Strategic CIO // Digital Business
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9/4/2014
11:20 AM
Rob Preston
Rob Preston
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Digital Disruption Uber-Style Is Never Pretty

The legal and regulatory backlash that ride-sharing company Uber faces in Germany will play out across many more industries.

Old economy vs. new economy is a meme that goes back decades, but it's bursting back into prominence as governments, regulators, and entrenched industry groups take on a range of digital disruptors in the name of competitive fairness, consumer protection, and tax collection. A German court's ruling this week banning two of Uber's digitally based car-sharing services in the country is but the latest, most overt example.

A regional court in Frankfurt issued an injunction that temporarily stops the company from operating its Uber and UberPop ride-sharing services anywhere in Germany. The rationale? The two services constitute unfair competition because, by using unregistered drivers who don't pay standard taxi insurance rates and other fees, Uber can undercut the prices of mainstream competitors.

The court ruling -- which doesn't apply to Uber's premium service, which relies on registered drivers -- came in response to a suit filed by Taxi Deutschland, a nationwide association of dispatchers. The association also claims that Uber and its drivers aren't paying their fair share of taxes.

[Big data, social business, and other factors are coming together to cause disruption across all industries. Here's how to stay ahead of the curve: Future Of Work: 5 Trends for CIOs.]

Uber, which continues to operate in Germany despite the threat of fines and jail time, reports that it has experienced a steep rise in signups in the country following the court ban, just as it did in England earlier this year following a protest in London against Uber's treatment by the local transportation agency. So much for a chilling effect. Uber says it will be able to operate legally in Germany once its application appealing the court ruling is accepted. A formal hearing is expected in about four weeks.

Uber, of course, isn't the only digital pioneer that entrenched interests have tried to stop or slow down. The big music labels squashed Napster after their claims of copyright infringement were upheld. State sales tax collectors are now getting their pound of flesh out of Amazon.com. The state of Minnesota initially threatened to prevent institutions using Coursera's MOOC software from offering online courses to state residents without prior authorization, though the state eventually backed down. Local regulators and tax authorities are trying to crack down on Airbnb's digital room-sharing (and potentially dinner party) services, claiming they amount to running illegal hotels (and restaurants). FedEx's Fred Smith, a tech-astute CEO, has called most of the reporting about package-delivering drones "mythology," even as FedEx does its own drone testing.

Author and economist Jeremy Rifkin calls this digital revolution a Collaborative Commons, whereby Internet-based providers draw on a range of drivers, music sharers, home and textbook renters, knowledge dispensers, and other "prosumers" to undercut established rivals. (In a statement, Taxi Deutschland head Dieter Schlenker hilariously called it a "Locust-like Sharing Economy.")

One man's horde of locusts is another man's swarm of innovators. Still, we can't ignore the legitimate concerns. Even though it's easy to copy and distribute music, movies, and other forms of digital entertainment without paying for the privilege, that doesn't make it acceptable for Napster and the scores of copyright violators that followed it to engage in the practice. The FAA is right to ask hard questions about the safety of commercial drones used for everything from delivering lingerie to inspecting railroad ties. Here's a grayer area: Should certain healthcare apps be subject to FDA approval?

In any regulated business or industry, there's a middle ground somewhere. Airbnb provides a valuable service; it has filled a void in the hotel market. But should home renters not have to pay standard hotel occupancy taxes? And should you have to live next to a home operated like a B&B when you bought your home in a non-commercial zone?

Likewise, Uber shouldn't be banned because its low prices are "anticompetitive." The conventional taxicab players need to get more efficient. This is a wake-up call. Many of them are still about as sophisticated as Taxi's Louie DePalma. Meantime, however, expect the cost of Uber and like services to rise as insurers identify consumer customers acting as commercial drivers and raise their rates.

We'll see many more of these battles play out across industries. Expect lots more protests, lawsuits, and over-the-top accusations -- and even more ugly disruption. (Uber reportedly is employing hardball tactics against its top competitor, Lyft, a case of one disruptor trying to disrupt another.) Capitalism is rarely pretty.

