Uber and the appropriation of public space

The debate over technology and disruption is a red herring, writes Glenn Fleishman. The trouble with Uber is that it's a middleman that can control both ends of the market.

Taxi drivers protest in London, June 11, 2014. Photo: David Holt

Uber, the ride-for-hire firm, recently raised $1.8 billion, putting the private company's valuation at $18 billion. How much they can raise—and how much they're worth—isn't so interesting as what it lets them aim for: an unprecedented amount of control over who gets to ride, who gets to drive, and where wages and rates land after the market shakes out.

Uber is a new middleman, making a market and profiting from it. It matches buyers (those who need rides) with sellers (drivers and companies that hire drivers). If it dominates the car-hire and taxicab business, it could become both a virtual monopoly and a monopsony. A monopsonist is the only buyer for a given set of services or products, and can dictate terms to sellers while also potentially, but not always, controlling the price that its customers pay.

A Maker of Markets

Uber wants to be considered part of the sharing economy, in which people turn underutilized assets — a spare bedroom, a lawnmower, a car, and so on — into something that can be rented out by the hour, mile, or other increment. It's often lumped into that category.

But most aspects of the sharing economy involve three key elements: someone owns, leases, or rents an asset that they hand off to another party; the asset is in the possession of another party for the duration of the transaction; and both parties rate each other for their side of the transaction, and those ratings are typically made public. (Sometimes there are endorsements, too: so-and-so, who you know, recommends such-and-such.)

There's sometimes a touch-and-go contact; other times, people have a passcode or other information that gives them access. This varies a lot by type of transaction. You might rent an apartment via Airbnb and never see the host; or you might be staying in a room in a host's apartment or house and have little, some, or no interaction.

Uber stands largely outside of these three aspects. Its goal isn't uniqueness — as with Airbnb, which wants every property to be distinct — or a personal connection. Rather Uber makes a market. It owns no vehicles and has no driver employees; all drivers are independent contractors or employees of other businesses with which Uber has a contractual relationship. Uber's staff writes software and checks and meet with drivers, city officials, and companies with which it does business.

The company took an inefficient industry and turned it into a fungible one from which it takes a 20% cut. (That can vary by ride type and there's currently a price war and driver-acquisition fight.) Regulation and artificial monopoly power wrapped in politics make cabs scarce and livery vehicles (town cars or black cars) expensive. Both are underutilized relative to demand because they are hard to book and supply has no dynamic relationship to demand. Cabs pick up hails and, in some cities, can be centrally dispatched. Black cars must be booked, often for a period of time at high expense, and some regions require booking at least an hour in advance; they cannot pick up passengers without prearrangement.

Uber relies on ratings by passengers of drivers as a way to ensure consistency and high quality. Rather than Russian roulette, it's a hamburger, albeit one from a very nice upscale chain. Every ride should be of the same quality, something impossible to arrange with a cab and logistically hard with black cars.

Uber started with what is now called Uber Black: livery drivers, who are insured as drivers for hire and licensed in their jurisdiction, or with firms that own cars and hire drivers. The price was often 50% to 100% higher than a cab, but below town-car prices. It was more like a super-cab.

Drivers get their own Uber-issued phone and can be blocked from Uber, regardless of the firm they work for. Having spoken with several drivers (and no, I am not Thomas Friedman) and read many interviews with them, it is clear that for many, Uber fills in downtime or allows a much more flexible schedule.

Uber's use of surge pricing has made people extremely angry at times, because it makes the service seem unreliable and capricious by pricing it out of range. Surge prices can range from 1.5 times to several times the base pricing when, Uber says, drivers are scarce and demand is high. The company says it raises the multiple and alerts drivers to bring more capacity online.

On New Year's Eve, for instance, a driver might be contracted for $1,000 for a few hours work in big metro areas. The New York Times's Nick Bilton recently Tweeted a picture of his Uber driver's app where it alerts the drivers to areas in which multiples are in effect. Demand stabilizes as drivers flood in, and the surge price ebbs. If Uber surged but there were enough cabs or other alternatives, the demand wouldn't be there to raise prices. (I don't take Uber at its word; it's economics at work.)

