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How Uber and Airbnb Won

[J]eff Bezos never gave Brad Stone an interview for his best-selling biography of Amazon, “The Everything Store” (2013). But for “The Upstarts,” Mr. Stone has talked with all the key players at Airbnb and Uber to produce a fun, briskly told narrative that, unfortunately, labors under some burdens. Amazon launched in 1995—when some were still asking, what’s the internet?—and so Mr. Stone has lots of material to unearth. “The Upstarts” opens in 2009 and closes just seven years later. A lot happened in those seven years but much of it in the public eye. Many readers will remember, for example, when anti-Uber taxi drivers torched cars and shut down Paris. Or they’ll recall the news splash the first time a renter trashed an Airbnb home. It’s hardly news.

Uber CEO Travis Kalanick delivers a speech on June 28, 2016, in Beijing, China. PHOTO: VCG VIA GETTY IMAGES

Mr. Stone’s reporting is excellent, however, on one less well-known part of the story: the firms that lost the race. Neither Uber nor Airbnb were the first in their respective spaces. Taxi Magic, Cabulous, Couchsurfing and HomeAway all offered ride-hailing or home-sharing services, but despite “first mover” advantages, none became billion-dollar unicorns. Why not? It’s tempting to argue that the leaders of the winning firms simply worked harder, smarter and with greater foresight than their less successful competitors. Mr. Stone doesn’t fall into this hagiographic trap.

As events unfolded, it wasn’t obvious to anyone which firms would succeed or indeed if any of them would survive. Plenty of venture capitalists, people whose livelihood depends on seeing into the future, never opened their wallets to Airbnb and Uber. Stupid? No. Even the companies’ founders didn’t always understand their own innovations: Airbnb was originally called AirBed and Breakfast. AirBed! You would be hard-pressed to find a blow-up mattress on Airbnb today, but it does list over 1,400 castles. Uber’s original vision was a more elegant car service at a higher price point than a taxi cab. It was Uber’s competitor, Lyft, that first democratized the transportation business. For a brief time, Uber even lobbied against the legality of the ride-sharing business model before embracing the idea with fervor.

The radical uncertainty at the heart of the capitalist discovery process has lessons for how we should regulate innovation. Regulators often subscribe to the “precautionary principle,” the notion that any new product with unknown effects should be introduced slowly. But imagine what would have happened if, in 2009, regulators or voters had been asked whether any driver with a cellphone should be allowed to pick up paying passengers. Regulators and voters—helped along by lobbyists from the taxi industry—would have come up with a dozen reasons why this was a bad idea. Get in a car with a stranger? If we had attempted to regulate that proposition in advance, we would have no end of rules, regulations and restrictions. Had innovation been up for a vote, the public would have voted “no.”

Brian Chesky at Airbnb and Travis Kalanick at Uber didn’t wait for collective approval. They pushed for growth even before the legalities of their services were established. We could still lose these innovations to excessive regulation: Vancouver and Austin have banned Uber, which makes traveling to these cities seem like a frustrating trip into the past. But at least today the public has a better idea of what is at stake in the regulation debate. Airbnb and Uber have also grown so big that they can now defend themselves against established hoteliers and taxi monopolies who might have liked to strangle them in the cradle.

THE UPSTARTS

By Brad Stone 
Little, Brown, 372 pages, $30

“The Upstarts” tells us about the billions of dollars in venture capital that Airbnb and Uber have spent in expansion, but it doesn’t offer much insight into the platform economics that drive this process and what they may mean for the future. Platforms bring suppliers and demanders together, and this often creates economies of scale. Uber drivers want to use the app with the most passengers, and passengers want to use the app with the most drivers. This explains why Airbnb and Uber have gambled on growth even before profits. Indeed, to break into new cities, Airbnb and Uber have been pricing at below cost. But when the competition for the market ends, we may have too little competition in the market, causing prices to rise.

Instead of thinking about how to protect the hotel and taxi industries, policy makers should be thinking about how to make it easier for the next Airbnb or Uber to compete. They could require, for instance, that key application program interfaces remain open to competitors, just as some utilities are required to allow alternative energy companies to send electricity through their networks.

Likewise, it’s not obvious that requiring Uber to contract with drivers as employees rather than as independent contractors is a good idea, even for the drivers. Lots of people are willing to drive for Uber, which suggests that Uber is providing drivers with opportunities superior to those that they can find elsewhere. The first rule of the regulator’s oath should be: “Do not destroy mutually profitable exchanges.” Banning the independent-contractor model could also make it harder for cash-strained startups to compete with Uber. Uber might even accept new regulations as a way of raising the costs of its rivals and locking in its monopoly. From upstart to rent-seeker in just seven years—the speed is astounding, but the arc is commonplace.

“The Upstarts” closes in 2016 as Uber breaks with an early partner, Google, to fund its own driverless-car division. Driverless cars will change the industry dramatically, and Uber will lose advantages derived from its huge pool of drivers. Uber’s Mr. Kalanick boldly predicts that Uber can greatly reduce traffic congestion in cities across the country. A smaller number of cars used more intensively could indeed reduce congestion, but the politics and economics are less clear. Will it take five years or 20, and will the first congestion-free city be New York, Singapore or an entirely new city in China or India? The future is opaque. “The Upstarts” is not the end of the story but an excellent history of the beginning.

By 

ALEX TABARROK