Is skirting regulation innovation?

Two current darlings of the tech industry are Uber and Airbnb. For those unfamiliar with these companies, Uber is a ride-sharing service that provides drivers with an application that allows them to use their personal vehicles to provide rides to passengers who use the Uber app. Airbnb allows people to provide rooms within their house, or entire properties, for rent to individuals who can book these rooms over the internet or through the Airbnb mobile app. In the past year, both companies have raised massive amounts of financing that have valued the companies at well over $10B.

I question whether these companies are really pursuing innovation or whether they are making money by exploiting loopholes in the regulatory system.

Uber, at its heart, is an alternative to the taxi system. It was born in San Francisco where the taxi system can be frustrating and inefficient. Uber allows people to bypass the taxi system to hail drivers using their smartphone, but that isn’t the biggest difference. Uber’s drivers are not required to purchase a taxi license, or medallion, to operate their vehicles. Medallions often cost any where from $500,000 to $1,000,000 or more depending upon the city. There’s also question as to whether Uber’s drivers are required to carry insurance and how stringent the background checks are since Uber claims these are part of its proprietary processes.

Because of the lack of regulatory oversight, licensing costs, and vague insurance and background requirements, Uber has a distinct advantage from taxis out of the gate. In other words, Uber isn’t focused on innovation, it’s focused on exploiting loopholes.

I will acknowledge that the current taxi system is rife with issues. It’s corrupt, monopolistic and generally dysfunctional. It’s a system that’s been in place for a long time and one that could benefit from competition. However, doing it in a way that skirts regulation and jeopardizes public safety by avoiding oversight is dangerous and irresponsible. It’s not unlike a battle fought in the early 1900’s over jitneys. In fact, I would feel more comfortable with Uber if it was working towards cooperating with governments to improve the current system to accommodate their service rather than fighting them, which seems to be the case with every new location they enter, especially on the international level.

Airbnb, on the other hand, is an alternative to the existing hotel system. Much like Uber, Airbnb has tried to categorize its service to avoid regulatory oversight. Up until recently, hosts (those renting the properties) were not required to register with the city to pay occupancy taxes like regular hotel operators. It’s slowly changing as city and local governments are slowly getting their arms around the service, as evidenced in San Francisco.

To put this in perspective, a friend of mine who lives in a small Southern California resort community decided to rent out their guest house on Airbnb. In an attempt to be a “good citizen”, he approached the city about applying for occupancy tax so the city could collect its fair share. The city, who had not dealt with this scenario previously, took months to issue him the proper license. Upon doing a search of all the other Airbnb rooms available in his community who obviously did not go through the process, he estimated that the city was losing approximately $250,000 in tax revenue from people renting unlicensed rooms.

For a small city, $250,000 is not an insignificant amount of revenue. Its taxes that allows them to provide and improve upon city services, provide adequate police and fire protection, and maintain public areas – many of which tourists use. Skirting occupancy taxes hurts everyone.

It also creates issues related to zoning. Residential areas are meant to be just that, residential. Services like Airbnb (and others) allow investors to come in, buy properties, and then use them for short-term rentals. It’s another reason why many cities are re-writing code to limit the number of days a property can be rented during the course of the year. It’s a regulation to protect the residents of the city and neighborhood from investors looking to make a quick buck.

What’s ironic about this situation is that I’m generally against regulation and more taxes. However, I’m also pragmatic and understand why we need certain taxes and regulations. It’s to protect us from ourselves and our human greed and selfish tendencies. Left unchecked, people will do what’s best for them, not what’s best for the common good.

There are valid reasons why regulatory systems were put in place over ride-sharing and room-sharing arrangements. I find it disingenuous and selfish that companies and investors claim to provide valuable services by skirting these regulations. Instead of driving change by working to improve the current system, they are trying to drive change by avoiding it. They are exploiting regulatory loopholes for short-term gain rather than investing in truly disruptive innovations that will provide long-term benefits. It makes me question whether services such as Uber and Airbnb are using technology to create disruptive innovation or merely manipulating it to maximize short-term gain at the expense of the systems that can’t adjust fast enough.