Uber was an early entrant, but it quickly faced competition from "ride sharing" companies starting in earnest in 2012 with Lyft (once dedicated to long-distance rides), Sidecar, and others. Uber started with the issue of reliability and quality at the high end, tapping people who could afford to pay more than a cab (or stretch to pay it). Lyft and the others had people share their own cars, which required a lot more extremes, but charged rates in line with cabs. (Lyft was originally paid drivers from voluntary donations to sidestep whether it was a transportation operator or not, but now requires donations in some markets and straightforward taxi-like fees in others.)

The taxi market didn't stand still, either. Taxi Magic came out of an existing dispatch software company (along with Sedan Magic) and ties into cab companies' networks to allow an electronic hail equivalent to a street hail. The app can also handle payment.

Uber expanded its offerings to match its competitors. It now operates UberX, a Lyft-like service; Uber Taxi, which works with central dispatch; Uber Black, its original service; and Uber SUV for parties of more than four. (It's entering the courier business, too, which could shake up or complement a whole other industry already in tumult.) To recruit UberX drivers, the company has given $500 bonuses and a free iPhone to Lyft drivers, according to reports and a ride-sharing driver I spoke with on background.

Uber and the others have lobbied hard and enlisted local users when battles brew with regulators; Uber is the most vociferous because it has so many different lines of business. The companies have often won deferrals, carveouts, and legislative changes, but not everywhere. Virginia recently banned car-aggregation services, including Uber and Lyft, but the companies say they will keep operating. Madison, Wisconsin, is issuing fines to drivers and considering either restrictive rules or ones that require 24/7 operations.

California enabled ride-sharing services and the like through rule changes at its Public Utilities Commission (CPUC) that came with insurance requirements, but just threatened to shut them all down because the companies were supposed to obtain permits to have drivers handle pickups and dropoffs at airports. None of the companies have. Meanwhile, Pennsylvania's PUC wants judges to shut down all ride-sharing operations.

The firms all think, and Uber in particular, that they will win the day because their services offer so much to passengers and are so well liked. Regulators are circling, and trying to draw rules or draft laws around the upstarts.

One Buyer to Rule Them All

So what's wrong with these new offerings? An upstart technology company optimizes an inefficient market in a way that all participants benefit: passengers are safer and can more reliably get a ride with a low likelihood of fare cheating; drivers are safer and don't have people skip on fares. It's great!

But here's the catch: the economics of disruption don't always shatter regulated monopolies in way that produce persistent efficiencies. Rather, newcomers can destroy one mode of doing things and then install themselves as the gatekeepers on new battlements, setting prices as they see fit because there are no effective competitors nor any good path for competition to rise.

Look at Amazon in the book market. Its aggressive discounting of book titles initially reduced book prices and allowed more unique titles to come to market, increasing the diversity of thought and providing more revenue to more publishers. It created the first ebook reader that was widely adopted by consumers.

But it also locked in users to its digital-rights managed (DRM) Kindle ecosystem. One can only buy books from a Kindle via Amazon and read those purchased titles on Kindle readers or in Kindle software. (A small number of Kindle titles are DRM free and can be transferred off and read elsewhere. Publishers and individuals can also offer Kindle-compatible titles that can be imported or sent to a Kindle account with some limits and difficulties.)

Amazon has taken its dominant position in selling ebooks and print books to exercise monopsony power in negotiating a pricing contract with Hachette, a relatively small American arm of a large international publishing company. Amazon has delayed and reduced orders of Hachette's print books and removed pre-order buttons from not-yet-issued works. We don't know the terms: Hachette may be asking for unreasonable wholesale prices; Amazon may be demanding absurdly high discounts or other requirements. Amazon is also fighting Warner Home Video, blocking pre-sales of The Lego Movie and other films.

Without its monopsony, Amazon could not engage in this fight, because potential buyers would simply turn elsewhere, and potentially grow accustomed to not buying from Amazon. Amazon lacks a true monopoly, but, like Walmart, can use its buying power to keep its prices low for all merchandise, and its scope of departments to keep shoppers from turning elsewhere. Hachette and Warner will lose more sales than Amazon will lose customers. As David Streitfeld wrote in the New York Times, "Amazon is basically telling its customers to go elsewhere for them, which is a very un-Amazon thing to do."

While Uber has no lock in to passengers the way Amazon does with customers — passengers aren't compatible only with certain cars — it has the capability as an ever-more-dominant firm to push its competitors into ever smaller niches. It seems to have forced Lyft into a corner that has resulted in a price war between the two companies: Uber may have initiated it specifically to put financial pressure on Lyft.

