator Gordon Campbell recently made this exact point, citing a recent case where the Labor Commissioner of California ruled that Uber drivers were indeed employees. That the same decision would be reached here is less clear due to a broader test employed by the Employment Relations Authority, as was recently noted by employment lawyer Susan Hornsby-Geluk. Indeed, David Farrar has also made the point that if Uber were such a bad deal for drivers, why are most of them taxi drivers?

Change is painful, particularly when it is forced by disruptive competition.

This is indisputable.

The Cato paper notes that there are legitimate issues with the ridesharing business model, notably around privacy and insurance coverage. However, it concludes that these are relatively minor, and “[t]he appropriate response is to modernise and rationalise the out-dated and heavy-handed [taxi] restrictions, not extend restrictions to the ride sharing industry”.

The challenge, according to Cato, is that many lawmakers and regulators have not adapted their thinking to include the sharing economy, which “fits awkwardly into existing regulatory frameworks governing taxis.”

Luckily in New Zealand we are not overly burdened with this problem. [So far Ed.] Speaking at the International Transport Forum in Germany recently, Transport Minister Simon Bridges promised that his government would apply the lightest regulatory burden possible on ridesharing operators. The light-touch approach has also been endorsed by David Seymour, Act Party MP and Parliamentary Under-Secretary to the Minister for Regulatory Reform.

Both should be praised for correctly reading the direction of technological change, judging that it benefits consumers, and supporting it. To do otherwise would be Luddite-ism, a term that takes its name from 19thcentury workers who fought the introduction of productivity-enhancing technologies in the textile industry by destroying them.

The problem the Luddites failed to recognise at the time is that the introduction of new technology is almost always irreversible, and that is as true now as it was in the industrial revolution.

Yes the change can be painful, but fighting the inevitable only prolongs the suffering.

Jason Krupp is a research fellow at the New Zealand Initiative. 

Follow him on Twitter.



  1. It's worth noting that the people killing off the existing taxi business are not the Uper entrepreneurs, not their techs and app people, nor the folk who have bought shares in their company: it is everybody who had downloaded and used the Uber app because in their view it offers a better deal than they got before."

    In other words, in the truest sense, it is the customers who decide who wins and loses, based on their own evaluation. When new disruptive technologies emerge and take over the marketplace so quickly, it is because customers have decided they're a great thing by the only standard that counts -- their own.

    So the introduction and acceptance of new disruptive technology like this is almost always irreversible because it's also almost always good -- as judged by those whom it most benefits.

  2. I have often wondered if this would be a worthwhile side job on an empty block of time and after speaking to many drivers in US and EU markets, here is what I've gathered.

  3. Uber offers better deal than the local taxt drivers. People are likely to go with uber. Customer have issues always with local taxi drivers regarding the fare, which they dont have to face with uber.


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