In a January 2016 posting we commented on the city of San Francisco seeing the economic effects of Uber and Lyft, including that Yellow Cab, the largest taxi company in San Francisco, was reported to be seeking bankruptcy protection. Uber and Lyft are both headquartered in San Francisco. We have also posted on Uber’s push to expand in New York, claiming to have the potential to create up to 13,000 full and part time jobs.
While the prior posts focused on the potential decrease in demand and value of taxi medallions, other events are worth mentioning. Action by Uber and Lyft to cut fares in an effort to increase each company’s’ respective market share has had a substantial economic impact on their bottom lines. It’s been reported that both Uber and Lyft are facing significant financial losses.
These actions, and others in the online business community, have started a debate amongst economists and public policy analysts, including the Harvard Business Review (HBR). The HBR published an article arguing that no regulatory regime is necessary, whereas the Unified Repository Base on Implementation Studies (part of the European Parliament, this particular study was published by the U.K. House of Lords) is considering the creation of a regulatory platform “with caution.” The fact that the European Union is considering a regulatory regime is important because the E.U. has the largest use of the Internet by residents (77%) of anywhere on the planet. The House of Lords report has repercussions to businesses in the “shared” community such as AirBnB, and eBay, as well as more traditional online platforms such as Amazon and others.
Whether market economics of supply and demand or the creation of “a better mouse-trap” is sufficient to address the regulations of online businesses is something now being debated amongst various economists and elected officials.
Today, online platforms are such a part of our daily lives that companies such as Amazon, Google, Twitter and Uber are virtually taken for granted. These companies, and others, have provided additional choice for consumers and driven market efficiencies to the benefit of consumers.
The Case Against Regulation
The European Union published in May of this year its summary of what it identified as key issues related to the role of online platforms within the E.U. While the E.U. currently has rules regarding consumer protections and the safeguarding of personal data is required of online platforms, the report concluded that new regulations be promulgated only where “deemed necessary” and online business should not be hampered by “burdensome regulation.” The report further recommended an E.U.-level approach rather than a national approach so as to provide a consistent outcome for online platforms throughout the E.U.
Around the same time as the E.U. Commission report, the Harvard Business Review (add link or hyperlink to full Harvard Business Review) published a piece stating that the online business platform needs no additional regulatory regime as these “businesses have not redefined industries in a fundamental way; instead they are ‘old wines in new bottles’” and therefore existing regulations apply – no new regulations are necessary.
Current Regulatory Efforts
New York State in fact has adopted legislation, currently sitting before the Governor, which would regulate AirBnB within New York City. Strongly opposed to this, AirBnB announced on September 7, 2016 that it would sue the State should the Governor sign this bill into law. Various other municipalities have enacted legislation which has not resulted in such threats, however, the City of New York is reported to be AirBnB’s most lucrative market and therefore this legislation may impact AirBnB’s financial viability.
Also in New York state, the Village of Skaneateles enacted an ordinance banning short-term (under 30 days) rentals, although hotels, lodges and bed and breakfasts with a special use permit are exempt from the ordinance. In June 2016, several homeowners reportedly pled guilty to violating this ordinance. In Florida, the City of Miami Beach has a similar ordinance, the enforcement of which has resulted in fines of more than $1.6 million against homeowners and websites as well as the eviction of tourists staying at 31 properties.
And across the country in Texas, the City of Austin enacted regulations requiring all drivers be fingerprinted by February 2017, whether an Uber, Lyft or taxi driver. In May 2016 both Uber and Lyft ceased operations in Austin due to this requirement, arguing it does not advance safety of passengers, while seeking an amendment to that regulation by the city council. As reported in August by CNBC, up to 10 new companies have “filled the void” left by Uber and Lyft ceasing operations with many of these new companies reportedly hiring former Uber and Lyft drivers. Other cities in Texas have similar regulations, but have not had Uber or Lyft operating within those cities. At present Lyft is reportedly seeking a state-wide regulation so as to avoid similar issues on a city by city basis.
In August 2016 Bloomberg reported that Uber lost “at least $1.2 billion in the first half of 2016” with subsidies to Uber drivers comprising a “majority of the company’s losses globally.” Those subsidies, per the Washington Post in August 2016, were worth up to $500 per driver for making pick-ups in certain cities. This is part of a larger “price-war” between Uber and Lyft with Lyft providing its own incentives to its drivers. Uber also cut passenger fares in many cities this past January while also reducing the commission its drivers pay. These fare cuts resulted in increased ridership but upset drivers who then protested Uber’s actions this past May. Lyft drivers likewise were upset when Lyft reduced its fares in April of this year. Recent reports suggest losses at Uber are more than $4 billion over Uber’s 7 year history, while an August report suggests Lyft may be losing up to $50 million per month.
Both companies have financial backing and are each believed to seek dominant market share based on the strategy that achieving long-term dominance will result in profits and ultimately will justify these initial operating losses. Time will tell whether undercharging customers so as to achieve market share supremacy was smart business but it is possible that at least one of these companies will lose financial backing and become a trivia question.