Different Regulatory Tactics Lead to Success for Sharing Economy Startups Uber, Airbnb
As pioneers in the sharing economy, Airbnb and Uber face a host of similar challenges. Hoteliers and cab drivers alike are up in arms about the disruptive force driving the companies’ business models: It’s the notion that, in a world of peer-to-peer connections, individuals can connect and swap services—without the need for traditional housing and transportation providers.
Pressure from established groups has encouraged regulators to step in, and both companies now face legal challenges to their very existence.
Yet, key differences exist in the ways that Airbnb and Uber have defended themselves, largely due to how their respective industries are regulated. While Airbnb is moving to collect hotel taxes from its hosts as a way of establishing itself as a traditional hospitality provider, Uber has resisted being labeled as a taxi service. And as Airbnb seeks permission to play by industry rules and demands its users do the same, Uber is galvanizing its supporters to push for new rules of the road.
Airbnb’s driving motivation is likely the need to legitimize itself in the face of serious opposition. The startup is mired in a legal battle with the New York attorney general over a subpoena for records on its 16,000 New York-based hosts. The state says a majority of hosts are operating illegally, and it has already issued citations against thousands of hosts, with fines up to $25,000 for repeat offenders, in response to complaints. A similar push to crack down on violators is underway in San Francisco.
Airbnb has responded swiftly in each instance to present itself as playing by the rules. It updated its terms and conditions in April to underscore that it is hosts’ responsibility to comply with the laws of their cities. It also has booted identified violators of local ordinances.
A spokesman for the Airbnb declined to comment. Instead, he pointed to the company blog where global public policy head David Hantman unequivocally dismisses such bad actors.
“When their existing bookings end, there will be no trace of (these hosts) on Airbnb,” Hantman says in an April 21 blog post about violators identified by New York’s AG. “We are a young company, we are constantly learning. We are committed to making cities better and will, to the extent possible, investigate complaints when we receive them.”
Airbnb also announced plans to collect hotel taxes from its hosts, a gesture aimed at winning over policymakers with the promise of a revenue windfall. By being classified as a hotel in New York state, Airbnb says it will contribute $21 million in taxes annually to the state.
“They want to legitimize the activity,” says Arun Sundararajan, a New York University professor who studies the sharing economy. “Right now, it seems important just to have a framework under which people who are doing this can continue to operate…. This is sort of a compromise that will help create a starting point.”
Ultimately, Sundararajan says Airbnb may have legitimate cause to question whether or not its services should be taxed. One benefit of peer-to-peer services is that the community polices itself. A dirty apartment, for example, will generative negative reviews on Airbnb and become less popular. That allows the government to step out of its traditional role of holding hotels up to established cleanliness norms.
“The burden falls on the platform to screen for safety,” Sundararajan says. He notes that there will still be an ongoing role for government oversight for handicap accessibility and disaster preparedness, as examples.
That Airbnb currently doesn’t comply with any of those sorts of regulations on hotels is what makes the situation unfair, according to Geoffrey Allan Mills, board chairman of the Hotel Association of New York City.
“Intentionally or not, Airbnb has propagated what has become an unlicensed, unregulated and unsafe industry of illegal hotels in New York City,” Mills says. “We know that Airbnb isn’t going away. What we simply believe is that they should be subject to the same regulations and inspections for health, safety and taxes that legitimate hotels are.”
Apparently, Airbnb believes similarly. But when the company made its bid to pay hotel taxes in New York, the Hotel Association announced it would oppose the effort. Airbnb’s Hantman called it a “flip-flop.”
“It isn’t every day that a company offers to help contribute more tax revenue,” he wrote.
Uber, on the other hand, has established its brand using a very different strategy. Rather than welcome the varying regulations that taxicabs face in cities across the country, Uber has spread to 100 cities in open defiance of transportation laws.
“Together we have sparked a revolution in transportation,” reads an April 7 post on the company blog. The post calls on Uber users in Seattle to advance a referendum to repeal a ridesharing ordinance that Uber says threatens to “make it impossible for drivers to serve Seattle riders.” The proposal being considered by the Seattle City Council would cap the number of ridesharing vehicles on the road and boost taxicabs, a move to defend established taxi services.
