Uber Can’t Be Fixed — It’s Time for Regulators to Shut It Down

Edelman, Benjamin G. “Uber Can’t Be Fixed — It’s Time for Regulators to Shut It Down.” Harvard Business Review (digital) (June 21, 2017). (Translations: Japanese, Russian.)

From many passengers’ perspective, Uber is a godsend — lower fares than taxis, clean vehicles, courteous drivers, easy electronic payments. Yet the company’s mounting scandals reveal something seriously amiss, culminating in last week’s stern report from former U.S. Attorney General Eric Holder.

Some people attribute the company’s missteps to the personal failings of founder-CEO Travis Kalanick. These have certainly contributed to the company’s problems, and his resignation is probably appropriate. Kalanick and other top executives signal by example what is and is not acceptable behavior, and they are clearly responsible for the company’s ethically and legally questionable decisions and practices.

But I suggest that the problem at Uber goes beyond a culture created by toxic leadership. The company’s cultural dysfunction, it seems to me, stems from the very nature of the company’s competitive advantage: Uber’s business model is predicated on lawbreaking. And having grown through intentional illegality, Uber can’t easily pivot toward following the rules.

Three Problems in Protecting Competition (teaching materials) with Lena Goldberg

Edelman, Benjamin, and Lena Goldberg. “Three Problems in Protecting Competition.” Harvard Business School Case 917-012, November 2016. (Revised March 2017.) (educator access at HBP. request a courtesy copy.)

In three mini-cases, readers see a range of disputes in competition law—and apply legal principles to assure fair competition.

Teaching Materials:

Three Problems in Protecting Competition – Teaching Note (HBP 917014)

English Translation of FAS Russia Decision in Yandex v. Google

In September 2015, the Russian Federal Antimonopoly Service announced its decision that Google had violated Russian law by tying its mobile apps to Google Play and setting additional restrictions on mobile device manufacturers, including limiting what other apps they install and how they configure those apps and devices. These topics are of great interest to me since I was the first to publicly distribute the Mobile Application Distribution Agreements, and because I explored related questions at length in my 2015 article Does Google Leverage Market Power Through Tying and Bundling? and more recently my working paper Android and Competition Law: Exploring and Assessing Google’s Practices in Mobile (with Damien Geradin).

For those who wish to understand the reasoning and conclusions of Russia’s FAS, one key limitation is that the September 2015 decision is available only in Russian. While the case document library summarizes key facts, allegations, and procedural developments, that’s no substitute for the full primary source documents.

In the course of expanding my Android and Competition Law paper, I recently obtained an English translation of the September 2015 decision. The decision is unofficial but, as best I can tell, accurate and reliable. It suffers redactions, but the original in Russian has the same limitation. I offer it here to anyone interested:

Yandex v. Google – Resolution on Case No. 1-14-21/00-11-15 – resolution of September 18, 2015 – unofficial English translation

Exploring and Assessing Google’s Practices in Mobile

Since its launch in 2007, Android has become the dominant mobile device operating system worldwide. In light of this commercial success and certain disputed business practices, Android has come under substantial attention from competition authorities. In a paper Damien Geradin and I posted this week, we present key aspects of Google’s strategy in mobile, focusing on Android-related practices that may have exclusionary effects. We then assess Google’s practices under competition law and, where appropriate, suggest remedies to right the violations we uncover.

Many of Google’s key practices in mobile are implemented through Mobile Application Distribution Agreements, confidential contracts that became available to the public through Oracle litigation and are available, to this day, only on my site. But we also evaluate Google restrictions embodied in other documents including Google’s Anti-Fragmentation Agreement as well as supplemental contracts with device manufacturers and mobile carriers providing for exclusive preinstallation of Google search.

If one accepts our conclusion that certain Google practices violate competition laws, it’s important to turn to the question of remedies–what changes Google must make. The natural starting point is to end Google’s contractual ties, allowing device manufacturers to install Google apps in whatever configurations they find convenient and in whatever way they believe the market will value. One might expect to see low-cost devices that feature Yahoo Search, MapQuest maps, and other apps that vendors are willing to pay to distribute. Other developers would retain a “pure Google” experience, foregoing such payments from competing app makers but offering apps from a single vendor, which some users may prefer.

Beyond that, remedies might seek to affirmatively restore competition. Because much of Google’s dominance in mobile seems to come from its powerful app store, Google Play, an intervention might seek to shore up other app stores–for example, letting them copy in Google’s APK’s so that they can offer Google apps to users who so choose. A full remedy would also attempt to restore competition for key apps. Just as Europe previously required Microsoft to show a screen promoting five different web browsers when a user booted Windows for the first time, a similar screen could provide users with a genuine choice of Android apps in each area where Google has favored its own offering. We suspect some users would favor a more privacy-protecting location service if that were prominent and easily available. Other users would probably find competing local services, such as TripAdvisor and Yelp, more trustworthy than Google’s offerings. These developments would increase choices for both users and advertisers, reduce the sphere of Google’s dominance, and begin to restore a competitive marketplace in fundamental mobile apps.

Our working paper:

Android and Competition Law: Exploring and Assessing Google’s Practices in Mobile

(Updated October 26, 2016: This article, as revised, is forthcoming in the European Competition Journal.)

How Uber Uses API Restrictions to Block Price Comparison and Impede Competition updated June 3, 2016

Popular as Uber may be, it isn’t the only way to summon a car for a ride across town. In most US cities, Lyft is a strong number two. Here in Boston, Fasten touts lower fees to drivers, promising cheaper rides for passengers and greater revenue to drivers. Drivers often run multiple apps, and passengers switch between them too. If these apps competed fiercely, Uber might be forced to lower its fee, reducing or eliminating profit. So what justifies Uber’s lofty $68+ billion valuation?

For years, Uber has tried to use its API as a potential barrier against competition. Uber invites third-party developers to connect to its servers to get real-time information about vehicle location (how many minutes until a vehicle can pick up a passenger at a given location) and the current level of surge pricing. But there’s a catch: To access data through Uber’s API, developers must agree not to include Uber API data in any tool that Uber deems competitive.

Uber encourages app developers and the general public to think this API restriction is Uber’s right—that Uber’s data is for Uber to use or restrict as it chooses. But the restriction is calculated and intended to block competition—a purpose considered improper under competition laws, and a special stretch for Uber in light of the company’s positions on related issues of competition and regulation.

Uber’s API restrictions

Uber’s API Terms of Use explains Uber’s purpose in remarkable simplicity:

Be a strong, trustworthy partner to Uber. Please do not:

Compete with Uber or try to drive traffic away from Uber.

Aggregate Uber with competitors.

Uber’s API Terms of Use then instruct:

In general, we reserve the sole right to determine whether or not your use of the Uber API, Uber API Materials, or Uber Data is acceptable, and to revoke Uber API access for any Service that we determine is not providing added benefit to Uber users and/or is not in the best interests of Uber or our users.

The following are some, but not all, restrictions applicable to the use of the Uber API, Uber API Materials, and Uber Data:

You may not use the Uber API, Uber API Materials, or Uber Data in any manner that is competitive to Uber or the Uber Services, including, without limitation, in connection with any application, website or other product or service that also includes, features, endorses, or otherwise supports in any way a third party that provides services competitive to Uber’s products and services, as determined in our sole discretion.

