In 1865, the British government passed a law called the Locomotive Act to protect pedestrians and horse-drawn traffic. It stated that any car must have a crew of three: a driver, a stoker and a man to walk at least 55 metres ahead of the vehicle, waving a red flag.

The “Red Flag Law” also restricted cars from travelling at more than two miles an hour in urban areas, which limited the usefulness of the new vehicle. It turned out the groups lobbying for this act were the stagecoach and railroad companies, which were rightfully nervous about the threat automobiles posed to their businesses and argued “precautionary laws” were necessary for public safety.

The history of the car shows how a new technology fundamentally changes the way people do things and how policymakers and regulators are faced with the vexing challenge of figuring out how to protect the public and resist pressure from players with a vested interest in protecting the status quo.

These days, industries as diverse as telecommunications, hotels, taxis, energy, music and cable television networks are wading through their respective versions of red flag laws as disruptors challenge the way these powerful and lucrative businesses have operated for a very long time. Many emerging business models are so new they don’t fit into existing regulations.

Take Uber, a rapidly growing transportation company that has recently found itself the subject of Australian news headlines.

Launched in San Francisco on May 31, 2010, Uber is the brainchild of entrepreneurs Garrett Camp and Travis Kalanick. In search of their next big idea, both started talking about how often they got stranded on the street unable to find a taxi – a notorious problem in the Bay Area. They rightly assumed that satisfaction with traditional taxi operators was low and that there was a massive unmet demand to change the way people get from A to B. So the duo did something that sounds really simple.

They built a platform that connects passengers directly with the drivers of vehicles – initially private-hire black town cars, whose drivers had downtime between dropoffs and pick-ups. On the main Uber platform the drivers are professionals with luxury vehicles, whereas on UberX anyone over 24 with a licence and no criminal record who owns a four-door car can offer rides. Both models bypass the highly regulated taxi middlemen.

Today, Uber is backed by $US1.5 billion ($1.6 billion), including a $US258 million investment from Google’s venture capital arm. The investment reportedly values Uber at about $US17 billion. The company now operates on every continent, except Antarctica, and is in 128 cities across 37 countries, including Sydney, Brisbane and Melbourne here in Australia. Typically, it does not ask the city for permission before launching, but follows the strategy of entering a market and scaling demand fast. Worldwide, 20,000 new drivers a month are joining Uber.

OUTSIDE THE BOX

It’s understandable that the traditional taxi, limousine and cab companies are scared and unhappy about the competition, given they did not see it coming. The incumbents are appealing to state regulators, arguing the likes of Uber are “rogue apps” that create unfair competition because they “operate outside of the regulatory framework” of the taxi industry. Herein lies the problem: “on-demand ride sharing” was not considered when the laws governing the taxi industry were enacted.

It’s a common approach for the disruptor to focus on what their product isn’t (“We are not a taxi company”) and for the incumbent to focus on what it is (“Yes, you are providing taxi services”). Technically speaking, Uber and other US-based competitors such as Lyft and Sidecar are not operating as taxi companies, namely because they don’t own any cars and the drivers are not employees. In other words, it’s a car “service”, but not a “car service”.

So do these new services pose a threat to public safety? Does the Uber surge pricing model (a premium price charged during peak hours, bad weather or major holidays) represent optimal demand and supply economics or is it just greedy fare-gouging? Are these new entrants unfairly skirting regulations? Could a new category for what they offer be created? Are the existing regulations outdated, enshrining the status quo and blocking new ideas from entering the market? The answers depend on who you ask. NSW Transport Minster Gladys Berejiklian has been criticised for not sending a clear enough message about where she stands on Uber’s operations in Sydney. “It depends what they’re purporting to call themselves,” Berejiklian says. “They’re not allowed to call themselves a taxi service; they’re not allowed to call themselves certain categories of things.”

Uber does not think of itself as a taxi operator or car service, but a technology company. “It’s not just about finding a ride, it’s about using technology to put available resources to more efficient use, which is a win for drivers, riders and communities,” says Jordan Condo, Uber’s head of public policy for the Asia-Pacific region. “While change is never painless, technology means it’s inevitable.”

REGULATION FOR THE BETTER

In my opinion, Berejiklian is supporting innovation by not taking a combative stance. She is wading through the grey areas to answer a critical question: whose interest is the law really protecting? The current cease and desist letters, fines and regulatory battles about Uber should not be just about Uber, per se.

In the bigger picture, what’s at stake is the risk of getting wedged into a myopic viewpoint that damages the progress of the entire industry. Ultimately, regulation should enable innovation that disrupts a market for the benefit of the majority.

In the case of Uber, the net result should be safer, more reliable, more diverse and affordable transport options as well as good wages, proper insurance cover and quality assurance for the drivers. If traditional taxi companies remain middlemen that don’t add value in any way to the service for drivers or customers, they will become redundant.

YOU CAN’T REVERSE THE STORY

As the cases for and against Uber unfold, it’s interesting to pause and look at the music industry and the unintended consequences that can typically unfold from a regulatory fight. Peer-to-peer sharing network Napster was deemed illegal, but it proved there was a different way to access and buy music. As one music executive eloquently explained in a paper published in 2012, called Copyright and Innovation: The Untold Story, the record companies were used to “selling one pound of shit in a 10-pound bag”. Napster smashed the concept of bundling; people realised they were being ripped off and wanted à la carte options.

The music industry, for the most part, got so consumed with the fight over illegal peer-to-peer file sharing that they failed to see there was another unstoppable idea in the wings, and a massive market waiting to be tapped: the idea that millions of people would want to legally download songs and albums (and pay good money for them) via a legitimate online marketplace.

For every business that is threatened with extinction and fighting it by waving the legal stick, there is a disruptor focusing on the carrot – hello iTunes, Pandora and Spotify.

If we look back over the history of innovation, a repeated mistake is the assumption that a successful lawsuit can magically erase a new idea from the minds of the public. Win or lose on the legal front, it doesn’t matter; you can’t untell the story.

If the idea is a good one, it won’t quietly disappear into a black hole. Ask an Uber passenger what they think of the service, and common responses are “simple”, “beautiful” and “I will never take a ‘normal’ taxi again”. As soon as the genie is out of the bottle that a new way exists and the public decides that new way is as good as, if not better, than the current option, then change happens quickly.

WIN THE BATTLE, LOSE THE WAR

The immediate risk for incumbents pursuing the fight is the risk of losing the case in hand. But even a win in court does not mean you can stop the market innovating. If Uber does not win the current fights, some other player will. Plus, regulatory fights and drawn-out lawsuits create the immediate loss of hard dollars, time and energy, as well as having the unintended consequence of popularising what they are trying to eliminate.

The real impact often happens five or even 10 years later, when the fighter realises the victory was only temporary and the real damage for the company (and often the entire industry) is that it killed their own opportunity for innovation. If a new entrant is seriously threatening a business, it’s a pretty good indicator that the world is changing and it’s time to rethink the model.

 

This article has been reposted from: Australian Financial Review