European Court of Justice Advocate General: “Uber is really a transport company, not an internet company. Now regulate the ass off it, damn it!”

 

12 May 2017 – Uber is really a transport company, not an internet company, in the official opinion of an Advocate General to the European Court of Justice, Maciej Szpunar.

Side note: Szpunar is a bit of an expert on the roles and responsibilities of Internet intermediaries. At an OECD event I attended last month in Paris he was one of the speakers who discussed how internet intermediaries have evolved “from invisible facilitators to market players that interact directly with consumers in various functions and roles”. His point was not only do they facilitate e-commerce transactions, but also increasingly influence or in many cases determine our access and choice to online services and goods, and our ability to navigate and retrieve information online. The growing dominance of mobile providers with their telecommunication services accentuate the issues. A good chap to write this opinion.

The opinion is quite significant and if it’s followed by the court … these opinions are not always followed by the court itself but in a detailed exposition such as this one (as was notably the situation in the Max Schrems’ “Safe Harbor” case) most legal pundits say the Court will follow it. Which means it will have a significant impact on horizontally integrated platforms operating in Europe that present themselves as intermediaries and thus bypass many regulations. I will have more on the growing importance of “platforms” at the end of this post.

The underlying case was quite simple. It was brought against Uber by Barcelona’s licensed taxi association, Elite Taxi, which alleges that the unlicensed UberPop service is illegal. The case boils down to whether Uber can bypass local licensing requirements by qualifying as an information service. Transport isn’t covered by the European Single Market services directive, which is intended to sweep away local protectionism. So if Uber qualified as an “information service”, it could sidestep the requirement to follow local taxi licensing regulations.

According to Szpunar, it doesn’t. He recommends that the court reject Uber’s defense. I have links to the Court press release and to the full opinion at the end of this post, but here is a summary of the key points made by Szpunar:

1. Szpunar set two tests for an information service, both of which he concludes Uber fails to meet. One is that the information supply is “economically independent” of the customer-facing bit, as it is with airline reservation systems such as Amadeus and Sabre. The second test is whether “the provider supplies the whole service… so that the two services form an inseparable whole, a proviso being that the main component… is supplied by electronic means”.

2. Uber fails to meet either standard. Drivers aren’t autonomous of the platform, and wouldn’t be driving around for hire if it wasn’t for Uber. It’s Uber, not drivers, who set the price:

All those features mean that Uber cannot be regarded as a mere intermediary between drivers and passengers. In addition, in the context of the composite service offered by the Uber platform, it is undoubtedly transport (namely the service not provided by electronic means) which is the main supply and which gives the service meaning in economic terms. In relation to the supply of transport, the supply whereby passengers and drivers are connected with one another by electronic means is neither self-standing nor the main supply.

Therefore, Szpunar concludes, the court should view Uber as a transportation company.

The case raises the tricky question of how regulators should treat companies such as Airbnb, Skype and Uber: platforms that offer rides, accommodation and communications despite not owning taxis, hotel rooms or telephone lines. In the short term, the ECJ case has the potential to add to Uber’s European woes where it has faced an extremely tough regulatory ride. Uber’s introduction has been met with a mixture of riots, fines and even the arrest of senior executives in some cities, while the app was broadly welcomed in others, such as London.

And of course Uber played down the opinion:

Being considered a transportation company would not change the way we are regulated in most EU countries as that is already the situation today. It will, however, undermine the much needed reform of outdated laws which prevent millions of Europeans from accessing a reliable ride at the tap of a button.

That statement is a wee bit of a smoke screen. In recent years, Uber has attempted to abide by local rules … after initially ignoring them and facing the riots, arrests, etc. noted above. For instance, after initially facing fines of up to €10,000 per driver in Brussels, the company now operates a legal, regulated service in the city. It now says that it “abides by local laws and works with independent, licensed minicab professionals” so it would not have to change dramatically how it operates.

