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Uber Regulation

For those unfamiliar with Uber, it's an on-demand car service that operates in several U.S. cities. Many compare it to a taxi service, but it isn't. Taxi service is a highly regulated business, and taxis can be hailed when needed. Uber's vehicles are not hailed, but rather pre-booked like a car service using an online application. That distinction is largely what separated taxis from car services (and lots of regulation) for decades. Uber pushes the distinction by allowing on-demand pre-booking via smartphones. The Uber mobile app enables both booking and payment.

Since Uber is not a taxi service, it runs unregulated. Uber is free to adjust prices based on supply and demand--and does so. Uber calls this practice surge pricing , but critics call it price gouging. As demand for its services increases, so do its rates (significantly). Uber defends the practice as a means to incentivize its drivers to become/remain available during peak periods. Surge pricing was initially launched on New Year's Eve (2011), when demand was 20 times higher than usual.

In the U.S., we generally embrace supply and demand economics. We accept that businesses can set their prices to whatever the market will bear. But it can feel out of place on costs that were otherwise predictable. Uber defends the practice by comparing it to airlines and other industries. Uber CEO Travis Kalanick recently tweeted "SFO to LAX 1-way/coach delta $660, same flight on 1/7 $58--11.3x Surge Pricing..."

Many Uber customers are frustrated with surge pricing. Despite Uber's efforts to warn its customers, last week's Twitter feed was filled with complaints from New Year's revelers. Patrons were charged a minimum fee of $75, with charges as high as $350 for just a few miles. Some tweeted that drunk driving fines were a relative bargain by comparison.

The idea of a regulated marketplace is familiar to those of us in telecommunications. Both the federal and state governments began regulating telecommunication services nearly a century ago. It was then that the states created Public Utility Commissions (PUCs) to regulate utilities and other government-sanctioned monopolies.

At the time, the Bell System owned the patents for loading coils, which enabled long-distance calling. It interconnected its own exchanges, but refused to connect its long-distance network to non-Bell exchanges. The result was the Bell network became far more attractive, and competitor exchanges became distressed businesses. Bell acquired these firms at discounted rates and then interconnected them to its long-distance network, effectively flipping them back into profitable businesses. It wasn't illegal, but as Bell grew, the anticompetitive practice became a concern.

Regulation was an emerging option, but the primary method of controlling anti-competitive behavior was antitrust law. It was antitrust that tore apart Rockefeller's oil empire, so Theodore Vail, president of Bell, opted to embrace regulation. Vail agreed to government regulation of Bell's prices, service, and rate of return in exchange for no competition.

The Bell System became a nationally regulated monopoly. Each state began forming public utilities commissions (PUC) to control local utilities. The system worked reasonably well with a few (major) adjustments along the way---namely the 1934 Communications Act, the 1956 Consent Decree, and The Telecommunications Act of 1996. The model was built upon a set of assumptions and technologies that have since largely disappeared.

One of the key benefits of regulation for consumers was predictable pricing, and the same logic and benefit was applied to taxis. This is why passengers don't have to negotiate with taxi drivers, as is the case in some other countries. The meter determines the price, and the meter's rates are set by the PUC. Regulation prevents a taxi from overcharging or gouging the customer in a situation where there are few or no alternatives.

Taxis and telecom services are both subject to spikes in demand. Telephone service traditionally tended to peak on Mother's Day and Christmas. Typically, rates are low for the holidays, but in a post-regulated world, should rates "surge" upward? Should the rates be preset or subject to demand, and if demand, how should customers be informed of the current bid?

Uber received considerable flack for surge pricing during Hurricane Sandy. The hurricane took out the subways, causing unprecedented demand for Uber's services. Uber incentivized its drivers to keep driving by doubling its rates, and passed on the increase with its practice of surge pricing. It was a public relations disaster for Uber because it was perceived as opportunistic. "As NY floods, 'Robin Hood' Uber robs from the rich and... Nope, that's about it ."

Disasters always create tremendous demand spikes for telecommunications. Should carriers be able to increase rates on calls to/from disaster-affected areas? What if the carrier has to pay hazard premiums to its employees? Uber claims it needs surge pricing to incentivize its drivers to stay in their cars--isn't the same true for telecom workers who have personal and family matters to attend to during a time of crisis?

Dynamic rates would make it impossible to predict the cost of services during a disaster. Today, it is common to have standby network capacity for failover, a known and predictable cost. Would it still be a common practice if pricing was both dynamic and uncapped? Or, are the flat rates we pay an unreasonable burden to the provider? Disasters and wars impact many other costs with unpredictable financial implications, including the cost of fuel--should telecom be different?

There are no simple answers to these questions, but they do need to be asked. The trend of deregulation has been consistent since the 1996 Telecommunications Act. Most states have moved away from rate-of-return regulation to various forms of price cap regulation on local services. VoIP services have largely remained outside the jurisdiction of the PUC due to the competitive nature of the Internet. Regulation was in lieu of competition, so there is less need for it as the Internet flattens the industry.

There are lots of issues and even more solutions. Uber-like services in France now have a 15-minute minimum waiting period before they can pick up a customer. The legislation was passed in efforts to protect the taxi services. The French figured it was easier to break the technology than the obsolete model. The problem is the transition isn't yet complete. As Uber has shown us, expectations were shaped by regulation.

The declining role of PUC regulation creates opportunity, confusion, and gaps. For example, one role of the PUC was quality enforcement via penalties. Today, there is no industry authority or ombudsman that enforces quality. Customers can, of course, vote with their wallets, but that can be fairly complex too--particularly if the complaint has to do with poor support of number porting. Also, not all markets have viable competition, thus disappearing regulation creates a new set of old problems. States are grappling with the concept of a test for competition.

Telecom is hardly a local issue any more. Internet access rather than telephone service has become the new last mile. Uber's issues with surge pricing are just a preview of our unregulated future. Everyone is getting into the hosted VoIP business. Factor in Skype, WebRTC, and the NSA and things are going to get very interesting.

Dave Michels is a Contributing Editor and Analyst at TalkingPointz.

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