Uber’s developer documentation specifically warns:

Using the Uber API to offer price comparisons with competitive third party services is in violation of § II B of the API Terms of Use. Please make sure that you familiarize yourself with the API Terms of Use to avoid losing access to this service.

Assessing Uber’s API restrictions

The most favorable reading of Uber’s API restrictions is that Uber alone controls information about the price and availability of its vehicles. From Uber’s perspective, accessing Uber’s API is a privilege, not a right. Indeed, some might ask why Uber might be expected, let alone required, to assist a company that might send users elsewhere. A simple contract analysis shows no reason why the restriction is improper; if Uber prominently announces these requirements, and developers willingly accept, some would argue that there’s no problem.

A strong counterargument begins not with the contract but with Uber’s purpose. One might ask why Uber seeks to ban comparisons with other vehicle dispatch services. Uber doesn’t ban aggregators and price comparison tools because it believes these tools harm passengers or drivers. On the contrary, Uber bans aggregators and price comparison tools exactly because they help passengers and drivers but, potentially, harm Uber by directing transactions onto other platforms. Uber’s purpose is transparently to impede competition —to make it more difficult for competing services to provide relevant and timely offers to appropriate customers. Were such competitors to gain traction, they would push Uber to increase quality and reduce its fees. But blocking competing services positions Uber to retain and indeed increase its fees.

Consider a competitor’s strategy in attempting to compete with Uber: Attract a reasonable pool of drivers, impose a lower platform fee than Uber, and split the savings between drivers and passengers. If Uber’s current fee is, say, 20%, the new entrant might charge 10%—yielding savings which could be apportioned as a 5% lower fare to passengers and a 5% higher payment to drivers.

Crucially, aggregators help the entrant reach passengers at the time when they are receptive to the offer. Every user at an aggregator is in the market for transportation, not just generally but at that very moment, making them naturally receptive to an entrant’s offer. Furthermore, a user who visits an aggregator has all but confirmed his willingness to try an alternative to Uber. So aggregators are the most promising way for an entrant to reach appropriate users.

At least as important, aggregators help an entrant gain momentum despite a small scale of operations. At the outset, a new entrant wouldn’t have many drivers. So if a consumer installs the entrant’s app and opens it to check vehicle availability, the entrant’s proposed vehicle would often be further away, requiring that passengers accept longer wait times and that drivers accept longer unpaid trips to reach paid work. Notably, an aggregator helps the entrant reach users already close to the available vehicles—providing an efficient way for the entrant to begin service.

In contrast, without aggregators, entrants face inferior options for getting started. They could advertise in banners or on billboards to attract some users. But those general-purpose ad channels tend to reach a broad swath of users, only a portion of whom need Uber-style service, and even fewer of whom are ready to try a new service. Meanwhile, any users found through these channels will tend to have diverse requirements for ride timing and location; there is no way for an entrant to reach only the passengers interested in rides at the times and places where the entrant has available drivers. With a low density of drivers and passengers, the entrant’s passengers will face longer wait times and drivers will face longer unpaid positioning trips. Some users may nonetheless be willing to try the entrant’s service. But they’ll have to open the entrant’s app to check, for each trip, whether its availability and pricing meet expectations—extra steps that impose delay and will quickly come to seem pointless to all but the most dedicated passengers. As a whole, these factors reduce the likelihood of the new service taking off. Indeed, small transport services have famously struggled. Consider, for example, the 2015 cessation of Sidecar.

Uber might have tried to explain away its API restrictions with pretextual purposes such as server load or consumer protection. These arguments would have been difficult: Price comparison requests are not burdensome to Uber’s servers; Uber nowhere limits the quantity of requests for other purposes (e.g. through an API fee or through throttling). Nor is there any genuine contention that price comparison services are, say, confusing to users; the difference between an Uber and a Lyft ride can be easily communicated via an appropriate logo, on-screen messaging, and the like. But in any event Uber hasn’t attempted these arguments; as Uber itself admits in the rules quoted above, the API restrictions are designed solely to advance the company’s business interests by blocking competition.

The relevant legal principles

One doesn’t readily find antitrust cases about APIs or facilitating price comparison. But Uber’s API partners act as de facto distributors—telling the interested public about Uber’s offerings, prices, and availability. A long line of cases takes a dim view of dominant firms imposing exclusivity requirements on their distributors. Areeda and Hovenkamp explain the tactic, and its harm, in their treatise (3d ed. 2011, ¶1802c at 76):

[S]uppose an established manufacturer has long held a dominant position but is starting to lose market share to an aggressive young rival. A set of strategically planned exclusive-dealing contracts may slow the rival’s expansion by requiring it to develop alternative outlets for its product, or rely at least temporarily on inferior or more expensive outlets. Consumer injury results from the delay that the dominant firm imposes on the smaller rival’s growth.

Most recently, the FTC brought suit against McWane, the dominant US pipe fitting supplier, which had controversially required distributors to sell only its products, and not products from competitors, by threatening forfeiture of rebates and perhaps loss of access to any McWane products at all. The FTC found that McWane’s exclusionary distribution policy maintained its monopoly power; the Eleventh Circuit upheld the FTC’s finding; and the Supreme Court declined to hear the case. McWane thus confirms the competition concerns resulting from exclusive contracts from distributors. In relevant respects, the parallels between Uber and McWane are striking: Both companies use contracts to raise rivals’ costs to prevent them from growing into effective competitors. Compared to McWane, Uber’s API restrictions are in notable respects more aggressive. For example, McWane’s first response to a noncompliant distributor was to withhold rebates, and in litigation McWane protested that its practice was not literally exclusive dealing but rather a procompetitive inducement (through rebates yielding lower prices). Putting aside McWane’s failure in these arguments, Uber could make no such claims, as its API restrictions (and threats to UrbanHail, discussed below) exactly implement exclusive dealing, expelling the noncompliant app or site from access to Uber’s API as a penalty for including competitors.

More generally, Uber’s conduct falls within the general sphere of exclusionary conduct which has been amply explored through decades of caselaw and commentary. The Department of Justice’s 2009 guidance on Single-Firm Conduct Under Section 2 of the Sherman Act is broadly on point and usefully surveys relevant doctrines. As the DOJ points out, the essential question for exclusionary conduct cases is whether a given tactic is appropriate, aggressive competition (which competition policy sensibly allows) versus a practice intended to exclude competition (more likely to be prohibited under competition law). After considering several alternatives, the DOJ favorably evaluates a "no-economic-sense test" that asks whether the challenged conduct contributes profits to the firm apart from its exclusionary effects. In Uber’s case, no such profits are apparent. Indeed, the API restrictions require Uber to turn down referrals from apps that violate the API restrictions—foregoing short-term profits in service of the long-term exclusionary purpose.

The DOJ ultimately offers its greatest praise for an "equally efficient competitor test," asking whether the challenged conduct is likely in the circumstances to exclude a competitor that is equally efficient or more efficient. Uber’s restrictions fare poorly under this test. Consider a more efficient competitor—one with, perhaps, lower general and administrative costs that allow it to charge a lower fee on top of payments to drivers. Uber’s restrictions prevent such a competitor from effectively reaching the consumers who would be most receptive to its offer.

Separately, the DOJ notes the promise of conduct-specific tests that disallow specific practices. While the caselaw on APIs, data access, and price comparison is not yet well-developed, one might readily imagine a conduct-specific test in this area. In particular, if a company offers a standardized and low-burden mechanism for consumers, intermediaries, and others to check its prices and availability, the company arguably ought not be able to withhold access to that information for the improper purpose of blocking competition.

