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Regulating the Sharing Economy: new wine in old bottles

Michael Kende Senior Adviser, Consulting

"The regulatory issues raised by the sharing economy arise from convergence – the collision between traditional services and new online-enabled services."

Sharing Economy

A recent decision of the European Court of Justice (ECJ) stated that Uber should be regulated as a transport company, and not, as claimed by Uber, as a computer services business. This is the latest in a series of challenges to the new online sharing economy, and raises significant questions as to how companies like Uber should be regulated.

The sharing economy is, in many ways, new and different. It allows the efficient use of resources – our cars, spare rooms, our brainpower, and our labor. It is also, in many ways, self-regulated, relying on two-way ratings to help customers identify good providers and vice versa. But it also raises a number of regulatory issues, not all new.

The regulatory issues raised by the sharing economy arise from convergence – the collision between traditional services and new online-enabled services. What is new about the sharing economy is that it involves convergence with traditional offline sectors such as taxis, unlike earlier phases that involved online services including music, voice over IP and online video.

Because of the low cost of online distribution, online services had significant impacts on their offline counterparts – CDs, DVDs, international telephone calls, traditional TV - all showing declines. In the case of traditionally regulated services – notably voice calls and broadcast television – this convergence also led to regulatory issues of whether and how to apply traditional regulations to the new services.

In a more recent development, by lowering transaction costs, the Internet enables platforms such as Uber to compete with traditional (and regulated) taxi services. Once again, as seen with the ECJ decision, this convergence has led to a regulatory clash.

A recent New York Times article about taxis in New York City highlights several issues. A traditional yellow cab needs a medallion to operate. There are a limited number of medallions that have not increased much since the system was put in place following the Great Depression in the 1930s. Currently, there are 13,587.

Given the enforced scarcity, medallions represented a good investment for drivers – acting as a stream of income while increasing in value. The record value for a medallion was set at USD 1.3 million as recently as 2014! It is easy to guess what happened since then. There are now 61,000 Uber cars in New York. Medallion owners are underwater on their loans or going bankrupt, with recent sales as low as USD 150,000.

The article also highlighted another issue, namely differences between ride-sharing services and regulated cabs, in terms of fare regulations, vehicle equipment requirements, and disabled access. All of which weigh on the yellow cab medallion owners.

This clash highlights two sets of issues when new online services converge with traditional regulated services. The first is short-term - how to manage the transition to the market with new services included, while the second is more long-term – how to regulate the new services side-by-side with the traditional services.

In the transition, the issue raised by Uber in New York is highlighted by the dropping price of the medallions. Drivers invested under one set of conditions, and now face another. Uber is worth billions; the City of New York made USD 359 million in 2014 auctioning off 350 medallions; riders benefit from increased options and lower prices, but should this all come at the expense of medallion owners?

In the long-term, the issue typically raised is whether and how to apply regulations to the new services, but that discussion should also encompass the regulations on the traditional services. Using the taxi example, with the increased competition from ride-sharing services, does it make sense to limit the traditional cabs’ rates? How about worker conditions, disabled access, and vehicle equipment? If it makes sense for the traditional cabs, should they be imposed on the new services?

It is important to resist the urge to simply impose legacy regulations on new sharing economy services (regulating up); but on the flip side it may not work to eliminate all traditional regulations (regulating down). It is important to look at the whole of the sector, decide what conditions are important in the new environment, take into account economic and social concerns - and regulate accordingly.

These concerns have already been raised for online services such as telephony and online video where convergence first started. The sharing economy takes convergence into new directions such as taxis and room rentals. These new discussions are likely just the beginning, as the Internet spreads and convergence continues in new directions, and require extending the debate about how to impose traditional regulations on converged markets.

For further discussion on this topic as it applies to broadcasting, see The rapid transition of video and TV to the Internet must be supported by updated policy and regulation.