Another Example of Regulator Impact on Business Strategy

Taxi and limousine regulators from 15 U.S. and Canadian cities plan to place restrictions on use of smart phone applications and online services that allow people to find and use taxi services, the  Wall Street Journal reports.

The story would be a familiar one for many veterans of the communications, broadcasting, cable TV and radio businesses, and a newly-heard story for technology industry participants. And that story is the foundational role played by regulations in enabling or barring a new industry from developing.

In fact, some global studies indicate that such entry restrictions not only are harmful to consumer welfare, but also lead to corruption. That flies in the face of theories of the benefits of “public interest regulation,” but the facts are hard to ignore, some might argue. Simply put, a study of practices in  85 countries shows fewer public benefits, not more, from heavy entry regulation. 

Deregulation has dramatically reshaped mobile service provider markets, for example, leading to a situation where it is common for a former monopolist to have only about a third of the market.



The other element of the story that will be familiar to many in the telecommunications business is the notion that the industry that is supposed to be regulated comes to ”own” the regulatory process. Such regulatory capture is widely seen as part of the reason large firms spend so much money lobbying in Washington, D.C., for example.

The rules, created by a task force of the International Association of Transportation Regulators,  would, for example, ban the use of a GPS-equipped smart phone in place of a taxi meter. Any experienced executive in the communications business could likely point to many instances where a regulator ruling on a technology matter had large business consequences for a service provider, or would-be service provider.

The rules would essentially kill Uber Technologies, and others like it, which use drivers' phones to determine the length and cost of rides. That appears to be a simple “technology” rule, but it also has business consequences.

The rule is, in some cases, and perhaps ultimately, about controlling entry into the business. The use of new smart phone based systems essentially undermines the licensing system used in the taxi industry. By banning the use of smart phones for metering, regulators also control entry into the business.

That is a hallmark of communications regulation as well, where a wide variety of rules, some based on technology, also prevent or enable contestants to enter the business.

The proposals also speak to retail packaging and pricing, another hallmark of communications regulation. The new rules would forbid "demand-pricing,” where fares for trips of equal length and destination could vary based on supply and demand.

As always, regulators will say the new rules are intended to protect the public from unfair fares and protect safety. The corollary is that the rules will protect an incumbent industry from competition that represents more consumer choice.

It’s an old story, indeed. The story might be less obvious in the wake of widespread deregulation of telecommunications in most nations, but remains a crucial element of the communications business. And the car for hire business, it now seems, is in the spotlight.

Whatever one thinks of the benefits or costs of entry regulation, there are costs.