In January, it cut its UberX prices to undercut taxi fares in many cities, sometimes by 20 to 30 percent. This puts even more pressure on cabs. Lyft matched it and in some cases went further. In San Francisco, one cab company executive says he's lost so many drivers to Uber, Lyft, and the like that he expects the entire industry to shut down within 18 months. (Some drivers are happy and others not about the latest price cuts because they reduce payment but increase the number of trips during the same period of time.)

Will prices remain as much as 30% below cabs when there are no more cabs? If Uber provides 90% or more of the car-for-hire trips in a region, will its regular prices slide back up above cab rates? Will surge prices be invoked every day, everywhere during rush hours? This could easily happen during the disruption, long before it owns a market.

As a near monopolist and monopsonist, Uber can set consumer prices and supplier pay, dialing them up and down to maximize profit while discouraging new competitors. With the regulated environment, there is a ton of abuse: driver pay isn't set, taxis fees are often quite high, and medallion owners and cab companies reap outsized rewards. (Forget for a minute fraud by drivers.) That has created a bad, stable system. But once Uber owns the market, who would invest to create a Lyft competitor or shore up a failing cab company?

In cities in which people frequently take cabs — say, New York, as opposed to my hometown of Seattle — I've seen and my friends and colleagues confirm that the average taxi experience has become worse. I crosschecked this with a number of UberX drivers on a recent trip to San Francisco: some had been cabbies. Cab drivers with the right skills who can buy, borrow, or lease a car in good condition switch to a ride-sharing service. It's better money (even with the recent changes) and provides more freedom.

Because Uber approves drivers and keeps a steady eye on ratings, a driver can easily be blocked from its network or be knocked out after entry. I won't feel bad when awful people are forced out of a profession in which they have to provide service to others. (I suppose I can't be a socialist now.) Cab companies and commissions take complaints, but even in areas in which those are taken seriously, the result is a process, sometimes governed by employment law, and not as immediate as Uber's response. Drivers can be knocked out of Uber instantly.

Drivers who face discrimination in other fields may have turned to driving a cab, a traditional way for immigrants to ratchet themselves into an economy and up into more stable businesses or professions for themselves or their children. Drivers who don't speak English well or have a heavy accent, who cannot afford a new-looking and perfectly maintained car, who are people of color — how will they fit in in the ride-sharing world? (Drivers used to be able to afford a taxi license, or a "medallion"; these have risen in New York from $100,000 in 2004 to over $1 million recently. Even groups of drivers can no longer buy them.)

Drivers can also easily be blackballed. A few bad fares, like drunks who rate badly or angrily, and a driver is dumped with little recourse or appeal. Under cab commission rules in most places, drivers have some means of dealing with being fired or blocked, whether it winds up being fair or easy to use or not. This, in a private business arrangement, is something altogether different.

And what of passengers? Uber only allows booking through a smartphone, so while smartphone marketshare among people who might use a taxi is now extremely high and growing, that's certainly a bar to entry, excluding a class of people should regular cab service essentially collapse.

The Agony of the Loss of Agora

Uber and the rest aren't trying to build a system that lets them screw people, but because they want to sit in the middle and avoid the overhead of the taxi world, which is seemingly designed to screw both passengers and most drivers, they could wind up being a regressive force that also pushes prices up.

Regulators may step in, which increases inefficiency and expense, but may be necessary to eliminate discrimination and provide protected recourse. Despite libertarians' and Randians' fervid illusions, people are biased against other people, often unconsciously. One role of democracy, it could be argued, is to provide a bulwark against and repercussions for bias.

This reminds me strongly of the erosion of public space that has occurred as more areas in which people spend their time are privately owned (such as malls) or privatized (such as public spaces deeded to companies to maintain, but also to control). There are fewer places for free speech and assembly, which chills freedom.

Huge disruption has come to the taxicab industry, and it should. But the concern of concentration of ownership in a party that makes the markets should keep everyone on their toes, no matter how well intentioned Uber may be.

Published 8:00 am Mon, Jun 30, 2014

About the Author

Glenn Fleishman, @glennf, is the editor and publisher of The Magazine, a fortnightly electronic periodical for curious people with a technical bent. Glenn hosts The New Disruptors, a podcast about connecting creators and makers to their audiences, and writes as “G.F.” at the Economist's Babbage blog. He is a regular panel member on the geeky media podcast The Incomparable. In October 2012, Glenn won Jeopardy! twice.

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