Note: Uber … in some version … now operates in 21 of the EU’s 28 countries.

The European Commission is pushing for member states to use a light touch with the car-hailing app and other similar services. One commissioner likened trying to ban Uber to “fighting with print in medieval times”. And that’s because the EU’s executive arm has tried to reduce the regulatory differences between EU countries when it comes to “digital services” … the tag they use for Uber. Yes, the Commission has taken a tough stance on competition issues involving Apple, Google and Microsoft but it has taken a far softer tone with the so-called “gig economy”, arguing that national regulators should take a light touch.

Technically, as an app, you should set up in one country and be able to offer services in France, Netherlands, etc. without going through a special regulatory regime. This whole thing exists as a fundamental pillar of single market. Because in theory, the EU allows service companies to operate freely across the bloc. But some sectors, such as transport, still face strict national regulation. Companies such as Uber and Airbnb, which facilitate a service but do not carry it out, sometimes fall awkwardly between sets of rules. And it is a conundrum: the tech community rises in arms saying regulating pieces of software as if they were taxis or hotels makes no sense at all and wouldn’t help protect consumers or stimulate the economy.

The counter: these companies gain an unfair advantage by avoiding rules that apply to rival players in their sectors.

And there is a bit of a divide in the EU. Those sympathetic to Uber’s argument are small, digitally inclined countries such as Estonia and Finland. And repeated time and again, in much of Europe poor worker conditions power gig economy. But there is also an argument to be made that the problem is not with the technology as such, but the way Uber organizes the relationship with the drivers. The deal is not a win for the drivers as much as it is for Uber and its  users.

My view: sorry, but taking a cab or staying in a rented room for a night or weekend are not “digital experiences” and both need to be treated as taxi or hotel services by regulators. Telecom services, watching a film or listening to music … these are digital experiences but monopoly and oligopoly regulations apply to these as well. What the legal opinion seems to be saying is that if you contact Uber, ask for a ride, and pay them, then Uber is providing some sort of transportation service, not an introduction agency. This seems a rare and remarkable victory for common sense. Although the cynic in me says we might be a wee bit distracted by these head-lines. If Uber’s self-driving cars … or somebody’s self-driving cars … ever get through testing/approval there will be no drivers.

PLATFORMS

In his bio on Steve Jobs, Walter Isaacson describes how Jobs didn’t want to build an app store. It was a “platform” and Jobs was wary of the “bandwidth” needed to police a veritable army of third party developers not under Apple’s control. Eventually, Jobs relented and the App store would become an enormous success (App store revenue was  $28 billion last year). In fact, third party apps have become so central to the iPhone, it’s hard to imagine it without them. Increasingly, products are becoming platforms.

It’s become kind of a Joy’s Law for the networked era—the best resources and capabilities always lie somewhere else.

A recently as a decade ago, the world was largely dominated by “pipeline” businesses with linear value chains. We would buy products at retail outlets, or possibly their online versions, stay in hotel chains when traveling and hail taxis one the street and nobody thought much about it. Clearly, a lot has changed. Today, platforms like Amazon, Airbnb and Uber are dominating those earlier, linear business models. I certainly cannot detail in this post all the points to be made on why platforms are important so I direct you to two books by prominent economists, Matchmakers and The Platform Revolution, which ably explain the dynamics of how platforms like these function as multi-sided markets.

In truth, platforms are nothing new. In medieval times, village markets and fairs served as platforms to facilitate connections between ecosystems of merchants and ecosystems of customers. More recently, enterprise software companies like SAP and Oracle used the database as a platform to control software ecosystems, much like Microsoft used the operating system to dominate PC’s. And today’s open technology platforms allow us to access vastly more technological capability than any one organization could provide by itself and do so at far lower cost. Any firm that would try to go it alone simply wouldn’t be able to compete. That’s why today, even Microsoft loves open software.

