Photo: Paul J. Richards/AFP/Getty Images
Uber and Airbnb Are Waging a Libertarian War on Regulators
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Uber and Airbnb Are Waging a Libertarian War on Regulators Silicon Valley's politics get complicated

By Photo: Paul J. Richards/AFP/Getty Images

Last week Airbnb, the home rental service, caught a break when a judge tossed out a subpoena by the New York attorney general for the names of 15,000 Airbnb hosts. It’s illegal under New York law to rent your apartment out for fewer than 30 days, something the AG, Eric Schneiderman, believed Airbnb was enabling on a massive scale. For its part, the company has protested that such laws only apply to traditional businesses, not its users (“there are no laws written for microentrepreneurs,” Airbnb CEO Brian Chesky has opined), and that the AG’s demands were too intrusive in any case. The judge accepted the latter argument, if not the former.

The victory aside, Airbnb’s legal problems are far from overSchneiderman vowed to submit a narrower subpoena that would presumably pass muster with the court. But, then, Airbnb’s main strategy for dealing with regulations it dislikes has never been so much legal as it is political. Amid the company’s battle with Schneiderman, an Airbnb-affiliated group called Peers gathered more than 200,000 signatures for a petition urging the state to ease up on short-term rentals. According to the San Francisco Chronicle, Peers also ran a crowdfunded ad touting the virtues of home-sharing and dispatched hundreds of zealous Airbnb users to the offices of local politicos, armed with “their personal stories about the impact home sharing has made in their lives.” The company and its various allies have ginned up similar efforts in San Francisco and Los Angelessuggesting that, win or lose in court, they see public opinion as the more important arbiter.

Every tech boom has a moment when utopian giddiness gives way to the messy reality of running a business. But that moment has proven far more painful in this boom, for two reasons. First, companies like Airbnb have honed in on parts of the economy where powerful regulators have traditionally deterred new entrants. Second, and largely as a result, the upstarts must not only innovate with their technology and business strategy, but also when dealing with the government officials who control their fate.

Unfortunately, not every startup has covered itself in glory amid this new world order. In fact, the companies doing the most innovating on the regulatory front appear to be guided more by their libertarian ideology than what’s best for their customers and the economy as a wholeor even, at times, for themselves.

Like Airbnb (and for that matter eBay and PayPal during the 1990s), the popular car service Uber defines itself as emphatically not in the business it appears to be in for the apparent purpose of eluding regulators. CEO Travis Kalanick is fond of asserting that Uber is a technology company rather than a transportation company, and therefore shouldn’t be regulated the way taxis are. Like Airbnb, Uber also invites its diehard customers to mau-mau regulators on whom this distinction might be lost. As Mark Egerman, a former Consumer Financial Protection Bureau official and recent startup founder, sums it up, the Airbnb-Uber strategy is, “Get super popular, ignore the laws, and if you try to enforce them, we’ll use the power of the bully pulpit.”

But Uber actually adds its own special ingredients to this recipe. First, it uses a certain amount of trickery when corralling its customers to support its cause. It once invited its top Chicago riders to what was billed as a fan appreciation night involving free drinks, hors d’oeuvres, and “some awesome surprises,” only to turn the gathering into an anti-regulation organizing session replete with PowerPoint slides. (It was not Uber’s only flirtation with trickery. The company has been caught ordering and then canceling cars from a rival service to tie up its vehicles, among other gambits.)

Uber also rarely misses an opportunity to remind regulators and politicians it plans to battle them relentlessly, and with powerful allies in its corner. Call it the walk loudly and carry a big stick strategy.  When the company raised more than $250 million last year, Kalanick explained that Uber needed the money partly to “fight off protectionist, anti-competitive efforts,” then went onto boast that several of his new investors had “regulatory know-how in highly regulated … industries in the farthest corners of the globe.”

Predictably, these strategies often lead to self-defeating scandals. Airbnb has taken serious lumps over the way it’s abetted tax avoidance by large-scale enterprises that are effectively running hotels. Uber has struggled to defuse outrage over an under-insured driver who killed a young girl by running into her at a crosswalk. In both cases, it’s hard to believe the companies wouldn’t have been better off playing nice with regulators than suffering massive amounts of PR blowback.

