Apps Charging for Free Services Get Savvy—and Sleazy

Web entrepreneur Brian Mayer is well aware of the acrimony that exists between some locals in San Francisco and the technorati of Silicon Valley. So it would take some doing to briefly become, as he described himself, “the most hated person in San Francisco.”

It would take ReservationHop, an app Mayer designed to scrape the restaurant site OpenTable, create phony peak-time reservations at choice eateries and then resell them at a nice profit to real diners. The outrage was so great that Mayer had to retreat. But he plans to reboot.

And he’s not alone. In the past year or so, dozens of apps have launched that charge for ostensibly free real estate, including MonkeyParking (users pay to get pinged when spots open up) and Table 8 (similar to ReservationHop). Uber has also caught flak for its surge-pricing model, which charges riders more during peak times.

To many, these apps seem like a betrayal. We’ve relied on the Internet to be the undoer of middlemen, lowering prices by making information about products and services, especially price, more freely available. ReservationHop and its ilk are doing the opposite: inserting a level of intermediation–a middleman–along with a toll.

Economically, however, they make perfect sense. People see a utility in paying a StubHub premium for tickets to a sold-out concert–yes, you can call it scalping–so the creators of apps like MonkeyParking and ReservationHop are betting they will do the same for reservations and parking spots. (Restaurants throw away money by not having demand-based pricing, says Table 8 co-founder Santosh Jayaram.) “The fact that there’s intermediation is not necessarily bad,” says Haim Mendelson, a professor of electronic business and commerce at Stanford University.

It’s all part of a repeating cycle, says Waverly Deutsch, a professor of entrepreneurship at the University of Chicago’s Booth School of Business. “When an app is created to solve a problem, it creates other problems,” she says. Think of the launch of Groupon, ostensibly a one-stop shop for can’t-beat coupons, which spurred multiple clone coupon sites. Then the apps that were created to solve those, like coupon aggregators, create new problems, and other developers step in. Ultimately, consumers decide the winners and losers–unless authorities intervene first.

That’s what happened to MonkeyParking earlier this year, when San Francisco city officials clamped it with a cease-and-desist order, saying the sale of parking spaces violates city codes. “Technology has given rise to many laudable innovations in how we live and work,” said San Francisco city attorney Dennis Herrera in a statement that accompanied the order, “and MonkeyParking is not one of them.” Similar challenges could affect its regional pay-for-space competitors like Haystack (Boston just banned the scheme) as well as reservation apps such as Resy, zurvu and Killer Rezzy.

Not that those challenges will deter entrepreneurs. Eventually, says Deutsch, “somebody’s going to figure out something good,” and the windfall will be worth it. Consider much lauded middlemen like Kayak and TripAdvisor.

People like MonkeyParking’s creator Paolo Dobrowolny are going to continue to search for opportunities to use information arbitrage to suck more money from your pocket. It might not be what you bargained for, so just call it what it is: naked appitalism.