At the end of 2014, Google (GOOG) pulled its news service out of Spain in response to a government order to pay content providers. This, after Germany attempted the exact same thing, received the exact same response from Google, and Germany quickly backtracked after realizing it had a lot more to lose from Google pulling its news service than it would gain from Google’s compliance with its law. Here, we have a classic case of short-sighted law makers and greedy lobbies that did not recognize the huge benefits that technology could bring them.

Sadly, the same cannot be said of the legal problems that young upstarts like Airbnb and Uber are facing. Touted as the most disruptive tech companies around, the reality is that their legal troubles over the last few years are significantly different from the example above and do warrant a degree of attention from the state.

The Disruptors

Both products of the sharing economy, Airbnb is a web portal that allows one to "list, discover and book unique accommodations around the world.” Sounds like any other booking portal, but the key difference is the fact that none of the properties listed are hotels, and are instead rooms or entire homes that private citizens like you and I can rent out. But wait, isn't that Craigslist? Unlike a pure classifieds site, Airbnb also acts as the payment intermediary, processing the transaction through its own website and making its money by taking a cut from every transaction. That the company is currently valued at $13 billion tells us that the sense of security introduced by Airbnb and the promise of something different appeals to a lot of people.

Uber takes the same sharing principle and applies it to cars. By registering with Uber and downloading an app, any driver with a car can become a taxi service and find the places with the highest demand, courtesy of Uber's proprietary algorithms. From the passenger’s point of view, Uber’s app provides a very convenient GPS-enabled taxi service that always finds the nearest cab and brings it straight to their location. As with Airbnb, Uber does not actually own any of the taxis, the drivers are not full-time employees of Uber, and it makes its money by charging fees for the service it offers. Uber’s $41 billion valuation suggests it has been even more successful with its interpretation of the sharing economy than Airbnb.

The Other Disruptor

While Google’s self-driving cars are not quite ready to prompt our own version of the red flag laws that early motorists faced, Airbnb and Uber have certainly managed to draw quite a bit of attention from lawmakers around the world.

The first major contention is on the tax front. Both companies provide the same service as many other traditional companies but pay none of the taxes. Hotels and bed and breakfasts are regulated and pay a variety of taxes that Airbnb has mostly been able to bypass by claiming to be a technology company. Uber, too, gets away with bearing none of the fiscal responsibilities that its traditional brethren in the yellow cab and limousine companies do. For every happy customer that these companies acquire, the state becomes unhappier as it loses revenue.

Unfortunately, tax evasion is just the tip of the iceberg. The next major objection comes from the licensed hotels and taxi companies which contend that these so-called technology companies are able to undercut them on prices by engaging in unfair trade practices. Since this emerging sector has next to no regulations and the overhead caused by compliance is so low, these companies can offer significantly cheaper prices and still be just as, if not more, profitable.

While Airbnb and Uber can certainly make the claim that these new ideas from the sharing economy will ultimately prove to be positive, the fact remains that when billions of dollars are involved, only the free market exists; and in so far as the market is free, a lack of regulation only enables exploitation and abuse, not empowerment and goodwill. Reports of landlords evicting poor tenants to get more for their square footage, as well as the news that mini conglomerations are turning entire buildings into Airbnb rentals, bolster the claims of unfair trade practices. In Uber’s case, non-existent labor laws and unclear conditions of employment mean plenty of opportunity to engage in exploitative practices.

What about Democracy?

Both companies have been so successful that they are on IPO watch-lists everywhere. Their immense popularity with the people must surely mean that the political will exists to get them through these teething problems. Unfortunately, both companies have faced severe problems on this front too. Neighbors and other tenants of Airbnb properties have complained about issues ranging from noise and disorderly conduct to burglaries and vandalism, and even brothels and sex parties in their buildings. Put simply, in community living of any kind, people have the right to demand that their peaceful residential spaces not be turned into a tourist playpen.

Though the only direct opposition Uber faces on the roads is from drivers who work for the competition, the company gets into far deeper problems indirectly. Questions of liability and accountability are huge sore spots for Uber. When a regular taxi driver gets into an accident, there is a generally clear chain of accountability and insurance procedures, but with Uber, there are more questions than answers. Making an already murky situation even murkier is the issue of liability when the Uber driver is not actively running a fare.

As though this was not enough to drive home the real need for legal intervention, Uber faces even bigger issues with its, for lack of a better word, driver enabling policies. Claims of rape and sexual assault have been filed against Uber drivers in multiple countries and questions have been raised about the precise nature of the allegedly sophisticated background checks they conduct on their drivers.The latest case in India really makes one wonder where Uber’s priorities lie, for one would expect a smart and dedicated service provider to have updated protocols to prevent repeated occurrences after the first incident. Yet, despite having faced the same problem in the U.S. many months before it occurred in India, the company somehow failed to anticipate another case of rape, and in Delhi, which has emerged as the poster child for rape and violence against women in recent years.

The Bottom Line

The sharing economy is not such a bad idea, especially in these troubled times. The problems faced by Airbnb and Uber are not products of this alternate economic paradigm, but instead a result of their attempts to superimpose conventional economic ideas on an idealistic economic precept.

To be fair, there is nothing wrong with this, and the fact that even charging a $1 safe rides fee for conducting background checks has not dissuaded the masses from using Uber is a testament to the relative importance of the convenience and novelty that these services provide. Bans will soon be condemned as Luddite behavior, and in time clear and friendly laws will be established, allowing them to clean up their act.

Until then, Airbnb, Uber and others of their ilk only need to weather the storm and ensure that their purses don’t run dry before the seas calm. For the investor, the challenge is to figure out what the cost of compliance will be at that point and if these companies can maintain their price advantage once the convenience becomes a standard offering and the novelty wears off.

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