Ride-Sharing Companies Have Enjoyed A Free Ride; Why and How Governments Need To Restore Equilibrium and Equity

With Uber and Lyft’s triumphant IPOs (“price to perfection” it seems), the ride-sharing story seems far behind the rear-view mirror. It certainly was for me, until I came across a sharing app that purportedly allows drivers to monetize municipal parking spots.

This app’s business model in a nutshell:

Find a parking spot, log into your app, stay in your spot (let’s hope it’s an electric car if the engine is on), get paid when you relinquish your parking spot to an appreciative driver.

One thing became clear to me. The Ubers and Lyfts of the world are rushing head-on to “disrupt”, “reoganize” — and yes, monetize — our entire economy. From housing to food delivery, parking to helicopters — Sharing Economy Companies promise consumers access, convenience and low cost. They also promise investors out-sized long-term revenues predicated on highly-scaleable platforms (we won’t use the word monopoly). They tout high profit margins built on an asset-light model leveraging someone else’s assets.

That last one got your attention, hopefully — leveraging someone else’s asset.

Many of us have forgotten, but let’s review a few examples of how ride-sharing companies have turned traditional business practice on its head, which isn’t necessarily a bad thing, except no other type of company in recent memory has gotten away with so much in so short a time arbitraging regulations and bending the rules.

Private Operators Monetizing Public Infrastructure

First scenario. Imagine states invested billions to build out wireless infrastructure for the benefit of individual residents and small local businesses. With the help of innovative engineers, Verizon is able to tap into the network and re-sell — at massive profit margins! — enterprise-grade broadband services to large corporations. Quite a business model if you were the lucky “innovator”!

That can never happen, you say. But ride-sharing companies do actually utilize infrastructure owned by governments (roads, bridges and highways) without directly contributing a cent to their upkeep.

In some large cities, the annual maintenance and capital improvement costs for roads is in the hundreds of millions. In large states, roadwork projects cost billions.

The specific issue at stake is proportionate use. For families owning 2–3 vehicles, their taxes can legitimately be considered payment to use public infrastructure. Ride-sharing companies are believed to generate as much as 30% of rush-hour traffic in major cities today — that number is expected to creep up higher. So if Uber and Lyft are stressing municipal roads and other infrastructure, why aren’t they paying their fair share?

Powerful Corporations Can Limit Choice

Switch gears to a small cafeteria operating under a contract with a university. The cafeteria is only allowed to charge $7 for simple meals catered to students and faculty. A swanky new restaurant opens just outside campus — thereby avoiding university regulations — providing patrons 3-course lunches for $25. While both operators have highly differentiated customer bases, the siphoning of just 15–20% of customers is enough to run the cafeteria out of business, since the cafeteria enjoyed very low margins in the first place.

Just about everyone on campus lost out, except for the swanky new restaurant — a bizarre case of “market failure” that apparently everyone foresaw but did nothing about.

During the early days, ride-sharing was “sold” as a method to reduce private vehicle use and urban congestion. Fast forward to 2018, private vehicle sales have not reduced. For some large cities however, congestion has increased with the proliferation of ride-sharing vehicles and drained precious revenues from transit systems.

The greater the revenue drainage, the more transit systems have to cut back on services/maintenance. The end result is service disruptions, even more dissatisfied transit passengers, who then migrate to ride-sharing. The vicious cycle can only be broken either through greater governmental subsidies for the public transit operator, price adjustments on the side of the private operator or even outright caps on ride-sharing growth, which some governments have enacted.

Regulatory Arbitrage Penalizes Incumbents

Final example. A buyer purchases shares (“A-Shares”) of a highly profitable business for $10 per share but later learns that the absent (or fragrant disregard) of anti-dilution clauses in the executed purchase contract meant that the issuer placed new B-Shares (with virtually identical economic interests, but named differently) to different shareholders at $5 per share, then $2, $1 then $0.10. Terribly unfair (and potentially illegal) — because it is.

