Does UBER Know It's the NAPSTER of the Decentralized Sharing Economy?

Published on September 7th, 2015 by Adam B. Levine

Johnston's Law

In March of 2014, David Johnston, an influential early adopter and angel investor in the cryptocurrency space coined what he called “Johnston's Law”.

“Anything that can be decentralized, will be decentralized.”

It’s a bold statement, but it comes at a point in history where everywhere we look we are surrounded by centralized control, and the limitations to the actions of individuals that go along with it.

Even as recently as a hundred years ago, the vast majority of the systems you’d be familiar with operated using decentralized decisionmaking and practices simply from necessity. Whether farming or making paper or selling products, the majority of operations were independent and basically at the whim of the person who owned and operated the venture. This was, and remains good because, when owners or stakeholders are in control, they are responsible not to some distant “Boss” but to themselves.   Any failure or missed opportunity is their own, as well as any success.

Decentralization combined with competition (and a lack of monopolies) does not seek to deliver totally consistent results. Instead it delivers a bell curve;  businesses succeed or fail in varying degrees due to the choices they make, how the market likes their answers, and how fortuitous their luck or timing might be.

Decentralization is a core value of cryptocurrency and Johnston identified many, many niches within the global economy where it simply makes more sense for (nearly) everyone involved to come up with a better way.

But if decentralization is so great that it will be pervasive in our lives, why isn’t it now?

To answer that question, let’s take a look at the Taxi industry in New York City. As one of the largest, oldest and most controlled licensed livery systems (a term left over from the days when cabs were horse-drawn) it’s in the midst of Johnston’s Law today as Uber and other rideshare alternatives innovate and disrupt the long standing “way things are done”.

The End of the Start-Up Cabbie Bonanza

"The way things are done" all started in the late 1930s with the passage of the Haas Act, which for the first time placed a limit on the number of individuals with permission to operate a cab. Previously, to earn your living as a Cabby in New York, you had to find a car and spend your time putting it to use finding and delivering fares. This wasn’t a trivial problem; it took resources and work but there was no need to ask for permission and most importantly, nobody to tell you “no”.

The Great Depression changed all of that, as the boom of the 1920's became the bust of the 1930's, and prospects faded in most corners of the economy. The remaining avenues of opportunity, unsurprisingly, saw enormous inflows of those who now saw these as their best chance to make a living. Early Taxis were quite expensive to ride in, and before long, the combination of the ongoing slump pushing down the supply of passengers and the inflow of new cabbies creating a surplus of drivers culminated in a crisis.  Something had to be done.

In 1937 the Haas Act was passed. It created the Taxi Medallion system which remains largely unchanged today.  In order to drive a taxi, a driver must acquire a Medallion which goes on the front of the Cab. These original Medallions never expired and the maximum number in 1937 was set at 16,900 - That’s a little more than half a license available per driver operating at the time.

The Haas Act worked to drive down the supply of drivers without changing the supply of passengers, and it stuck. The number of legal cabs would never be higher than the year the Haas Act took effect, and although New York City would recover from the Great Depression, find prosperity and add millions more to its population over the years, today there are less than 14,000 taxi Medallions in circulation.

What sold in 1948 for $2500 (or about 4,000 “Standard Trips” at $0.63 cents per fare to pay off the investment) became $26,000 only 16 years later (or about 29,213 “Standard Trips” at $0.89 per fare to pay off the investment) became $60,000 in 1980 (or about 19,887 “Standard Trips” at $3.02 per fare to pay off the investment). Since 1996 we’ve seen the cost skyrocket from $176,333 (or 33,615 “Standard Trips” at $5.24 per fare to pay off the investment) to $732,250 (or 82,657 “Standard Trips” at $8.75 per fare to pay off the investment) with individual medallions selling for more than 1 million dollars being reported over in 2013/14.  

http://www.zerohedge.com/news/2014-11-29/yellow-cab-bubble-pops-taxi-medallion-prices-tumble-17-last-years-record-highs

By any measure, the Medallion system raised the cost of both operating and riding in a cab. 

Cui bono?

So what was the gain and to whom? It’s been argued that taxis were sometimes low quality or had abusive prices in the days before Medallions.  This might be true but it’s to be expected in a decentralized system that also lacks rules. To this point, the rules of driving a taxi were much the same as those of driving a car.  So while the Medallion system came with rules and standards for what a taxi must or must not be, that could have happened entirely on its own and at any point.

There were two winners of the Medallion system. The first was the governmental authority who now had the power to control what a taxi would or would not be, and who would be allowed to make their living in that fashion.   

More importantly, the other winners were the large taxi companies who, with fleets of hundreds of cars (The New York Taxi Cab Company opened their doors with more than 600 imported French cabs that went on to be the first, now standard, yellow cabs) who had a lot to lose. 

Just like anything else, available supply and immediate demand determines the value of a given service, and in the years leading up to the Haas Act the taxi industry was fighting a losing battle as leaner, hungrier competition saw the opportunity to compete for their livelihood, and took it. Medallions added a barrier to entry that was easily overcome by these large, existing companies but not nearly as easily for hopeful independents. These Medallions (licenses) were also perpetual, transferable and more importantly, there weren’t enough to go around even if a third of the original 1936’s cabbies had walked away.