For evidence of this, just consider the financial sector, into which venture capitalists have plowed billions of dollars in recent years. If anything, the sector is even more regulated than hospitality or transportation. For example, a so-called payments start-up, which transfers money between consumers, businesses, banks, and governments, often much more efficiently than Visa and MasterCard, could theoretically need a license to operate in almost all 50 states.

If ever there were a place where the shoot-first/ask-questions-later strategy would be tempting, in other words, it's fintech. And, in fact, many companies do find it to be a rational calculation. “My observation from my days as California commissioner is that there’s so much unlicensed activity going on currently, it becomes a question of prioritization [for the regulators],” says Bill Haraf, who once headed the state’s department of financial institutions. The regulators couldn’t possibly shut down more than a small fraction of noncompliant companies even if they wanted to. No surprise, then, that more and more startups have “rolled the dice” of late, says Greg Kidd, a former Federal Reserve official who now invests in a variety of fintech companies and works as an adviser to one.1,2

But, as it happens, there’s a way to launch a startup that doesn’t require willful ignorance or a calculated gamble, even in an industry as thick with regulators as this one. It’s called respect. Dwolla is an Iowa-based payments company that’s competing with credit cards by using the Internet to transfer money from one party to another. The company used the first $200,000 of capital it raised from a group of local investors to formally apply for a license.

Then, over the next few years, Dwolla’s co-founder Ben Milne worked on tweaking his business to make a license unnecessary. The company now uses sophisticated software that tells banks the most efficient way of crediting one party’s account and debiting the other, meaning Dwolla doesn’t actually hold any money itself. But unlike Airbnb and Uber, Milne didn’t simply announce that the rules don’t apply to him. When his license came up for renewal, he went to the Iowa authorities and said, “Here are the reasons we no longer believe we need a license, we’d like you to relieve us of our license if you agree.” The regulators did. “I’ve found myself to be unpopular in startup circles,” says Milne. “I think regulators are good people, they’re trying to protect people.”

Naturally, the approach won’t work everywhere. Some regulators really are on a power trip. Others get captured by the biggest companies they regulate, making them instinctively hostile to startups. In still other cases, the law can be so vague and the licensing process so convoluted that it effectively punishes those who make a good-faith effort to get legal. “Even if you want to do it by the book, no one knows what the book is,” says Kidd.

On the other hand, there are a surprising number of regulators who see their mandate as helping new companies operate safely and legally rather than shutting them down. To take one example, when a startup inadvertently fails to make certain disclosures under the Truth in Lending Act, federal regulators typically ask them to correct the issue without so much as levying a fine. “There’s a belief that under the Patriot Act we want to regulate anyone who wants to do anything,” says Egerman. “Part of my job in government was convincing people that the regulatory environment for fintech startups was not as crazy as they think it is.”

There’s a lesson in all this for the Airbnbs and Ubers of the world: You can scream all you want about anti-capitalist bureaucrats and their jihads. But sometimes it’s worth having a polite conversation before you take them on.

Update: Airbnb negotiates a peace agreement with the New York AG, announced today

 

1

The one big competing consideration is that you can actually do hard time for running afoul of the law at a financial services company. “The difference here is that Airbnb and Uber are not facing felony charges,” says Kidd. “Under the Patriot Act, the way the legislation is written, operating an unlicensed money transfer firm is a felony.”

2

Perhaps most famously, Square, which allows businesses to accept credit card payments on their iPhones and iPads, and which had plenty of cash and influence to throw at the problem (Twitter co-founder Jack Dorsey is its CEO), got hit with a consent decree and a half-million dollar fine because it waited two-and-a-half years before applying for a license to legalize certain products in Florida. (In fairness, there’s no evidence that Square was deliberately flouting the rules, a la Airbnb and Uber.) [NOTE: This footnote has been corrected to make it specifically about the Florida case, rather than Square's posture generally.] 

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