When disrupters become all too powerful

The brief history of tech-enabled ride-sharing is not really a story about transportation, but a story of clashes with regulators. Uber and Lyft versus cities and courts. Municipalities have tried to ban ride-sharing companies, but have mostly given up. Courts have disagreed on whether the companies’ drivers should count as contractors or employees. More fights are ahead.

Ride-sharing’s growth was first seen as cannibalising demand for taxis or rental cars, but the next strategy for growth appears to be competing directly with public transit.

Consider Lyft Shuttle, which started in June. It offers fixed-route, fixed-price pooled service — just like a bus. It’s tailored toward urban professionals who commute to job centres. (Service is available only in San Francisco and Chicago right now.) If these companies can profitably poach the ridership of high-demand transit routes, they will. Which then raises important questions: If ride-sharing firms can operate more effectively and efficiently than public transit agencies, should the government get out of the transit business and let private companies provide better service at a lower price?

Or should government subsidise or outsource, rather than operate its own transit services? Or should government adopt the companies’ best ideas — perhaps new or different routes with different types of vehicles — and then ban the private sector from offering competing services?

If governments do none of the above, then lost ridership and revenue would further strain the budgets of public transit agencies. This would aggravate the social equity concerns inherent in an emerging two-tiered transit system.

Private-sector competition to public services raises these sorts of concerns because the companies’ agenda is simpler: to make money. Public services strive toward solvency, but also seek to meet public policy needs, like providing transit access for poor neighbourhoods.

Consider an example from outside the transportation world: What if a Silicon Valley firm created a service to compete with US Postal Service’s first-class mail? At the moment it costs 49 cents for a stamp that allows the sender to mail a letter anywhere in the US.

But presumably it doesn’t actually cost 49 cents to get a letter from New York City to Philadelphia. The post office overcharges for mail along those shortest, busiest routes, to subsidise the far higher expense of conveying a letter from, say, rural Alaska to rural Puerto Rico.

When it comes to mail, dense urban areas subsidise rural ones.

If a start-up decided to replicate the service but only in dense urban areas, and at a lower price, it might initially be seen as an innovative new growth company. But as the company got bigger and bigger it would cut into the revenue of the USPS, destroying its ability to overcharge urban areas in order to undercharge rural areas.

Options

Perhaps USPS service in rural areas would become more expensive or less reliable. Either would draw the attention of rural politicians concerned that their constituents were being excluded from the service. Perhaps to avoid regulation, the company would then offer rural service but at a much higher price to offset the higher operational costs. It would be sound business logic, but it would not address the politicians’ concern.

The other option would be for the company to raise its rates in urban areas, so it could charge the same rates in rural areas. Suddenly its prices would look very much like those charged by the USPS in the first place. These are the dilemmas that await ride-sharing companies and governments. What will be the impact on transit agencies as ridesharing firms, and in the future firms that operate fleets of autonomous vehicles, offer competing services?

What will the societal and political response be if these services are mostly offered in wealthy, dense communities at the exclusion of poorer and/or rural ones?

One possibility is that government will mandate minimum levels of service in all communities where ride-sharing firms are allowed to operate. Maybe in exchange for agreeing to such an arrangement, large incumbent companies would be offered licences denied to other companies.

We’ll have traded the taxi medallion system for a new entrenched regulatory regime.

To date, ride-sharing regulation has been about tearing down old laws to make way for disrupters. The next battles may end in a more familiar standoff, by creating a new highly regulated regime.