Uber’s threat to traditional taxis is real, because the ridesharing service reduces costs for everyone–most notably the driver. Unlike taxi drivers in Seattle, Uber drivers can forego costly upfront requirements such as municipally mandated language, geography tests and physical exams. They can also defy metered rates, so long as passengers are willing to pay their established rates.
“When many people are breaking a law, it’s a good sign that we should re-examine the law,” says Janelle Orsi, executive director of the Sustainable Economies Law Center, which provides legal council to peer-to-peer companies. “Regulations define the boundaries of what we are allowed to do, and the sharing economy is demonstrating that there are vast new realms of possibility.”
That argument has worked in Uber’s favor in California, where the state public utilities commission codified the nation’s first model for overseeing ride-sharing companies last fall. The rules require the companies to carry $1 million in liability insurance and obtain a license to operate.
Uber’s main challenge has been demonstrating that it screens its drivers and has a hefty insurance policy in case of accidents. It currently faces litigation in San Francisco for a fatal accident that involved an Uber driver. However, the company has worked in coalition with competitors Lyft and SideCar to emphasize that their standards for driver background checks and insurance policies are as stringent as, if not stronger than, those for limo and taxi drivers.
One of Uber’s biggest challenges is the deregulation of taxicabs. Each city has its own regulations, and so far each city seems to have reacted in its own way to ridesharing. Minnesota has called for the companies to obtain commercial licenses, while Chicago and Washington, D.C., have moved to rewrite their laws. New York has ruled that the practice of “e-hailing” a ride is legal, and Pittsburgh cited Uber and Lyft drivers for criminal offenses in a sting operation.
“In a hundred different cities, you’ve got a hundred different rules,” says Sundararajan, who points out that the dilemma Uber presents to policymakers spans the sharing economy. The lines are blurring between picking up a friend from the airport and operating as a professional driver.
“There’s a need for clarity on what is legal and what is not,” he added.
The hodgepodge of taxi regulations demonstrates why Uber is hesitant to comply with the rules, unlike Airbnb. Another key difference, Sundararajan contends, is that Uber stands to replace the taxicab as currently exists, whereas Airbnb is unlikely to eliminate the market for professional hotels. (Mills notes that occupancy at New York hotels has gone up, not down, in the time since Airbnb launched there.)
“Both industries have made the point that the existing regulations were designed for a different business model,” Sundararajan says.
To make way for the new business model, 15 city leaders signed a motion at the U.S. Conference of Mayors annual meeting last summer to examine regulatory barriers for peer-to-peer companies. San Francisco has created a taskforce with a similar goal, and other cities are eager to find a way to embrace the burgeoning industry. Forbes projects revenues from the sharing economy to total $3.5 billion this year, growing at a rapid 25 percent.
Shareable, a nonprofit that aims to promote “a more joyous, resilient and equitable world,” has published guidelines for policymakers interested in embracing the sharing economy. It focuses on noncontroversial ways cities can encourage growth, such as offering free parking for ridesharing cars. Airbnb and Uber are “just the tip of the iceberg” in terms of the sharing economy’s potential, says Shareable Cofounder Neal Gorenflo.
“We need new regulations that make it easier to share our property,” he said. “Law and policy greatly favor exclusive use of property and private versus cooperative or micro enterprise.”
That’s a mindset experts say is starting to change, swept in by a generation of Millennials accustomed to sharing—whether it be streaming music instead of buying it or consuming news based on what’s shared by friends on social media. To younger consumers, it only makes sense to parlay assets such as cars and apartments when they aren’t being used into ad-hoc services that can help others and generate extra cash.
But in the current state of things, there are communities where homeowners can’t legally sell the vegetables grown in their backyards because of protectionist labor laws, and those are the sort of regulations that will need to change to make way for the sharing economy. To bring about that change, Gorenflo says companies like Airbnb and Uber will have to continue investing serious money into lobbying and self-advocacy.
“That’s why these companies have raised these massive war chests,” he said. “They’re going to need it to scale the global level and challenge policy jurisdiction by jurisdiction.”
Editor’s Note: Airbnb is a member of 1776 in Washington, D.C. Uber also has been a sponsor of previous 1776 events.