This meant that if you could get a Medallion early, it was like money in the bank that would surely get more valuable as time went on. The unfixed growth of passenger numbers would dwarf the fixed (or diminishing) number of legally usable vehicles.

The waves of new drivers during a time of decreased demand was a major disruption that had the potential to fundamentally change the market for transportation. The Medallion system was a way to let those  already in control extend and maintain their dominance. They could even profit from their eventual demise through the early, indefinite control of the permission that still allowed them to do what others could not. This isn’t to say that the opportunity was uniquely available to these companies to the exclusion of all others. Rather, those already in power have a massive advantage in maintaining it and so often do. Nothing unusual was happening here.

Of course, it can be fighting a losing battle to preserve “the way things are,” but when the transition is one from being the king of the hill, to not being the king of the next hill, your every incentive is to delay or slow the movement, and so retain your position for that much longer.

Things are as they are for a reason. It might not be a great one but change can only come at times of disruption because lacking that, who would bother? Things are great, or at least good enough for those currently on top.

The Way Things Are

Disruption comes in different forms and flavors, by its nature impossible to predict. What can be predicted is what types of people will win and lose when the hammer falls and everything changes.

Those who are least vested in a given system are much more receptive to critique and suggestion towards its improvement than those who are most vested.

“The Master Switch” author Tim Wu calls this the Kronos Effect, where early opportunistic innovators who find success with their own innovations soon become settled in The Way Thing Are.

When in power, rather than enabling further progress of the sort that gave them their place and power, they act to delegitimize, buy out or crush those who would improve on their improvements.

Who Benefitted?

The Taxi Medallion system was supposed to be good for everyone, but in reality it was a limitation placed on the market that hurt everyone involved. Drivers may have initially wanted less competition in the face of limited takers for their services; the Medallion allowed them to operate where others could not but this was always an artificial restriction, no more real than the ability to enforce it. What it actually accomplished was to create two classes of drivers in the system; those who had the Medallion and had permission to drive  but also were made to pay the cost of it, and those who did not. 

The Medallion means the cost of the legal ride must go up, so for customers  more focused on cash than comfort there’s probably an illegal ride that can better fit your needs.

Should people be allowed to choose cheaper services that come with fewer guarantees and comforts? In recent years we’ve seen exactly this as rideshare applications like Uber and Lyft change the very nature of what a taxi is.

Centralized Disruptors

Uber is a real company with offices, employees, founders, intellectual property and staff but they don’t employ any drivers; they are all independent contractors.

Drivers self-select within the Uber app and then go through a basic verification process. Unlike driving a cab, you don’t need to buy or lease an official Taxi, and unlike driving a cab you don’t need a Medallion.

Uber is a centralized company that only bothers to centralize its dispatch and support services to enable its decentralized community of drivers to connect with and provide a service to its decentralized community of riders. It’s not just drivers who do work that benefit; as part of the experience, a rider rates their driver after each encounter, and so drivers build up easily accessible reputation scores that can provide some context on if they’re a good driver to select.

Taxis are assumed to be safe and their drivers worth riding with because they have the relationships or money to acquire permission to drive a formal cab.   Where Taxis assume, Uber users constantly evaluates and re-affirm based on the reality as they find it.

What Uber does through their "riders rating drivers"  app, is give riders the opportunity to share their experiences so future riders can make an informed decision in choosing a driver.   

At the time of this writing, Uber seems the dominant force in the disruption of Taxi service. In reality, Uber is the Napster of its market - a centralized company reaping the lower costs of not maintaining a centralized service. Uber seems to deliver on the promise of decentralization in a market that’s been getting more expensive and less useful for decades, but if we follow the example a bit further you’ll quickly see the problem.

This Changed Everything

Napster was initially a success, and why wouldn’t it be? In a world dominated by CD sales (Real and Bootleg), Napster offered the ability to, at no cost, download music from the collections of others around the world into your collection. Compared to the existing way of doing things, this was not only revolutionary in its ease-of-consumption (a few minutes on your 56k modem compared to driving to a music shop) but it was free. Add to that, it never ran out of stock and had the largest sheer variety of choices the world had ever seen, including many rare, live, or unreleased tracks that would never see the light of day in the legacy system.  

Those outside the music industry who enjoyed the product of music had a tool here that was undoubtedly better than the one which came before; and it was fast, plentiful and free - Who could say no to that?

The RIAA (Recording Industry Association of America) could, and along with the MPAA (Motion Picture Association of America) would go on to sue the nascent Napster out of existence - “Even though Napster (the company) wasn’t doing anything illegal, their users were”,  they argued and the courts agreed. The service slid backwards in terms of functionality until eventually it was forced to close for good.

Napster was held responsible for the actions of its users, even though it didn’t know any of them and they were neither employees nor customers. RIAA argued and the courts agreed, that the company was what mattered, not the users,  so if the company enables or benefits from illegal uses, it is potentially responsible for moderating or controlling those actions.