Relatedly, the DOJ points out the value of considering the scope of harm from the challenged conduct, impact of false positives and false negatives, and ease of enforcement. Uber’s restrictions fare poorly on these fronts too. Uber would face little burden in being required to provide data about its prices and availability to comparison services; Uber has already built the software interface to provide this data, and the servers are by all indications capacious and reliable. Enforcement would be easy: Require Uber to strike the offending provisions from its API Terms and Conditions. Uber need not create any new software interfaces or APIs in order to comply; only Uber’s lawyers, but not Uber’s developers, would need take action.

Uber might argue that it is one of many transportation services and that the Sherman Act should not apply given Uber’s small position in a large transport market. Indeed, Sherman Act obligations are predicated on market power, but Uber’s size and positioning leave little doubt about the company’s power. As the leading app-based vehicle dispatch service, Uber would certainly be found a dominant firm in such a market. In a broader market for hired transport services, including taxis and sedans, Uber surely still has market power. For example, analysis of expense reports indicates that business travelers use Uber more than taxis.

Experience of transport comparison services and the case of UrbanHail

As early as August 2014, analysts had flagged Uber’s restriction on developers promoting competing apps. Indeed, the subsequent two years have brought few apps or sites that help consumers choose between transportation platforms—some with static data or general guidance, but no widely-used service with up-to-the-minute location-specific data about surges and vehicle availability. Uber’s API restrictions seem to be working in exactly the way the company hoped.

An intriguing counterexample comes from UrbanHail, an app which promises to present "all of your ridesharing and taxi options in one click to help you save time and money [and] frustration." (UrbanHail was created by five Harvard Business School MBA students as their semester project for the required FIELD 3 course. As part of my academic duties as a HBS faculty member, I happen to teach FIELD 3, though I was not assigned these students. I advised them informally and have no official academic, supervisory, or other affiliation with the students or UrbanHail.)

UrbanHail prompted a response from Uber the same day it launched. In a first email, Uber’s Chris Messina (Developer Experience Lead) wrote:

Hey guys, my name is Chris Messina and I run Developer Experience for Uber. Chris Saad [CC’ed] is the PM of the API.

We wanted to congratulate on your recent press as we love seeing folks innovating in the transit space, but wanted to let you know that your use of our API is in violation of section II B of our terms of use.

We’re more than happy for you to continue developing your app, but ask that you remove any features that list Uber’s prices next to our competitors.

Please let us know if you have any questions. Thanks!

Three weeks later, he followed up:

Hey guys,

I haven’t heard back from you, so I wanted to follow up.

Unfortunately, UrbanHail is still violating the agreements you entered with Uber, including not only the API Terms of Use which I mentioned in my previous email, but also Uber’s rider terms (which prohibit scraping or making Uber’s services available for commercial use).

I’d like to highlight that not only are these conditions found in the legal text, but the spirit of our terms are summarized in plain english at the top of that document. Further, a specific warning to not create a price comparison app is provided in-line in the technical reference for the price estimates API.

Thousands of developers around the world use the Uber API to build new, interesting apps. To preserve the integrity of the Uber experience, we require these apps to stay within the guardrails we’ve created, and are set forth in our terms. Despite our efforts to make these terms and policies clear and transparent, you chose to act against them.

All that being said, we very much value the time and energy that developers like you invest in building with the Uber API, and we actively support and encourage them to be creative and innovate with us.

If you build something that complies with our Terms of Use, we would love to reward your effort in a number of ways. Here are just some of the things we can offer:

* A post on our blog featuring your app

* A listing in our showcase

* Affiliate revenue for referring new Uber riders to us

* Access to our "Insiders Program" which offers office hours with the Uber Developer Platform team and exclusive developer events

Please let me know when you’ve taken UrbanHail out of the App Store and removed any related marketing materials so we can start working on a new opportunity together.

Please note, however, if I don’t hear from you by May 31, I’ll be forced to revoke your client ID’s access the Uber API.


Today, May 31, is Chris’s deadline. I’ll update this post if Chris follows through on the threat to disable UrbanHail’s API access and prevent the app from including Uber in its price comparison.

Update (June 3): UrbanHail reports that Uber terminated its API access, preventing Uber from appearing within Urbanhail’s results page.

Special challenges for Uber in imposing these restrictions

Uber styles itself as a champion of competition. Consider, for example, CEO Travis Kalanick’s remarks to attendees at TechCrunch Disrupt in 2012. His bottom line: "Competition is good." Uber takes similar positions in its widespread disputes with regulators and incumbents transportation providers—styling its offering as important competition that benefits consumers. Against that backdrop, Uber struggles to restrict third-party services that promise to enhance competition.

Indeed, media coverage of Uber’s dispute with UrbanHail has flagged the irony of Uber criticizing competition from other services. The Boston Globe captioned its piece "New app gives Uber a little disruption of its own," opening with "Uber Technologies Inc. built a big business by pushing past regulations that limit competition with taxis. But the tech-industry darling isn’t always happy with smaller companies trying similar tactics." Boston.com was in accord: "Uber rankled by app that compares ride-hailing prices," as was BostInno: "Uber is trying to shut down this Boston price-comparison app."

Twitter users agreed: Henry George: "@Uber Do you find it the least bit ironic that you’re complaining about ride competition with @urbanhail? Don’t try legal BS, innovate!" Michael Nicholas: "The irony of @Uber complaining @urbanhail is ‘breaking the rules’ of api usage is breathtaking." Gustavo Fontana: "@Uber should leave them alone. It’s fair game."

Uber may dispute whether it has the market power necessary to trigger antitrust law and Sherman Act duties. But Uber’s general position on competition is clear. Uber struggles to chart a path that lets it compete with taxis without the permits and inspections required in many jurisdictions—but doesn’t let comparison shopping services compare Uber’s prices with taxis, Lyft, and other alternatives.

Moreover, Uber’s professed allies are equally difficult to reconcile with the company’s API restrictions. For example, Uber this month announced an advisory board including distinguished ex-competition regulators. Consider Neelie Kroes, formerly the European Commission’s Commissioner for Competition who, in that capacity, oversaw the EC’s €497 million sanctions against Microsoft. Having overseen European competition policy and subsequently digital policy for fully a decade, Kroes is unlikely to look favorably on Uber’s efforts to foreclose entry and reduce competition.

Special challenges for Uber’s developer team in imposing these restrictions

A further challenge for Uber is that its key managers—distinguished experts on software architecture—have previously taken positions that are difficult to reconcile with Uber’s efforts to restrict competition.

Best known for creating the hashtag, Chris Messina (Uber’s Developer Experience Lead) boasts a career espousing "openness." In his LinkedIn profile, he notes a prior position as an "Open Web Advocate" and a board member at the "Open Web Foundation." Describing his work at Citizen Agency, he says he "appl[ied] design and open source principles to consulting." Wikipedia disambiguates Messina from others with the same name by calling him an "open source advocate," a phrase repeated in the first sentence of Wikipedia’s article. Wikipedia also notes a 2008 article entitled "So Open It Hurts" about Messina and his then-girlfriend, describing their "public and open relationship." Google reports 1,440 different pages on Messina’s personal site, factoryjoe.com, mentioning the word "open." While the meaning of "open" varies depending on the context, the general premise is a skepticism towards restrictions and limitations—be they requirements to pay for software, limits on how software is used, or, here, restrictions on how data and APIs are used. It’s a world view not easily reconciled with Uber’s restriction on price comparisons.

