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Milan Should Be More Like San Francisco: Uber’s Latest Obstacle Points to Needed Italian Economic Reform

· May 31, 2013

Today’s news about taxi drivers storming a Wired conference on innovation in Milan to protest Uber tells us a great deal about Europe’s persistent economic malaise.

It’s no secret that European economies have been struggling as of late.  While the U.S. economy is anticipated to grow 1.9% in 2013, the 17 member eurozone economy is predicted to shrink 0.6% in 2013 (after shrinking 0.5% in 2012).  Given high debt-to-GDP ratios and unfriendly bond markets, government spending is unlikely to be Europe’s way out of its current slump.

One explanation for the difference in growth rates coming out of the financial crisis between the EU and U.S. economies is the receptiveness of both economies to Internet-centric innovation.  Previously at DisCo, I discussed reasons why Europe doesn’t have full scale equivalent of Silicon Valley.  We highlighted bankruptcy laws that discourage risk taking, labor laws that make it difficult to hire and fire employees, and a lack of early-stage venture funding.

However, there is another story to tell.  The European economy (partially the result of having 27 different regulatory regimes in many areas) has been less receptive of disruptive innovation than its American counterpart (or, in the case of Uber, innovation that threatens established constituencies).  Europe’s challenge may also be a veiled opportunity.  Lacking the ability to spend its way out of the recession, Europe has been forced to focus on “structural economic reforms” that remove unnecessary impediments to commercial activity.

One obvious place to look to is the Internet economy.  An area that is already under the spotlight is outdated IP laws.  Fair use provisions in U.S. copyright law allowed Internet companies to thrive in America.  (Furthermore, the lack of a “fair use” provision in Japan meant that early Japanese search engines had to ask each and every website permission to index them for searching purposes, which hobbled the Japanese search industry before it got off the ground.)  This sentiment motivated David Cameron to order a review of UK IP law three years ago.  In his press conference, he delved into the nitty gritty of copyright law (a rarity for the head of a G8 country!) in which he said:

“Over [in the U.S.], they have what are called ‘fair-use’ provisions, which some people believe gives companies more breathing space to create new products and services.

“So I can announce today that we are reviewing our IP laws, to see if we can make them fit for the internet age. I want to encourage the sort of creative innovation that exists in America.”

Which brings us to the “chaotic” protest that derailed Wired’s Next Fest in Milan earlier today (the protest was apparently so chaotic that the organizers had to shut the conference down).

Local cab drivers in Milan stormed a conference (ironically a conference on innovation) to protest Uber — the Internet company that uses a cool mobile application to connect customers in need of a ride with private drivers (Uber’s Italian General Manager was speaking at the conference).  Invoking local regulations, and good old-fashioned incumbent protectionist sentiment, the Milanese cab drivers have been protesting Uber ever since it announced its intention of serving Milan customers earlier this year.  This latest high-profile incident is a brazen escalation of the protest.  (In fact, the larger issue of taxi liberalization has been a major political battle in Italy and other European economies.)

Uber addressed concerns in the company’s Italian blog in March. To the company’s credit it sought to work within the strictures of Italian law, at least according to its blog post (note: this is a Google translation of the original Italian):

Uber Dear friends, as you will be well aware by now we arrived in Milan and it was exciting to see that many of you already use and are passionate about our app. We want to emphasize that our mission is to provide a fantastic service to our users and we work every day to keep that promise. We are lucky because we work in Milan with the drivers that are fantastic and with your support we ensure that we improve the level every day.

We have noticed that, from our entry into Italy, many have wondered how it will develop our role in the market and how we can meet the standards laid down by law. No new questions, because we are present in many other cities in the world, where we continue to offer our users the opportunity to easily find means of transport quality. When you enter a market that has never been changed for years, bringing innovation, it is normal to struggle with people who are not happy. . . .

Before entering a new country or a new city, we spend a lot of time studying the law and see if we can operate within the laws. In Milan we operate as agents and use the app to establish a direct relationship between our users and drivers, once you accept the latter race. This is also specified in the receipts that are emailed to customers, these being released by the driver and his company. In addition, our technology allows us to differentiate ourselves from a regular meter and therefore allows us to meet the standards of the law.

We are informed that two licenses were withdrawn by the police on alert, during the evening of our launch event. Both booklets were returned in a few days given the lack of documentation about the accusation. We hope that these situations do not distract us from focusing on providing an excellent service to Milan and, in the future, in other Italian cities.

The company has been a huge hit wherever it has opened up shop (and is growing at a rapid pace).  However, as frequent readers of DisCo know, the company has also been met with resistance in many localities by local cab drivers who are not pleased about the added competition.  Instead of embracing the technology to provide better customer service and more efficient pricing mechanisms, they often twist local laws and lean on local politicians to try to prevent Uber from operating.  However, at least for the most part, cities have often embraced Uber in the end, and the U.S. federal government has even weighed in on Uber’s behalf.

And in Italy, there is some hope.  The Italian government recently passed a decree that streamlined out of date financial regulations to make the crowdfunding of Italian startups possible.  Even though the local political economy of taxi regulations undoubtedly presents some different challenges, innovation-minded Italians should look at legalizing companies like Uber the same way they looked at crowdfunding.  Internet startups like Uber have created jobs, pleased customers and generally jumpstarted relatively stagnant arenas of economic activity.  Entrenched interest groups, like taxi drivers, are clearly resistant to Internet driven change, but regulators should resist the urge to quash these new companies that customers love.  The movie industry once opposed the VCR and tried to outlaw it, only to see the device (and future iterations of it like the DVD player) revolutionize the industry and become a bigger profit driver than box office receipts.  The same is likely to be true about applications like Uber that make it easier for consumers and providers of transport to schedule and pay for rides.

During the protest turned spectacle in Milan, one representative of the local taxi union exclaimed: “Milan is not San Francisco.”

In that regard, he is right.  San Francisco, a key hub of Internet innovation (and the birthplace of Uber), is currently booming.  And the rising tech sector is lifting all boats.  According to Bloomberg:

Having left the heavy lifting to technology companies until early this year, San Francisco’s non-tech employers are playing a growing role in the city’s labor recovery. Positions in everything from retail to construction to hospitality now comprise about 75 percent of the city’s job growth, helping the city add jobs at among the fastest rates in the nation and reduce its unemployment rate to 6.5 percent.

San Francisco’s experience is also seen in broadening expansions in other U.S. technology centers such as Seattle and Boston, easing concerns that innovation would create work for only the most highly skilled and highly paid while others get left behind. Every new technology job in a city creates five additional local jobs outside the sector over time, according to an analysis by Enrico Moretti, an economics professor at UC Berkeley.

With today’s revelation that Italy’s unemployment rate hit a 36 year high last month, maybe it is time for Italy to follow San Francisco’s lead.  Making the Italian economy more receptive to innovative Internet entrepreneurs like Uber (or the host of Italian startups being funded thanks to its forward thinking crowdfunding laws) should be a key component of Italian structural economic reform.  Reforms that, as the president of the European Commission recently pointed out, Italy needs so direly at the moment.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.