Clearly, Amazon is the 800-pound gorilla of e-commerce. In 2016, it accounted for a full 68% of US online sales growth. That gives it a leg up on traditional retailers because it can leverage its unique access to data about consumer behavior to outperform any other online retailer.

Many speak of “platform capitalism” – a broader transformation of how goods and services are produced, shared and delivered. Instead of the tired conventional model, with individual firms competing for customers, we are witnessing the emergence of a new, seemingly flatter and more participatory model, whereby customers engage directly with each other. With a smartphone in their pocket, individuals can suddenly do things that previously required an array of institutions. Uber is just one transformation we are witnessing across many sectors of the economy. And they are an example of the new business model: extraordinary valuations but suspiciously light balance sheets.

Facebook embraces the platform rhetoric. Uber … eh. Different story. Uber uses its platform status as a shield against lawsuits, and that is why it finds itself in such trouble. For the legal community and the champions of competition, there are many issues. Some of the supporting briefs in the Uber case (and a few prescient bog posts) noted some genuinely interesting questions: what is it that Uber’s platform offers that traditional cabs can’t get elsewhere? It’s mostly three things: payment infrastructure to make transactions smoother; identity infrastructure to screen out any unwanted passengers; and sensor infrastructure, present on our smartphones, which traces the location of the car and the customer in real time. This list has hardly anything to do with transport; they are the kind of peripheral activity that traditional taxi companies have always ignored.

However, with the transition to knowledge-based economy, these peripherals are no longer really peripherals – they are at the very center of service provision. Today, any service provider, and even content provider, risks becoming hostage to the platform operator, which, by aggregating all those peripherals and streamlining the experience of using them, suddenly moves from the periphery to the center.

And there’s a good reason why so many platforms are based in Silicon Valley: the main peripherals today are data, algorithms and server power. For instance, this explains why so many renowned publishers would team up with Facebook to have their stories published there. Most of them simply do not have the know-how and the infrastructure to be as nimble, resourceful and impressive as Facebook when it comes to presenting the right articles to the right people at the right time – and doing it faster than any other platform.

Few industries will remain unaffected by “platform fever”. If not they face death at digital speed.

Uber could have been in a more “happy” place. In the U.S. its clashes with city after city … and in Europe, country after country … showed that its brazen approach does not work in its favor. Policy makers worldwide are starting to question how such businesses in the so-called sharing economy should be governed. That is especially the Commission’s dilemma: how to encourage a regulatory environment in the EU that allows new business models to develop but keeping in mind the critical priorities of protecting consumers and also ensuring fair taxation and employment conditions for workers.

“Uber is a platform of pain, and Facebook is a platform of pleasure”. So says Sociologist Tiziana Terranova who is among the most prominent researchers on digital culture in Europe, and who has done some deep analysis on the European roots of protests against Uber. I will let her have the (second to) last word:

Yes, the Uber model is elegant, smooth and is linked to its own mechanisms. But the model comes from a culture that asks the technologies developed by Silicon Valley companies to automate the labor market and, in general, all markets where goods and services are moving. They have created a system that tries to disintermediate relationships and manage large work masses with minimal investment. Uber is the poster child for market platforms, and the shadowed economics and ethics that underlie them. Operating under the camouflage of internet era disruption and innovation, market platforms are beginning to be seen as an exploitation of the precarious workforce rather than agile and flexible transformation of industrial-era inefficiencies and waste. The halo is slipping, and the devil horns are showing. 

Uber has externalized major elements of its operating economics, just like industrial polluters taking no responsibility for spewing carbon into the air or pouring toxic chemicals into our waterways. But the externalities in this case are people.

In the end, the legitimacy of the Uber model … and all such models … will ultimately be settled in the courts and the legislatures. Because the issues involved are a microcosm of the precarious work economy as a whole, based on the shifting tides in the relationships between workers, the businesses that pay them, and the governments that are supposed to look after the interests of both.

 

For the press release on the Uber opinion click here.

For the full Uber opinion by Advocate General Maciej Szpunar. click here.

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