All Commentary
Wednesday, February 22, 2017

Analog Age Laws Could Crush Digital Trade

The sharing economy is now in the hands of the courts.

It’s been ten years since the iPhone was launched. At that time, the digital revolution was in its infancy, and the iPad, Kindle, 4G, Airbnb, Twitter, Android, Oculus, Spotify, Instagram, Snapchat, WhatsApp & Uber were the unknown future.

These are now the dominant technologies of our time. They are disrupting every industry and changing every aspect of life. Uber, for example, is valued at $68 billion, making it one of the world’s most valuable companies despite never having made a profit. Twitter is valued at over $10 billion and is an indispensable tool for many, yet it is in the same position.

There’s An App For That

This is the supreme irony of our age. These transformative technologies are democratizing and opening up society and the economy to those who have been marginalized for far too long: an 83-year-old woman who has given up her car because of failing eyesight but wants to maintain her independence, or a North African immigrant in a Paris banlieue [suburb] to whom no one will give a job, but who can now earn a living by offering his services on Uber.

Then there’s the young student who can do a variety of odd jobs thanks to the many apps that link those who need one-off services with people who have the necessary skills – and who can share a car to get to a far-away city to which they could never afford the train fare.

Most laws date from before 2006 and were never designed to deal with the digital environment.

However, many of the companies offering these transformative services have not yet found a way to monetize their services effectively – or, alternatively, are keeping their costs low in order to expand their services and market share.

The result of this is that, in many ways, private tech companies have ended the subsidization of new forms of public services, for the public good.

That ought to make them the darlings of the Left. Unfortunately, the Left just can’t rid itself of its urge to regulate, legislate, and tax. And in their efforts to thwart consumer freedom, they have a useful ally in the shape of a legal framework which was developed for the analog age.

Uber, for example, is the poster child of the sharing economy. Yet, 2017 is a make or break year for its European ambitions – and at its core is an age-old political battle of Left versus Right.

See You In Court

This battle isn’t on the streets of San Francisco or London; Uber has already won over consumers. Instead, the fight is moving to a soulless courtroom in Luxembourg. The question is whether the company is a technology or a transport company, and the answer is incredibly complex.

Uber has ruffled many feathers, as would any company which wants to break a monopoly. Its rate of growth has been huge yet many governments, local and national, are uneasy about it.

This will all come to a head in what could be the most important legal case for the sharing economy.

A cynic would say this is because they have grown accustomed to the large fees, often amounting to tens of thousands of pounds, that they can charge taxi drivers to register, which are then passed onto customers in the form of extortionate prices. However, the official line is that they are concerned about Uber’s business model and working practices.

Courts the world over – including those in London – are now being asked to arbitrate a range of disagreements concerning unemployment benefits, the minimum wage and holiday pay – even though the company’s  polls claim that a vast majority of Uber drivers are happy with their agreements with the company and that this flexibility is the key reason why they signed up in the first place.

The problem is that the legal frameworks the courts are operating under predate the arrival of any of these digital companies. Most laws date from way before 2006, and were never designed to deal with the digital environment that we now find ourselves in.

The Left recognizes this and is attempting to use this framework to kill  new services before they become mainstream

This will all come to a head in Luxembourg later this year, in what could be the most important legal case for the sharing economy.

In this case, the Court of Justice of the European Union has been asked to clarify Uber’s legal status and the applicability of EU competition law, which covers all 28 EU member states.

Tech or Transit?

It started in the Madrid courts with the Barcelona Taxi Association (Asociación Profesional Elite Taxi) citing unfair competition between Uber and its members. The taxi group alleges that Uber runs an illegal transportation service, not a digital ride-booking app.

The preliminary hearing, which is currently in session, rests primarily on a question of definition: is Uber a “digital” service or a “transportation” company? This classification goes to the very heart of the business model used not by Uber, but by Airbnb, BlaBlaCar, and many other tech firms.  And if Uber loses, the subsequent application of rules and regulations could be crippling.

Uber, for its part, claims that it is “an electronic intermediation or information society service”. If the judges agree, then it will officially be considered an online demand platform, in which independent drivers are matched with potential passengers. Importantly, it means the burdensome labor and licensing requirements no longer apply; instead, Uber and other companies will benefit from the protections enshrined in the EU treaties.

Companies that lose their status as an information service also face the risk of economy-crushing regulations.

This would be a huge win for consumers – but would potentially make it very difficult for local authorities to continue to make thousands from licensing taxis, and could even mean that existing licensing regimes become unworkable.

More importantly, it would also mean that Uber and other companies would no longer be operating in a regulatory vacuum, but within a clear legal framework. As Damien Geradin, a professor at Tilburg University and a keen Uber-watcher, explains: “People are being misguided … the taxi companies are trying to confuse them with the rhetoric that should Uber be classified as an information service, then no regulations would apply. That the market would be deregulated and that Uber would be able to unfairly steal business from the taxi companies. This is absolutely false.”

Should the court rule against the company, it would confine Uber and many other platforms to the rules and regulations applicable to transportation services and employers – taking away the incentive for innovation and ultimately killing the ride-sharing app’s competitive pricing strategy. That would lead to higher prices overall and lower customer satisfaction.

This approach can be seen across Europe, where disproportionate measures have been put in place to protect the economic interests of the incumbent operators. The problem is that consumers – and often those who would be natural left-of-center voters, such as the young, the poor and the unemployed – have embraced the digital and sharing economy in a way which puts them out of kilter with the parties that claim to represent them.

Setting a Digital Precedent

The sharing economy flourishes because it is not subject to sector-specific regulation.

Increased regulation also sets a dangerous precedent for other online work-on-demand platforms. Should other companies lose their status as an information service and be boxed into traditional definitions of business, they too run the risk of economy-crushing regulations. It will then be impossible for digital start-ups to gain any traction in the European market against the incumbents – and European consumers will be unable to benefit from any of the services that they offer.

Already, in Brussels, several communes have insisted Airbnb hosts only rent rooms with en-suite bathrooms, Berlin, London and Barcelona have also imposed equally burdensome regulations on hosts.

The sharing economy flourishes because it is not subject to sector-specific regulation – yet by doing so it threatens the advantages that incumbents have developed in regulated industries. As a result, they try to use sector-specific legislation and apply it to a sphere where legislation is neither necessary or advisable.

The ECJ case will dictate the rules for an entire continent – and is the first test of whether our legal framework is fit for the digital age.

If regulation must come, it should be specific to the tech industry. Yet if Uber loses this court case, the result would be to try to squeeze tech industries into regulations that were developed in an analog era. This will be a defeat for consumers, for innovation, and for tech in Europe – at just the wrong time.

Reprinted from CapX.