Chris Saad (Uber’s API Product Manager) has been similarly skeptical of restrictions on data. His LinkedIn page notes that he co-founded the DataPortability Project which he says "coined and popularized the phrase "data portability"; and led "an explosion of conversation[s] about open standards and interoperability." That’s a distinguished background—but here, too, not easily reconciled with Uber’s API restrictions.

It’s no coincidence that Uber’s developer team favors openness. Openness is the natural approach as a company seeks to connect to external developers. But in limiting how other companies use data, Uber violates key tenets of openness, restricting the flow and use of data that partners and consumers reasonably expect to access.

Looking ahead

Uber faces a looming battle to retain its early lead in smartphone-based vehicle dispatch. But as the dominant firm in this sector—with the largest market share and, to be sure, a category-defining name and concept—Uber is rightly subject to restrictions on its methods of competition. Cloaking itself in the aura of competition as it seeks to avoid regulations that apply to other commercial vehicles, Uber is poorly positioned to simultaneously oppose competition from other app-based services.

Uber is not alone in limiting the ways users can access data. In 2008, I flagged Google’s AdWords API restrictions, which impeded advertisers’ efforts to use other ad platforms as well as Google. Google defended the restrictions, but competition regulators agreed with me: Even as the FTC declined to pursue other aspects of early competition claims against Google, FTC pressure compelled Google to withdraw the API restrictions in January 2013. In Europe, these same restrictions were among the EC’s initial objections to Google’s conduct. Google has yet to resolve this dispute in Europe, and may yet face a fine for this conduct (in addition to substantial fines for other challenged practices). Uber’s API restrictions risk similar sanctions—perhaps even more quickly given Uber’s many regulatory proceedings.

What comes next? If Uber follows through on its threat to UrbanHail, as Messina said it soon would, there will again be no app or site to compare prices and availability across Uber and competitors. Uber won’t need to go to court to block UrbanHail; it can simply withdraw the security credentials that let UrbanHail access the Uber API. From what I know of UrbanHail’s size and stature, it’s hard to imagine UrbanHail filing suit; that would probably require resources beyond UrbanHail’s current means.

Nonetheless, Uber is importantly vulnerable. For example, transport is highly regulated, and Uber needs regulatory approval in most jurisdictions where it operates. This approval presents a natural and easy way for policy makers to unlock Uber’s API restrictions: As a condition of participation in a city’s transit markets—using the public roads among other resources—Uber should be required to remove the offending API restrictions, letting aggregators use this information as they see fit. Once one city establishes this requirement, dozens more would likely follow, and Uber’s API restrictions could disappear as suddenly as they arrived.

EC Statement of Objections on Google’s Tactics in Mobile

Today the European Commission announced a Statement of Objections to Google’s approach to Android mobile licensing and applications. Broadly, the EC’s concerns arise from Google’s contractual restrictions on phone manufacturers — requiring them to install certain apps, in certain settings, if they want other apps; preventing customizations that manufacturers would prefer; requiring manufacturers to set Google Search as the sole and default search provider.

These questions are near and dear to me because, so far as I know, I broke the story of Google’s Mobile Application Distribution Agreement contracts, the previously-secret documents that embody most of the restrictions DG Comp challenges. I described these documents in a February 2014 post:

Google claims that its Android mobile operating system is “open” and “open source”–hence a benefit to competition. Little-known contract restrictions reveal otherwise: In order to obtain key mobile apps, including Google’s own Search, Maps, and YouTube, manufacturers must agree to install all the apps Google specifies, with the prominence Google requires, including setting these apps as default where Google instructs. It’s a classic tie and an instance of full line forcing: If a phone manufacturer wants any of the apps Google offers, it must take the others also.

I offered the HTC MADA and Samsung MADA, both as they stood as of year-end 2010. So far as I know, these are the only MADA’s available on the web to this day; while Google now admits that MADAs exist (a fact unknown to the public before I posted these documents), no one has circulated any newer versions. Occasional news reports discuss new versions, most notably a September 2014 piece from The Information’s Amir Efrati reporting new and growing requirements embodied in "confidential documents viewed by The Information" but unfortunately not available to the public. So the documents I posted remain the best available evidence of the relevant restrictions.

While news reports and the EC SO offer some sense of MADA requirements, there’s no substitute for reading the plain language of the underlying contracts. I cited and quoted key sections in my 2014 piece:

"Devices may only be distributed if all Google Applications [listed elsewhere in the agreement] … are pre-installed on the Device." See MADA section 2.1.

The phone manufacturer must “preload all Google Applications approved in the applicable Territory … on each device.” See MADA section 3.4(1).

The phone manufacturer must place “Google’s Search and the Android Market Client icon [Google Play] … at least on the panel immediately adjacent to the Default Home Screen,” with "all other Google Applications … no more than one level below the Phone Top." See MADA Section 3.4(2)-(3).

The phone manufacturer must set “Google Search … as the default search provider for all Web search access points.” See MADA Section 3.4(4).

Google’s Network Location Provider service must be preloaded and the default. See MADA Section 3.8(c).

"Naked exclusion" and impeding competition

Competition lawyers offer the term "naked exclusion" for conduct unabashedly intended to exclude rivals, for which a dominant firm offers no efficiency justification. That diagnosis matches my understanding of these tactics, as the MADAs give no suggestion that Google is trying to help consumers or anyone else. Rather, the MADAs appear to be intended to push Google’s own businesses and prevent competitors from getting traction.

Consider the impact on competing firms. Suppose some competing app maker sought to increase use of one of its apps, say Yahoo seeking greater usage of Yahoo Maps. Yahoo might reasonably offer a bonus payment to, say, Samsung as an incentive for featuring the Yahoo Maps app on new phones sold via, say, AT&T. To encourage users to give Yahoo Maps a serious try, Yahoo would want its service to be the only preinstalled mapping app; otherwise, Yahoo would rightly anticipate that many users would discard Yahoo Maps and go straight to the familiar Google Maps. For $2 per phone, Samsung might be happy to remove Google Maps and preinstall Yahoo Maps, figuring any dissatisfied consumer could download Google Maps. And if some of that $2 was passed back to consumers via a lower price for purchasing the phone, consumers might be pleased too. Crucially, Google’s MADA prevents this effort and others like it. In particular, the MADA requirements prevent Samsung from removing any of the listed Google apps, Google Maps key among them. And if Samsung can only offer Yahoo the option to be a second preinstalled mapping app, it’s much less clear that Yahoo is willing to pay. In fact, based on Yahoo’s reasonable projections of user response, there may no longer be a price that Yahoo is willing to pay and Samsung is willing to accept.

The first key effect of the MADAs, then, is that they prevent new entrants and other competitors from paying to get exclusive placement. This impedes competition and entry, and streamlines Google’s dominance.

Meanwhile, the MADAs correspondingly reduce pressure on Google to provide market-leading functionality and quality. Some competing apps might be a little bit better than Google’s offerings, and a phone manufacturer might correctly assess that consumers would prefer those alternatives. But phone manufacturers can’t switch to those offerings because the MADA disallows those changes. This barrier to switching in turn discourages competing app makers from even trying to compete. After all, if they can’t get traction even when their apps are genuinely better, they won’t be able to raise capital and won’t develop the improvements in the first place.