Unstoppable Disruption

David Johnston said “Anything that can be Decentralized, will be decentralized” but there’s a bit more than that. Moving from a decentralized system to a better decentralized system isn’t that difficult, but to move from a centralized system to a decentralized system is another matter entirely. In fact, anything truly disruptive that can be stopped will be stopped because disruption always comes at the cost of the already powerful. The powerful, given the option, will always work to preserve their power until the cost of such preservation becomes more damaging than to let progress take its course.

Uber recently raised 1.2 billion dollars from capital markets at a total implied valuation of 16 billion. They’ve made it further than Napster in no small part because, where the music industry was centralized nationally, taxi monopolies are regional.  The media industry was able to pool their vast resources to wage a stalling action filled with scare tactics targeting normal users in an attempt to dissuade its use. Uber on the other hand is by its nature local and their competition is too. A Taxi Medallion in New York has a different cost, different rules and a different historical context than one in Chicago or Miami and so rather than fighting off pressure from the “National Taxi Foundation”, they’re waging war against a decentralized cohort of local monopolies.

Even so, whether Uber will be the dominant rideshare, or even still in business in five years seems anything but a sure thing - Napster is instructive here as well.  

When Napster closed its doors, that didn’t end the hunger for this new and better way.  Napster was the most centralized the  "decentralized file sharing" technology had ever been; they had real servers, kept logs of user information and even provided some of the indexing power that let users search the massive libraries.

Evolutionary Pressures

After its demise, alternatives started popping up targetting those users who had seen the light with Napster and were now frustrated by being required to go back to the old way of things. These new alternatives were not created in a vacuum.  Their founders watched closely the troubles encountered by Napster and designed their tools in ways that would make themselves safer. Or so they thought.

This next wave of companies found they had followed in Napster's footsteps too closely and themselves became targets of the same powers who had stopped the disruption previously. This was essentially, an arms race between technology and the legal system. Every time the legal system clamped down, purpose-built technology would allow users to route around it, and in doing so be connected more directly to each other and less to whatever company was enabling them.

In the modern age we have the Bittorrent protocol which can be seen as the evolutionary end-game that began with Napster. Bittorrent is fully decentralized and open source. There is no company, there are no servers, nor any site on the internet beyond the most basic. Anyone need simply list tiny “magnet” files to become a free-to-download directory for files you do not host yourself using bandwidth you will not pay for. If the file is popular, chances are good you’ll download faster with Bittorrent than you would through any centralized downloading service.

With all these advantages it seems obvious there’s money to be made in providing these services, but you’d be wrong and there’s a fundamental point to be understood here. Decentralization and Centralization can be thought of as the importance of “The Crowd” or “The Company” - Centralized systems rely on the company to be useful at even a base level. It doesn’t matter how many users you have or how long you’ve been around. It doesn’t really matter how much attention the service receives, if a company like Napster goes away, all of its users will need to find something else to do and so the core company is vitally important.

With Bittorrent? Not so much.

Connecting the Dots

So the end-game of Decentralization in any business stopped up by legality is to fully disintermediate anyone who in the past controlled access for a fee. The middleman isn’t even the problem; rather the problem seems to be the rules that govern what the middleman can or can’t offer.

If the limitations placed on what can be offered to a paying customer make the object the customer wants not as useful or desirable because of those limitations, the customer will only be a customer if there are no better options.

Other factors are the ability and ease to enforce the rule (if you’re more likely to get caught, you’re less likely to do it) and the severity of the punishment (if you’re caught, and it will ruin your life perhaps you’re less likely to try than if the punishment were less severe).

If in any way your motive is profit, you would not create such a product as Bittorrent for the taxi industry.   

But if your motive is to be able to find a market-rate ride easily without needing to wait for one of only thirteen thousand licensed cabs to pick you up in New York City, it’s a pretty perfect solution. Give market participants the tools to eliminate the middleman, and you also get rid of the regulation since the middleman is the only chokepoint that can effectively be regulated.

And there it is.

Disruptive Decentralization of any industry only can happen if it seems like a good idea. And it can only seem like a good idea if the industry has become stagnant and unresponsive to market forces and its users.

Decentralization “routes around the damage” in the truest sense of the word, by simply excluding the no longer necessary parties and connecting users directly to users. Once the world awoke to MP3s, the business of music would never be the same again. In this case as in most, once released the genie can never go back in the bottle.

At the core, this whole issue is about choice and who gets to make it.  

Disruptive Decentralization is a natural reaction that once begun is unstoppable In any market or industry whose services or products people actually want or need to use.  Whether you’re talking about healthcare or finding a cab, sharing your favorite music with a friend or even something as critically important to society as the money we use,  the systems are unwilling or unable to meet the needs, and so alternatives that operate outside of the system have been found.

And we’re back where we started.

Johnston's Law states,

"Anything that can be Decentralized, Will Be Decentralized",

To which I’d like to add the Levine Counterpoint,

"Anything Disruptive that Can Be Stopped, Will Be Stopped".

And in the pressure cooker world we call the New Renaissance, we all get to see how right Johnston was.

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