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Rob Preston currently serves as VP and editor in chief of InformationWeek, where he oversees the editorial content and direction of its various website, digital magazine, Webcast, live and virtual event, and other products. Rob has 25 years of experience in high-tech ... View Full Bio
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ChrisMurphy
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ChrisMurphy,
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9/5/2014 | 1:25:58 PM
Re: Fine lines
Airbnb will be interesting to watch play out politically. Usually hotel taxes are easy pickings b/c pols think "hey, it's not my voters I'm taxing." That's why you see stadiums often financed with hotel taxes. It's a popular tax, if such a thing is possible. 
RobPreston
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RobPreston,
User Rank: Author
9/5/2014 | 9:25:44 AM
Re: Fine lines
When it comes to airbnb, I'm less sympathetic with the hotel establishment (the competition will keep those hotels on their toes) and more sympathetic with the neighbors of frequent renters, especially in neighborhoods with lots of kids. 
GAProgrammer
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GAProgrammer,
User Rank: Ninja
9/5/2014 | 9:01:11 AM
Re: Capitalism ain't pretty, but it's efficient
I agree with you completely, but government rarely works towards efficiency. They are more concerned about "feeding the beast". While these services are innovative, they didn't take government into account when they started their business plan. They completely disregarded any legislation or licensing rules, which is why it costs as much as it does for a "standard" taxi service. That was a critical mistake - every government in the world, from the US to the EU, are finding ways to make more money off of business through regulation and "licensing" (just another term for taxes). Sadly, most people just don't understand the overreaching hand of government (in any country).

I will not be surprised to see other countries, and even states and cities, follow this lead.
Brian.Dean
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Brian.Dean,
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9/5/2014 | 5:54:18 AM
Re: Capitalism ain't pretty, but it's efficient
@daniel, I agree, disruption is good. It makes an economy to become efficient and in the long term this helps to raise the standard of living for the people.

Both Uber and Lyft are facing protectionism from established businesses that are not competitive. Either the claim is that their quality is lower or because their safety is below acceptable levels. The point is that when on average a car is only utilized for 1 hour a day, the economy has an unemployment rate of 6% and the population has smart phones that enable communication and coordination -- individuals tend to behave like businesses and increase their productivity.

Established businesses can try opting for protectionism to protect their businesses in the short term, but only the business that make their own underlying process efficient, will be around in the long term. For instance, analytics and tracking could be used to increase utilization levels of taxis and save on their waiting time for their next customer. In the end, consumers might select the taxi based on something entirely non-safety related, like choosing a cab based on its yellow color, but for that to happen the business needs to deploy resources in the right place and try to remain profitable for as long as possible.
danielcawrey
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danielcawrey,
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9/4/2014 | 8:08:11 PM
Re: Capitalism ain't pretty, but it's efficient
I feel like the industries pointed out above are in need of regulatory disruption. It's time for some change, which is why there are tech companies coming in to these particular verticals. I think these are interesting public policy issues that require some real consideration. Regulations can be changed; my thinking here is that they need to. 
Rich Krajewski
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Rich Krajewski,
User Rank: Ninja
9/4/2014 | 4:29:25 PM
It's not just new and old economic systems
It's not just new and old economic systems that are in conflict. Digital disruption is affecting political systems, as well. While computers may give more choices to taxi customers, it also infiltrates privacy. Eventually, everyone has to become a toady to survive (except the ones who are too stubborn, but then they get weeded out pretty easily). Thanks to computers, we'll wind up with the Ignoble Global Republic of All-Toadies.
Shane M. O'Neill
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Shane M. O'Neill,
User Rank: Author
9/4/2014 | 4:23:13 PM
Re: Ruthless Uber
Hailo does that very thing. It's Uber for taxis. I've been getting traditional taxis via Hailo for almost two years. But now Hailo is switching to Livery cars (nicer, cleaner cars and SUVs) and slowly turning away from taxis. With Uber, people saw they could get an easy ride in a clean and modern car (if it costs a little more so be it). Taxis are losing to Uber because of technology, but the final nail in the coffin is that most taxis are dirty and the cab drivers aren't friendly. Not all, but enough.
Lorna Garey
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Lorna Garey,
User Rank: Author
9/4/2014 | 4:07:38 PM
Not far enough
Some of the industries most desperately in need of disruption seem to be immune, so far. Take the monopoly a few carriers have on internet access, which is essentially a utility. People fortunate enough to live somewhere with competiton (say, Xfinity and FiOS) forget the misery that Americans in more rural areas feel. And who really thinks the FCC will block Comcast's merger with Time Warner? Aereo tried to strike a blow, and we saw the result. What innovator will crack this stranglehold?

 
Thomas Claburn
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Thomas Claburn,
User Rank: Author
9/4/2014 | 4:01:53 PM
Re: Ruthless Uber
I'm surprised that taxi companies don't have an easier time competing against Uber. It's chief achievement is software that lets you order a ride on a moble device and see where it is. That's a huge improvement in user experience but it's not difficult to replicate.
Laurianne
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Laurianne,
User Rank: Author
9/4/2014 | 3:58:20 PM
Fine lines
I wonder how the line will be drawn by cities between a frequent Airbnb renter and a household that has crossed the line into B&B territory. This could be a big deal in some vacation home locales.
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