Ride sharing scores a victory for the share economy

Last Thursday’s California Public Utilities Commission  voted 5-0 to set regulations on ridesharing, effectively legitimizing the business model from a regulatory standpoint. It’s an incremental victory for ridesharing and a larger sign that share economy business models stand a solid chance of being able to fend off regulatory threats that are fueled by the industries they’re disrupting.

Ridesharing is one of the most obviously controversial sectors in the share economy. Quite simply, taxi services are an area where there is significant vulnerability to disruption and it’s difficult to argue that services like Uber, Lyft and Sidecar are not going to eat into market share of the existing taxi services market even if the ease of use of the new services will also expand the market. We are likely to see both ride and taxi services more as they become more available and accessible, but I’m already hearing from taxi drivers that the supply flooding into the market is disrupting business as usual.

But first let’s look at why taxi services are so vulnerable to disruption? To start, riders in major cities routinely complain that not enough taxis are available during peak times. Perhaps more important than availability is that the service itself has not changed in the last fifty years, or even the last decade in which mobile connectivity has entered the picture. One of the most reported irritations is with regard to payment. Taxi drivers don’t have the right change, tipping is awkward, and fewer people are carrying or want to pay with cash.

Enter services like Uber, Sidecar and Lyft where you can locate a ride via a mobile device, as well as pay and tip via a smartphone. Forget the sustainability aspects of ride sharing, it’s a fundamentally better user experience, which is what makes it so potentially disruptive.

Not to mention the fact that the taxi medallion system in many cities tightly regulates the numbers of taxis on the road, which creates artificial scarcity. With ride sharing networks suddenly supply expands to market demand. In fact I expect the introduction of ride sharing programs to lower the cost of taxiing around town. Many taxi rates in places like New York are regulated by the city, which protects consumers and drivers, but now that the market is being opened up, might we see better pricing for consumers?

The regulations that the CPUC approved are themselves largely unthreatening to the growth of ride sharing. They include things like having drivers undergo a criminal background check and a zero-tolerance policy for drugs and alcohol. There’s also a requirement to hold $1 million per-incident insurance, which services like Lyft already offer.

I do wonder, though, if insurers may try denying coverage to drivers who participate in ride sharing networks merely because they don’t want any associated risk. Insurance experts have pointed out that if a ride sharing driver gets sued personally, they can be on the hook for the legal fees of a defense even if ridesharing companies offer a million dollar insurance policy. Once a driver accepts payment for a ride, it’s considered a commercial purpose, which for many insurance policies is an automatic exclusion.

Other share economy sectors like car sharing have received specific legislation in California preventing insurers from dropping drivers who let their cars be rented in peer-to-peer car sharing networks.

What taxi services need to survive is a great mobile platform that makes hailing a taxi, paying and tipping seamless and price competitive. But these are not competencies of the taxi industry and unlikely to become so without significant innovation. These are the competencies of their ride sharing competitors.

And on the ride sharing side, I don’t believe the CPUC’s approved regulations will be the last battle. Many state courts and the legislatures will, I believe, need to address insurance issues surrounding services like whether there can be any personal liability for a driver once the ridesharing network’s insurance has been exhausted. But these are not insurmountable barriers to adoption. And the longer consumers have to adjust to and support these innovative new share economy business models, the harder it will get for legislators just to brush off these disruptive startups. The CPUC’s vote just proved that.