Finally, the MADAs prevent Google from needing to pay to get and retain preferred placements and defaults. On desktop computers, search engines pay to be a browser’s default — giving additional revenue to a computer manufacturer, and reducing device cost. But MADAs allow Google to require that it be the default search provider, and require that its apps be preinstalled and prominent, all without payment to phone manufacturers.

Assessing Google’s responses

This week reporters conveyed to me Google’s responses to the EC’s SO. First, Google argued that it is merely requiring that its apps be preinstalled, not ruling out the possibility that other apps may be preinstalled too. That defense has three key weaknesses.

  • Some MADA provisions explicitly do require that Google functions be the sole or default in their spheres. Consider the requirement that Google Search be the default search provider for all Web search access points (MADA Section 3.4(4)) and the requirement that Google’s Network Location Provider service must be preloaded and default (MADA Section 3.8(c)). One can hardly overstate the importance of these two functions. Search is the most natural way to monetize users’ activities and is the natural gateway to other functions and services. Meanwhile, location providers are the crucial translation between a phone’s sensors and its inferences about the user’s geographic location — collecting and aggregating location data with exceptional commercial value though of course also special privacy consequences. In these two crucial areas, Google does exactly what its defense claims it does not — requiring not only that its services be installed, but that they be installed as the sole and exclusive default. We are fortunate to be able to read the MADAs (HTC, Samsung) to see these requirements embodied in contract language.
  • The possibility of a more intrusive restriction does nothing to deny the harm from the approach Google chose. Google sketches a different restriction on competition that would cause even larger harm — requiring not just preinstallation of Google apps but explicit contractual exclusion of competitors. But the possibility of a worse alternative does not mean Google’s approach is permitted.
  • Google’s argument runs counter to settled European competition law. Consider experience from prior EC proceedings against Microsoft. Microsoft always allowed OEM’s to install other web browsers and other media players. Nonetheless Microsoft faced EC penalties for requiring that OEM’s include Microsoft’s browser and media player. The law of the land, for better or for worse, is that dominant firms may not invoke this approach.

Second, Google told reporters that its tactics are necessary to protect the health of the Android ecosystem and to build and retain consumer trust. But this argument strains credibility. Would the Android ecosystem truly be less reliable or trustworthy if some phones came with, say, Yahoo Maps? The better assessment is that Google imposes MADA restrictions to advance its business interests. To evaluate these alternative understandings of Google’s conduct, one might depose Google employees or better yet read contemporaneous documents. Beginning in 2010, Skyhook litigation revealed some of Google’s internal email discussions in this area, revealing reveal that their purpose is competitive — "using compatibility as a club to make them [phone makers] do things we want." Further evidence against Google’s ecosystem/trust argument comes from Android’s other notable ecosystem weaknesses — from brazenly counterfeit apps to confusingly inconsistent user interfaces. Allowing those problems to fester for years, Google cannot plausibly claim significant consumer confusion or ecosystem harm from, say, a competing maps app clearly labeled as such.

Third, Google argued that dissatisfied phone manufacturers can always install core Android without any Google Mobile Services and hence without the MADA obligations. But this approach ignores commercial realities. In wealthy markets such as the EC and the US, few customers would accept an Android phone without Google Play, the app store necessary to install other apps. Without Google Play, consumers cannot get the Facebook app, the Pandora, Uber, and so on. Such a limited phone would be a nonstarter for mainstream users. Amazon’s Fire flop reveals that even Amazon, with a trusted name and distinctive positioning, could not offer a viable phone without Google Play access to install other apps. Conversely, consider how much more attractive users would have found Fire had they been able to use Google Play to get the benefit of third-party apps alongside the distinctive features Amazon provided. But Google’s MADA exactly prohibited that approach — converting a promising potential competitor into a weakling that quickly collapsed.

Looking ahead

One crucial next step is discussion of remedies — what exactly Google must do in order to correct the distortions its MADAs have created. Bloomberg reports Google reducing the number of apps phone manufacturers are required to preinstall and feature — but dropping losers like Google Plus is just tinkering around the edges.

The obvious first step is that Google should withdraw the MADA restrictions. With no more MADA, phone manufacturers could take the distinct Google apps that they want, and not others. Google has no proper reason to prevent a phone manufacturer from combining Google Play with, say, Yahoo Maps and Bing Search. Indeed, with Google’s search dominance increasingly protected from competition as Yahoo stumbles and Microsoft withdraws, these combinations are the most promising way to increase competition in mobile.

Next, it goes nearly without saying that Google should pay a substantial penalty. Billion-dollar fines have become routine in Europe’s competition cases against American tech giants, including for conduct far less brazen and less obviously calculated to impede competition. Anything less at this point would seem to be a slap on the wrist undermining the importance of the EC’s effort.

Most of all, a full remedy requires affirmative efforts to undo the harm from Google’s years of improper conduct. After Microsoft’s browser tactics were deemed unlawful, the company was for five years obliged to present a "ballot box" in which consumers affirmatively chose among the five most popular browsers — presented in random order with no default. It’s easy to envision a similar approach in mobile: Upon first activating a new smartphone, a user would choose among the top five maps apps, top five search engines, top five geolocation services, and so forth. These obligations would most naturally track all the verticals that Google has targeted through its MADA restrictions. As users saw these options, competing app makers would get a prominent opportunity to attract users at modest expense — beginning to restore the competition that Google has improperly foreclosed.

Finally, a remedy should undo the secrecy Google has imposed. I wrote in 2014 about the remarkable steps required to obtain the MADAs — documents whose very existence was purportedly confidential, and whose terms contradicted the public statements (and sworn testimony) of Google’s leaders. This secrecy prevented app developers, competitors and the general public from knowing and debating Google’s tactics and raising concerns for a prompt regulatory response. Furthermore, secrecy emboldened Google to invoke methods that would have been less attractive had they been subject to public scrutiny from the outset. As part of competition proceedings, Google should be compelled to publish key contracts, facilitating analysis and discussion by the interested public. Meanwhile, as John Gapper writes in the FT, it’s ironic for Google to claim that EU officials "could be better informed" when Google itself limits distribution of the most important documents.

Spontaneous Deregulation: How to Compete with Platforms That Ignore the Rules

Edelman, Benjamin, and Damien Geradin. “Spontaneous Deregulation: How to Compete with Platforms That Ignore the Rules.” Harvard Business Review 94, no. 4 (April 2016): 80-87.

Many successful platform businesses–think Airbnb, Uber, and YouTube–ignore laws and regulations that appear to preclude their approach. The rule-flouting phenomenon is something we call “spontaneous private deregulation,” and it is not new. Benign or otherwise, spontaneous deregulation is happening increasingly rapidly and in ever more industries. This article surveys incumbents’ vulnerabilities and identifies possible responses.

Android and Competition Law: Exploring and Assessing Google’s Practices in Mobile

Edelman, Benjamin, and Damien Geradin. “Android and Competition Law: Exploring and Assessing Google’s Practices in Mobile.” European Competition Journal 12, nos. 2-3 (2016): 159-194.