Before ride-sharing, many local governments imposed restrictions, licenses or caps to taxis and car services. For many different legal reasons, personal vehicles enhanced with a ride-sharing app fell outside the ambit of the law. As a matter of equity, it is unconscionable that Driver A was made to jump through hoops including financial barriers and job training but not Driver B. In many states and cities, that was exactly what happened — giving ride-sharing companies a financial and volume (since financial/legal barriers were low) advantage over traditional players.

How Governments Can Restore Equilibrium and Equity

It is imperative for governments to understand the impact of the sharing economy. Virtually every municipal asset and service — from public housing to parks; license approvals to municipal parking meters — are likely candidates for “sharing” and “monetizing” by ambitious startups and Big Tech.

Here are some thoughts of what governments can do in the specific case of ride-sharing companies:

• Co-Opt Ride-Sharing Companies into Urban Planning. Ride-sharing companies are here to stay. In many areas particularly the suburbs, ride-sharing companies have the potential to complement public transit to form an integrated local transportation system. Within cities, ride-sharing companies can supplement subways and buses — cities can actually pay Uber and Lyft for undeserved routes! Given the long gestation, states and cities must engage ride-sharing companies early in the process — scoping out transportation needs, analyze traffic trends and planning for the medium to long term.
• Require Ride-Sharing Companies Contribute to Transportation Funding. Some states and local governments have passed legislation to impose new taxes and/or user fees on ride-sharing companies. Rather than treating such revenues like any tax revenues deposited into the General Fund, governments should consider taxes imposed on ride-sharing companies as dedicated transportation funding. Governments should also explore a dynamic tax whereby ride-sharing companies pay their fair share to maintain roads and related infrastructure. The taxation philosophy is to maintain equilibrium between transit users and ride-sharing passengers, avoiding subsidizing one group disproportionately taking into account the cost to deliver transportation services. If an innovative company like Uber is made to pay for road investments and ongoing maintenance, I guarantee Uber Management will start pitching ideas and technical proposals to local DOTs to ensure transportation dollars are well-spent. It’s an Economics 101 problem — free ridership — with an easy fix. Stop the free-riding.
• Mandated Transfers to Impacted Communities. There cannot be equity without some form of restitution for previously-regulated industries disrupted by ride-sharing companies. The reality is, in many jurisdictions, governments required one set of rules for taxi/car service companies and a different set for ride-sharing companies. Governments dragged their feet on issuing regulations for ride-sharing companies. The equitable close to this chapter is for governments and ride-sharing companies to design and fund programs to alleviate those impacted including indigent and low-income taxi drivers.
• Design Competitive Models to Foster Competition. Ride-sharing is the classic business model with tremendous network effects — the more riders and drivers, the more valuable the platform. In many cities, Uber and Lyft are the two dominant players, increasing the odds of collusion and anti-consumer behavior. New players cannot hope to profitably compete with Uber or Lyft on a broad scale. However, innovative urban planners and transportation analysts can design competitive zones where smaller competitors can compete with Uber and Lyft on a level playing field — each operator will be capped in terms of available drivers operating within a competitive zone. As an alternative to direct taxes, governments can also explore the use of auctions to issue operating licenses within different competitive zones, the same way telco companies are required to bid for spectrum. Variables like vehicle caps and min/max auction prices can be set and reset annually so policy makers can manage congestion, adjust auction prices/revenues and directing (through incentives) drivers to under-served neighborhoods.

Properly Regulated, Ride-Sharing Companies Are a Welcome Innovation

Let’s be clear: ride-sharing companies have provided a tremendous benefit to consumers. As a user of both Uber and Lyft, I can attest to the immense convenience of their services. In the U.S. and around the world, taxi and car service industries did themselves no favors — relying on their monopolistic positions, under-investing in vehicles and neglecting customer service.

I remain steadfast in my belief that capitalism is still the best economic system to deliver prosperity, peace and individual happiness. Generally-speaking, prices for goods and services should be a function of demand and supply. However, government regulation is essential to manage bad actors and externalities. Free things seldom promote freedom, but create costly distortions in a market economy.

Unfortunately, that is what ride-sharing companies have been receiving — a free ride.

This needs to stop. Together, we can improve the ride-sharing experience so market distortions are limited and more can benefit.

The opinions expressed are my own and do not express the views or opinions of my employer, past or present, or any other organization with which I may be affiliated.