It wasn’t a great week for Airbnb.
Last Tuesday, representatives of New York State Attorney General Eric Schneiderman and lawyers for the apartment sublet company Airbnb met in an Albany court. At issue is a broad subpoena issued last fall, demanding that Airbnb turn over information about its “hosts” (those who list their apartments) in the belief that thousands of them are in violation of the law by acting as de facto unregistered hotels.
Then, on Wednesday, the San Francisco city attorney brought suit against two local landlords, alleging that they illegally evicted residents in order to convert residential housing into short-term rentals advertised on Airbnb and similar services.
The San Francisco case in particular appears to have considerable merit. (According to the lawsuit, two of the evicted residents were disabled.) A larger issue to be considered, however, is that Airbnb is part of a wave of companies whose business model is inherently disruptive both of existing industries and existing laws. Those industries and many regulators are challenging the new business models.
Airbnb is part of a suite of new companies — among them Uber, Aereo, HomeAway and Lyft — that are frequently described as constituting the “sharing economy.” It’s a poor term at best. None of what these companies do is “shared,” because nothing is free; everyone is in it to make some money.
What is notable about these models, however, is that they provide technology allowing users and buyers to transact without mediation by the powers that have traditionally controlled those transactions. So Airbnb matches those with rooms to those seeking to rent rooms; Uber matches cars and drivers with those seeking to hire cars and drivers; and so on. They provide a direct means of exchange for any set of buyers and sellers.
At stake are hundreds of billions of dollars of revenue. Incumbents are attempting to protect that revenue using the legal system. As we all know, laws can be tools crafted in the interest of established groups and businesses to further their needs and inhibit those of others. Regulations used to protect the common good are essential, but laws used to stifle innovation are deadly.
Until recently, however, the U.S. has mostly steered away from the worst effects of laws and regulations used to kill innovation and new business models. Yes, the Big Three car cartels in Detroit managed to make it nearly impossible for any competitors to manufacture cars for much of the 20th century. Their implosion in the 2000s created an opening for Tesla.
Yet now states such as New Jersey are responding to the complaints of car dealers and attempting to shut down Tesla’s direct-to-consumer sales model — which is another variant of cutting out the middleman. Taxi and limousine commissions have taken to courts to fight Uber, and a similar surge is happening with Airbnb.
It’s comforting to imagine that, in the end, the power of innovative technologies and business models will win out over status-quo thinking and entrenched interests, all for the public good. In the late 1990s, the established music industry viewed digital music as a proximate threat, pursued file-sharing innovator Napster with a vengeance, and won in court. It won that battle, only to see digitization overwhelm its distribution model anyway.
Further disruption occurred when the iTunes-driven ecosystem of today upended the brick-and-mortar stores selling albums and CDs. That ruined several chains, but enriched the lives of hundreds of millions of users.
Established companies, aware of the precariousness of their franchises, are determined to maintain their position. They use the tools of regulation and litigation as a powerful bludgeon.
These rearguard actions assume a zero-sum economy where every gain for innovative entrants is a loss for incumbents. That may be true in some cases, but it is hardly a given. Certainly with music and video, peer-to-peer has led to an explosive growth in usage rather than new entrants carving up a finite pie. It’s too soon to tell whether Uber will actually decimate the taxi industry, but in New York City, medallion sales are hitting record highs even with the onslaught of Uber — an early indication that Uber may simply lead to more people using car services, not fewer people taking taxis.
Instead of indiscriminately challenging the Ubers and Airbnbs of the world, regulators should be guided by what is in the public interest. If Airbnb hosts are in fact evicting disabled residents from their homes in San Francisco, authorities should hit back hard. But if new companies are simply creating models that provide more access to rides, more ease of facilitating travel and tourism, more ways of buying cars — all of which indisputably boost local economies — then our regulatory and legal system should embrace them, not impede them.
Karabell is an author, money manager and commentator. He wrote this column for Slate.com.