Since its launch in 2007, Android has become the dominant mobile device operating system worldwide. In light of this commercial success and certain disputed business practices, Android has come under substantial attention from competition authorities. We present key aspects of Google’s strategy in mobile, focusing on Android-related practices that may have exclusionary effects. We then assess Google’s practices under competition law and, where appropriate, suggest remedies to right the violations we uncover.

Assessing Uber: Competition and Regulation in Transportation Networks

For consumers, it’s easy to applaud Uber, Lyft, and kin (transportation network companies or TNCs). Faster service, usually more reliable, often in nicer vehicles—all at lower prices. What’s to dislike?

Look behind the curtain and things are not so clear. TNCs cut corners on issues from insurance to inspections to background checks, thereby pushing costs from their customers to the general public—while also delivering a service that plausibly falls short of generally-applicable requirements duly established by law and, sometimes, their own marketing promises.

In a forthcoming article in Competition Policy International, Whither Uber?: Competitive Dynamics in Transportation Networks, I look at a range of concerns in this area, focusing on market dynamics and enforcement practices that have invited TNC to play fast-and-loose. This page offers excerpts and some further thoughts.

Corners cut

My article enumerates a variety of concerns resulting from prevailing TNC practices:

In most jurisdictions, a "for hire" livery driver needs a commercial driver’s license, a background check and criminal records check, and a vehicle with commercial plates, which often means a more detailed and/or more frequent inspection. Using ordinary drivers in noncommercial vehicles, TNCs skip most of these requirements, and where they take such steps (such as some efforts towards a background check), they do importantly less than what is required for other commercial drivers (as discussed further below). One might reasonably ask whether the standard commercial requirements in fact increase safety or advance other important policy objectives. On one hand, detailed and frequent vehicle inspections seem bound to help, and seem reasonable for vehicles in more frequent use. TNCs typically counter that such requirements are unduly burdensome, especially for casual drivers who may provide just a few hours of commercial activity per month. Nonetheless, applicable legal rules offer no "de minimis" exception and little support for TNCs’ position.

Differing standards for background checks raise similar questions. TNCs typically use standard commercial background check services which suffer from predictable weaknesses. For one, TNC verifications are predicated on a prospective driver submitting his correct name and verification details, but drivers with poor records have every incentive to use a friend’s information. (Online instructions tell drivers how to do it.) In contrast, other commercial drivers are typically subject to fingerprint verification. Furthermore, TNC verifications typically only check for recent violations—a technique far less comprehensive than the law allows. (For example, Uber admits checking only convictions within the last seven years, which the company claims is the maximum duration permitted by law. But federal law has no such limitation, and California law allows reporting of any crime for which release or parole was at most seven years earlier.) In People of the State of California v. Uber, these concerns were revealed to be more than speculative, including 25 different Uber drivers who passed Uber’s verifications but would have failed the more comprehensive checks permitted by law.

Relatedly, TNC representations to consumers at best gloss over potential risks, but in some areas appear to misstate what the company does and what assurances it can provide. For example, Uber claimed its service offered "best in class safety and accountability" and "the safest rides on the road" which "far exceed… what’s expected of taxis"—but taxis, with fingerprint verification of driver identity, offer improved assurances that the person being verified is the same person whose information is checked. Moreover, Uber has claimed to be "working diligently to ensure we’re doing everything we can to make Uber the safest experience on the road" at the same time that the company lobbies against legislation requiring greater verifications and higher safety standards.

Passengers with disabilities offer additional complaints about TNCs. Under the Americans with Disabilities Act (ADA) and many state laws, passengers with disabilities are broadly entitled to use transportation services, and passengers cannot be denied transport on the basis of disability. Yet myriad disabled passengers report being denied transport by TNCs. Blind passengers traveling with guide dogs repeatedly report that TNC drivers sometimes reject them. In litigation Uber argued that its service falls beyond the scope of the ADA and thus need not serve passengers with disabilities, an argument that a federal court promptly rejected. Nonetheless, as of November 2015, Uber’s "Drivers" page continues to tell drivers they can "choose who you pick up," with no mention of ADA obligations, nor of prohibitions on discrimination on the basis of race, gender, or other prohibited factors.

I offer my sharpest criticism for certain TNC practices as to insurance:

TNCs encourage drivers to carry personal insurance rather than commercial insurance —anticipating, no doubt correctly, that drivers might be put off by the higher cost of commercial coverage. But TNC drivers are likely to have more frequent and more costly accidents than ordinary drivers: they drive more often, longer distances, with passengers, in unfamiliar locations, primarily in congested areas, and while using mobile apps. To the extent that drivers make claims on their personal insurance, they distort the market in two different ways: First, they push up premiums for other drivers. Second, the cost of their TNC accidents are not borne by TNC customers; by pushing the cost to drivers in general, TNCs appear to be cheaper than they really are.

In a notable twist, certain TNC policies not only encourage drivers to make claims on their personal policies, but further encourage drivers to commit insurance fraud. Consider a driver who has an accident during the so-called "period 1" in which the driver is running a TNC app, but no passenger has yet requested a ride from the driver. If the driver gets into an accident in this period, TNCs historically would deny both liability and collision coverage, claiming the driver was not yet providing service through the TNC. An affected driver might instead claim from his personal insurance, but if the driver admits that he was acting as a TNC driver—he had left home only to provide TNC services; he had transported several passengers already; he was planning more—the insurer will deny his claim. In fact, in all likelihood, an insurer in that situation would drop the driver’s coverage, and the driver would also be unable to get replacement coverage since any new insurer would learn the reason for the drop. As a practical matter, the driver’s only choices are to forego insurance coverage (a possibility in case of a collision claim, though more difficult after injuring others or damaging others’ property) or, more likely, lie to his insurance issuer. California law AB 2293, effective July 1, 2015, ended this problem as to collision claims in that state, requiring TNCs to provide liability coverage during period 1, but offering nothing elsewhere, nor any assistance on collision claims.

Where TNC practices merely shortchange a company’s own customers, such as providing a level of safety less than customers were led to believe, we might hope that market forces would eventually fix the problem—informing consumers of the benefits they are actually receiving, or compelling TNCs to live up to their promises. But where TNC practices push costs onto third parties, such as raising insurance rates for all drivers, there is no reason to expect market forces to suffice. Regulatory enforcement, discussed below, is the only apparent way forward on such issues.

Competitive dynamics when enforcement is lax

A striking development is the incompleteness of regulation of TNC or, more precisely, the incompleteness of enforcement of existing and plainly-applicable regulation. I explain:

In this environment, competition reflects unusual incentives: Rather than competing on lawful activities permitted under the applicable regulatory environment, TNC operators compete in part to defy the law—to provide a service that, to be sure, passengers want to receive and buyers want to provide, notwithstanding the legal requirements to the contrary.

The brief history of TNCs is instructive. Though Uber today leads the casual driving platforms, it was competing transportation platform Lyft that first invited drivers to provide transportation through their personal vehicles. Initially, Uber only provided service via black cars that were properly licensed, insured, and permitted for that purpose. In an April 2013 posting by CEO Travis Kalanick, Uber summarized the situation, effectively recognizing that competitors’ casual drivers are largely unlawful, calling competitors’ approach "quite aggressive" and "non-licensed." (Note: After I posted this article, Uber removed that document from its site. But Archive.org kept a copy. I also preserved a screenshot of the first screen of the document, a PDF of the full document, and a print-friendly PDF of the full document.)

