Why We Should Regulate Ridesharing Like Buses and Restaurants

In my last post, I shared my thoughts on why large ridesharing services around the world will recover and thrive after the global COVID-19 pandemic is over, and meaningfully replace public transportation everywhere. When will the virus be under control is unclear, and we should prepare for the worst. But whenever that future becomes reality, the transportation service that ridesharing provides will become essential, almost akin to power, water, and broadband Internet.

Which begs the question: how should ridesharing be regulated?

I believe it should be like buses and restaurants.

Why Buses and Restaurants?

Ridesharing will functionally become a type of public utility; it already is in certain cities with dense coverage. There are many regulated utilities to look at as references, but none of them are similar enough to ridesharing to justify copying and pasting the same regulatory framework onto ridesharing.

Taxi is the obvious analogy. The battles in the U.S. between ridesharing companies and taxis via the local city governments, which typically regulate the taxis, are well documented at this point. Where the current taxi regulations fail, and thus should not be replicated, is that it artificially lowers supply via the so-called medallion system. This system gives way to corruption and political patronage -- the number of taxis a company can operate in a city is based on who you can lobby in the government, not consumers’ demand for your service. The ample supply of drivers on these ridesharing platforms is what makes the service convenient and attractive to the riders vis-a-vis normal taxis. Market dynamics and competition for users should dictate the supply, not artificial limitations based on political connections in the guise of regulation, and that element of ridesharing should remain untouched.

Some other regulatory examples are pure public utilities, like power and water suppliers, and private-company-provided utilities, like cable, broadband Internet, and telecom services. In the U.S., these tend to be “regional monopolies”, where there is a single provider in a geographical region and the consumers don’t have any choice. The reasoning behind these monopolies are generally acceptable; it takes a lot of investment to build and maintain these basic infrastructures, so recreating them for the purpose of competition makes little macro-economic sense. However, the same reasoning is not applicable to ridesharing services, because they are asset-light and infrastructure-light to begin with; they don’t need to build and maintain any physical infrastructure.

To me, ridesharing should be regulated as a hybrid of public transportation, like buses, and restaurants. Because ridesharing is already a form of public transportation and will become more so in the future, which I’ve discussed at length in this earlier post, they should abide by the current public transportation safety standards for both the vehicles and the drivers. Some new guidelines and processes will have to be developed by the relevant state government commissions and law enforcement authorities to execute this (there are definitely more cars and drivers, than buses and bus drivers), but the substance of the regulations don’t need to differ much.

The cleanliness and health impact of the ridesharing cars can be treated like restaurants, because the type of concerns consumers will have post-COVID-19 will be similar. People will be cautious, if not paranoid, for a long time about the cleanliness of the things they touch, sit on, and of course eat. Restaurants will need an upgrade in cleanliness in general and the regulatory efforts to push forward those changes ought to be expanded to apply to ridesharing vehicles, without reinventing the wheels.

Regulating ridesharing as a hybrid of buses and restaurants can help ensure a baseline quality of service and trust. As for ridesharing’s other characteristics, they should be left alone and up to market dynamics to sort themselves out.

(These are mostly U.S.-based examples and analogies, but I think the principles can be applied in other countries too and adapted to their existing regulatory frameworks.)

Of course, there is always the option of no regulation at all. I don’t think that’s the right direction, not just because regulatory guarantees of safety and health are necessary for consumer protection reasons, but also because smart regulations will actually help these ridesharing companies improve their credibility and profitability, and thus economic sustainability.

Regulations Improve Credibility

Every ridesharing service has had its fair share of safety issues and public relations disasters when it reaches a big enough scale. Both Uber and Lyft have a long list of severe safety problems -- from sexual assaults to crashes to even murder -- happening on their platform. Didi Chuxing has had similarly egregious violations. Grab is no different.

Ridesharing services all have a credibility problem with the public. And instead of fighting regulators at every turn, being open to smart regulations will help its credibility and improve the service quality. And regulations don’t automatically impede profitability. No one in the U.S. would open an account with a bank that is not approved by the FDIC (Federal Deposit Insurance Corporation). Banks are making money just fine.

Similarly, a ridesharing platform that has the stamps of approval of relevant regulatory agencies that can ensure transportation safety, drivers’ background check, and health and cleanliness of the cars will attract more riders, not lose them.

It’s a question of balance, not either or.

Credibility Improves Profitability

Of course, we cannot ignore the reality that these ridesharing platforms are run by for-profit private companies, all of which built their services with venture capital money. So they are under pressure to deliver, not just some kind of profit, but hyper-growth, massive profit.

Interestingly, regulations that enhance these ridesharing services’ credibility may improve their profitability in the post-COVID-19 world. Yes, there will be new compliance costs. But the cost of acquiring drivers will also go down due to massive unemployment, as I posited in my previous writing. Furthermore, the compliance costs can be mitigated by a pricing scheme that is competitive with public transportation, while providing a much healthier and cleaner transportation option -- something I bet many people will be willing to pay for with an extra buck or two per ride.

Will all that lead to a profit margin large enough to meet the expectations of VCs or the most optimistic Wall Street analysts? Probably not, but that’s an expectation setting problem, not a business model problem.

The hard truth is ridesharing companies are not pure tech companies. They are what Social Capital Founder and CEO, Chamath Palihaptiya, calls “tech-enabled hybrids”. It’s a perfectly fine business model, but one that should not command the same high valuation or earning multiples as pure tech companies like Google or Facebook. And it’s long overdue for this difference to be reflected in the way these ridesharing businesses are operated, capitalized, perceived, and valued.

The coronavirus pandemic will lead to rethinking and reshuffling in every industry; ridesharing will be no different. By treating and regulating ridesharing platforms like buses and restaurants, they will become a service that is essential, trustworthy, and economically sustainable.

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