The Uber Challenge

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This post marks the debut of The Drucker Difference on It will appear every Wednesday.

In his 1976 biography of Peter Drucker, John Tarrant underscored the management thinker’s popularity by likening him to an eminent orchestra conductor who, hurrying out of a busy urban train station, hopped into a taxi. “Where to?” the driver asked.

“It doesn’t matter,” the conductor replied, with a sweep of his hand. “I am in demand everywhere.”

It’s always been tough to imagine Drucker being so haughty. But increasingly it’s difficult to picture him climbing into a taxi. These days, I believe, he’d prefer Uber—despite, and perhaps even because of, the controversy surrounding the automobile-for-hire service.

Last week, Los Angeles transportation officials joined a growing number of municipal regulators attempting to rein in the upstart. They sent Uber (along with Lyft and Sidecar, two other companies that similarly find fares via smartphone apps) a cease-and-desist letter, demanding that its drivers stop picking up passengers in the nation’s second-largest city. Hundreds of cabbies in L.A. signaled their support for the action by circling City Hall and honking their horns; many of them argue that it’s only fair for Uber and its ilk to be regulated under the same set of rules that traditional taxis are.

Uber and the others counter that they aren’t taxi companies and should be governed by another entity altogether—the state Public Utilities Commission, which has struck operating agreements with them and is working on crafting new rules better suited for an “online-enabled” age.

Meanwhile, as Drucker would have seen it, both the taxi operators and their local government overseers are focused on the wrong thing: trying to sweep Uber into yesterday’s reality, rather than helping move the entire system toward tomorrow’s.

“Regulations, no matter how badly needed at any one time, and how beneficial at any one time, always become obsolete eventually,” Drucker wrote.

He cited, for example, 19th-century rules over American rail companies, which originally amounted to “one of the great political inventions” by controlling these “natural monopolies” in a novel way. In most countries, Drucker noted, the railroads were nationalized. “In the U.S., alone in the developed world, they remained in private hands but under strict regulation,” he explained. “For a century, this worked well.” But eventually, the railroads (as well as telephone, telegraph, and electricity companies) faced fresh competition fueled by “new technology.”

(MORERideshare Battle Shifts to L.A.: City Tells Uber, Lyft, SideCar to Stop Picking Up Riders)

“At this point,” Drucker declared, “continued regulation becomes counterproductive. It can only do damage—and just as much to the former monopoly industry as to society and the economy.” Clearly, that’s what is happening now in the battle over Uber.

First, there’s the damage that regulators in Los Angeles and elsewhere are causing to society by making it more difficult for consumers to use a service that they greatly value. People love Uber because they feel that it provides things that they don’t get from most taxis: convenience, reliability, and comfort. (I myself have used Uber a couple of times, and had a great experience.) In fact, Uber patrons are willing to pay a premium—in many instances double what they would for a regular taxi—making the company an innovator more in the mode of Apple, say, than Southwest Airlines.

“Innovation may take the form of lower price—the form with which the economist has been most concerned,” Drucker wrote in The Practice of Management, his 1954 classic. “But it may also be a new and better product (even at a higher price), a new convenience or the creation of a new want.”

Second, there’s damage to the economy—especially the pocketbooks of individual drivers. Indeed, ample evidence exists that those profiting most from stifled competition against taxis are the companies that own the majority of medallions allowing the cabs to operate, rather than those sitting behind the wheel. In this respect, Uber gives cabbies (some of whom are already part of the online network) more opportunity to make a decent living, not less.

Third, there is the damage to the taxi industry itself. Public opinion against the old guard is mounting. In the end, there is a certain inevitability to deregulation or—better yet in this case, given the legitimate safety and insurance issues involved—to enlightened re-regulation (a la the California PUC).

“It is not that regulations are necessary or unnecessary—that depends on the individual regulation,” Drucker wrote. “What is important, above all, is that we avoid regulations that do harm.”

The more time, energy, and money that the taxi companies spend on defending their turf through rules and bureaucracy, the less these resources can be put into what matters most if they’re going to survive in the long run: improving their own services (including their own apps) and, in turn, their standing with consumers.

(MORE: The Other Complication for Airbnb and the Sharing Economy: Taxes)

There is often “a deep desire to protect the status quo and to make life easy and comfortable for the fat and lazy,” Drucker observed in The Age of Discontinuity. “Rapid change, with new industries and new business emerging fast, is neither easy nor comfortable, whether for managers . . . or for government administrators.”

Here’s hoping that the taxi companies find the courage to compete honestly. Or maybe, they’re really just yellow.