Uber’s ultimate decision, to recognize Lyft’s approach as unlawful but nonetheless to follow that same approach, is hard to praise on either substantive or procedural grounds. On substance, it ignores the important externalities discussed above—including safety concerns that sometimes culminate in grave physical injury and, indeed, death. On procedure, it defies the democratic process, ignoring the authority of democratic institutions to impose the will of the majority. Uber has all but styled itself as a modern Rosa Parks defying unjust laws for everyone’s benefit. But Uber challenges purely commercial regulation of business activity, a context where civil disobedience is less likely to resonate. And in a world where anyone dissatisfied with a law can simply ignore it, who’s to say that Uber is on the side of the angels? One might equally remember former Arkansas governor Orville Faubus’ 1957 refusal to desegregate public schools despite a court order.

Notice the impact on competition: Competitors effectively must match Uber’s approach, including ignoring applicable laws and regulation, or suffer a perpetual cost disadvantage.

Consider Hailo’s 2013-2014 attempt to provide taxi-dispatch service in New York City. On paper, Hailo had every advantage: $100 million of funding from A-list investors, a strong track record in the UK, licensed and insured vehicles, and full compliance with every applicable law and regulation. But Uber’s "casual driver" model offered a perpetual cost advantage, and in October 2014 Hailo abandoned the U.S. market. Uber’s lesson to Hailo: Complying with the law is bad business if your competitor doesn’t have to. Facing Uber’s assault in numerous markets in Southeast Asia, transportation app GrabTaxi abandoned its roots providing only lawful commercial vehicles, and began "GrabCar" with casual drivers whose legality is disputed. One can hardly blame them—the alternative is Hailo-style irrelevance. When Uber ignores applicable laws and regulators stand by the wayside, competitors are effectively compelled to follow.

Moreover, the firm that prevails in this type of competition may build a corporate character that creates other problems for consumers and further burdens on the legal system. My assessment:

Notice Uber’s recent scandals: Threatening to hire researchers to "dig up dirt" on reporters who were critical of the company. A "God view" that let Uber staff see any rider’s activity at any time without a bona fide purpose. Analyzing passengers’ rides to and from unfamiliar overnight locations to chronicle and tabulate one-night-stands. Charging passengers a "Logan Massport Surcharge & Toll" for a journey where no such fee was paid, or was even required. A promotion promising service by scantily-clad female drivers. The CEO bragging about his business success yielding frequent sexual exploits. "Knowing and intentional" "obstructive" "recalcitrance" in its "blatant," "egregious," "defiant refusal" to produce documents and records when so ordered by administrative law judges.

On one view, these are the unfortunate mishaps of a fast-growing company. But arguably it’s actually something more than that. Rare is the company that can pull off Uber’s strategy—fighting regulators and regulation in scores of markets in parallel, flouting decades of regulation and managing to push past so many legal impediments. Any company attempting this strategy necessarily establishes a corporate culture grounded in a certain disdain for the law. Perhaps some laws are ill-advised and should be revisited. But it may be unrealistic to expect a company to train employees to recognize which laws should be ignored versus which must be followed. Once a company establishes a corporate culture premised on ignoring the law, its employees may feel empowered to ignore many or most laws, not just the (perhaps) outdated laws genuinely impeding its launch. That is the beast we create when we admit a corporate culture grounded in, to put it generously, regulatory arbitrage.

An alternative model

Uber offers one approach to regulation: Ignore any laws the company considers outdated or ill-advised. But in other sectors, firms have chosen a different model to demonstrate their benefits and push for regulatory change. I offer one example as to the launch of Southwest Airilnes:

Planning early low-fare operations in 1967, Southwest leaders realized that the comprehensive regulatory scheme, imposed by the federal Civil Aeronautics Board, required unduly high prices, while simultaneously limiting routes and service in ways that, in Southwest’s view, harmed consumers. Envisioning a world of low-fare transport, Southwest sought to serve routes and schedules CAB would never approve, at prices well below what regulation required.

Had Southwest simply begun its desired service at its desired price, it would have faced immediate company-ending sanctions; though CAB’s rules were increasingly seen as overbearing and ill-advised, CAB would not have allowed an airline to brazenly defy the law. Instead, Southwest managers had to find a way to square its approach with CAB rules. To the company’s credit, they were able to do so. In particular, by providing solely intra-state transport within Texas, Southwest was not subject to CAB rules, letting the company serve whatever routes it chose, at the prices it thought best. Moreover, these advantages predictably lasted beyond the impending end of regulation: After honing its operations in the intra-state Texas market, Southwest was well positioned for future expansion.

In fact Southwest is far from unique in its attention to regulatory matters. Consider the recent experience of AT&T. In October 2015, AT&T sought to offer wifi calling for certain smartphones, but the company noticed that FCC rules required a teletypewriter (TTY) service for deaf users, whereas AT&T envisioned a replacement called real-time text (RTT). Competitors Sprint and T-Mobile pushed ahead without TTY, not bothering to address the unambiguous regulatory shortfall. To AT&T’s credit, it urged the FCC to promptly approve its alternative approach, noting the "asymmetry in the application of federal regulation to AT&T on the one hand and its marketplace competitors on the other hand." With the issue framed so clearly, FCC leaders saw the need for action, and they did so just days after AT&T’s urgent request.

Knowing that its casual-driver service was unlawful, as effectively admitted in CEO Travis Kalanick’s April 2013 posting Uber could have sought a different approach. (Note: After I posted this article, Uber removed that document from its site. But Archive.org kept a copy. I also preserved a screenshot of the first screen of the document, a PDF of the full document, and a print-friendly PDF of the full document.) I argue that this approach might have worked:

Assuming strict compliance with the law, how might Uber have tried to get its service off the ground? One possibility: Uber could have sought some jurisdiction willing to let the company demonstrate its approach. Consider a municipality with little taxi service or deeply unsatisfactory service, where regulators and legislators would be so desperate for the improvements Uber promised that they would be willing to amend laws to match Uber’s request. Uber need not have sought permanent permission; with great confidence in its offering, even a temporary waiver might have sufficed, as Uber would have anticipated the change becoming permanent once its model took off. Perhaps Uber’s service would have been a huge hit—inspiring other cities to copy the regulatory changes to attract Uber. Indeed, Uber could have flipped the story to make municipalities want its offering, just as cities today vie for Google Fiber and, indeed, make far-reaching commitments to attract that service.

Where’s the enforcement?

Park in front of a fire hydrant, and you can be pretty sure that you’ll get a ticket—even if there’s no fire and even if no one is harmed. TNCs violate laws that are often equally unambiguous, yet often avoid sanction. I discuss Uber’s standard approach to unfavorable regulation:

[Regulators’ findings of unlawfulness] are not self-effectuating, even when backed up with cease and desist letters, notices of violation, or the like. In fact, Uber’s standard response to such notices is to continue operation. Pennsylvania Public Utility Commission prosecutor Michael Swindler summarized his surprise at Uber’s approach: "In my two-plus decades in practice, I have never seen this level of blatant defiance," noting that Uber continued to operate in despite an unambiguous cease-and-desist order. Pennsylvania Administrative Law Judges were convinced, in November 2015 imposing $49 million of civil penalties, electing to impose "the maximum penalty" because Uber flouted the cease-and-desist order in a "deliberate and calculated" "business decision."

Nor was this defiance limited to Pennsylvania. Uber similarly continued to provide service at San Francisco International Airport, and affirmatively told passengers "you can request" an Uber at SFO, even after signing a 2013 agreement with the California Public Utilities Commission disallowing transport onto airport property unless the airport granted permission and even after San Francisco International Airport served Uber with a cease-and-desist letter noting the lack of such permission. In some instances, cities ultimately force Uber to cease or suspend operations. But experience in Paris is instructive. There, Uber continued operation despite a series of judicial and police interventions. Only the arrest of two Uber executives compelled the company to suspend its casual driving service in Paris.

While TNCs continue operation in most jurisdictions where they have begun, they nonetheless face a growing onslaught of litigation. PlainSite indexes 77 different dockets involving Uber, including complaints from competitors, regulators, drivers and passengers. (Notably, this is only a small portion of the disputes, omitting all international matters, most state proceedings, and most or all local and regulatory proceedings.) But no decision has gone as far as the Pennsylvania Public Utility Commission docket culminating in the remarkable 57-page November 2015 decision by two administrative law judges. In a July 1, 2014 order, the judges had ordered Uber to cease and desist its UberX service throughout the state for lack of required permits. Uber refused. The judges eviscerate Uber’s response, noting that their prior order "clearly directed Uber to cease its ridesharing service until it received authority from the ion," and "Uber was acting in defiance … as a calculated business decision" because "Uber simply did not want to comply … so it continued to operate." Uber then argued that it was justified in continuing to operate because the July 1, 2014 order was subject to further review and appeal. The PUC judges call this argument "incredibl[e]," noting the lack of any legal basis for Uber to refuse to comply with a duly issued order. It’s hard to imagine a decision more thoroughly rejecting Uber’s conduct in this period.

Notably, the Pennsylvania PUC fully engages with Uber’s defenses. In this proceeding and elsewhere, Uber argued that it is "just a software company" and hence not subject to longstanding laws that regulate transportation providers. The PUC picks apart this argument with care, noting Uber’s extensive control over the system. The PUC notes relevant facts demonstrating Uber’s "active role": Uber screened drivers and ejected some. Uber initially required drivers to use company-owned smartphones. Uber offered and touted an insurance policy which it claimed would cover possible accidents. Uber held the service out to the public as "Uber," including emails subject lines like "Your first Uber ride" and "Your ride with Uber" as well as message text like "Uber invite code" and "thanks for choosing Uber," all of which indicate a service that is Uber, with the company providing a full service, not just software. Uber further charges customer credit cards, using a charge descriptor solely referencing Uber. Not mentioned by PUC but equally relevant, Uber attracted both drivers and passengers with subsidies and price adjustments, set compulsory prices that neither side could vary, published drivers whose conduct fell short of Uber’s requirements, and mediated disputes between passengers and drivers. The PUC notes the breadth of conduct requiring license authority: "offering, or undertaking, directly or indirectly, service for compensation to the public for the transportation of passengers" (emphasis added). If the word "indirect" is to have any meaning in this statute, how could it not include Uber?

The PUC imposed a $49 million civil penalty against Uber for its intentional operation in violation of a PUC order. The PUC discussed the purpose of this penalty: "not just to deter Uber, but also [to deter] other entities who may wish to launch … without Commission approval." Their rationale is compelling: If the legal system requires a permit for Uber’s activity, and if we are to retain that requirement, sizable penalties are required to reestablish the expectation that following the law is indeed compulsory.

Meanwhile, the PUC sets a benchmark for others. Uber flouted a PUC order in Pennsylvania from July 1, 2014 through August 21, 2014. In how many other cities, states, and countries do Uber and Lyft equally violate the law? If each such jurisdiction imposed a similar fine, the total could well reach the billions of dollars—enough to put a dent in even Uber’s sizable balance sheet, and enough to compel future firms to rethink the way they approach law and regulation.

Looking back and looking ahead

Tempting as it may be to think Uber is first of its kind, others have tried this strategy before. I explain:

Take a walk down memory lane for a game of "name that company." At an entrepreneurial California startup, modern electronic communication systems brought speed and cost savings to a sector that had been slow to adopt new technology. Consumers quickly embraced the company’s new approach, particularly thanks to a major price advantage compared to incumbents’ offerings, as well as higher quality service, faster service, and the avoidance of unwanted impediments and frictions. Incumbents complained that the entrant cut corners and didn’t comply with applicable legal requirements. The entrant knew about the problems but wanted to proceed at full speed in order to serve as many customers as possible, as quickly as possible, both to expand the market and to defend against potential competition. When challenged, the entrant styled its behavior as "sharing" and said this was the new world order.

You might think I’m talking about Uber, and indeed these statements all apply squarely to Uber. But the statements fit just as well with Napster, the "music sharing" service that, during brief operation from 1999 to 2001, transformed the music business like nothing before or since. And we must not understate the benefits Napster brought: It offered convenient music with no need to drive to the record store, a celestial jukebox unconstrained by retail inventory, track-by-track choice unencumbered by any requirement to buy the rest of the album, and mobile-friendly MP3’s without slow "ripping" from a CD.

In fact, copyright litigation soon brought an end to Napster, including Chapter 7 bankruptcy, liquidation of the company’s assets, and zero return to investors. Where does that leave us?

One might worry that Napster’s demise could set society back a decade in technological progress. But subsequent offerings quickly found legal ways to implement Napster’s advances. Consider iTunes, Amazon Music, and Spotify, among so many others.

In fact, the main impact of Napster’s cessation was to clear the way for legal competitors—to increase the likelihood that consumers might pay a negotiated price for music rather than take it for free. When Napster offered easy free music with a major price advantage from foregoing payments to rights-holders, no competitor had a chance. Only the end of Napster let legitimate services take hold.

And what of Napster’s investors? We all now benefit from the company’s innovations, yet investors got nothing for the risk they took. But perhaps that’s the right result: Napster’s major innovations were arguably insufficient to outweigh the obvious and intentional illegalities.

I conclude the comparison:

Uber CEO Travis Kalanick knows the Napster story all too well. Beginning in 1998, he ran a file-sharing service soon sued by the MPAA and RIAA on claims of copyright infringement. Scour entered bankruptcy in response, giving Travis a first-hand view of the impact of flouting the law. Uber today has its share of fans, including many who would never have dared to run Napster. Yet the parallels are deep.

Despite the many concerns raised by TNC practices, I am fundamentally optimistic about the TNC approach:

It is inconceivable that the taxis of 2025 will look like taxis of 2005. Uber has capably demonstrated the benefits of electronic dispatch and electronic record-keeping, and society would be crazy to reject these valuable innovations. But Uber’s efforts don’t guarantee the $50+ billion valuation the company now anticipates—and indeed, the company’s aggressive methods seem to create massive liability for intentional violations in most jurisdictions where Uber operates. If applicable regulators, competitors, and consumers succeed in litigation efforts, they could well bankrupt Uber, arguably rightly so. But as with Napster’s indisputable effect on the music industry, Uber’s core contributions are unstoppable and irreversible. Consumers in the coming decades will no more telephone a taxi dispatcher than buy a $16.99 compact disc at Tower Records. And that much is surely for the best.

Will it be Uber (and perhaps Lyft) that bring us there? Or will their legal violations force a shut down, like Napster before them, to make way for lawful competitors? That, to my eye, is the multi-billion-dollar question.