/ Glenn Fleishman / 8 am Mon, Jun 30 2014
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  • Uber and the appropriation of public space

    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.

    / / 109 COMMENTS

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    Notable Replies

    1. Bluntly, no, it hasn't. Virtually every company in this space started with an app, some IT infrastructure, and at least one driver. That's all that is required to get started ... at the moment.

      You just answered your own question - if Uber raises rates, then there's space for a lower-priced competitor to take some of the market. (That is, unless you believe that price doesn't matter to Uber customers.) Millions for staff, app development, and driver recruiting are not required - especially when there are existing pools of experienced staff, developers, and drivers. In fact, competition is often created when members of an existing company see ways to do things better, so they split off and form a competitor.

      The economic ignorance of this article is appalling. Uber is not even close to a monopoly or a monopsony, and the market they are in is both growing rapidly and becoming more crowded. Many of the key features of a monopoly, such as strong barriers to entry, simply don't exist - compare the Uber market to the traditional cab market, which is a government-enforced monopoly (or oligopoly) where market entry simply cannot be had at any price. (And this is something that the author clearly understands!)

      The characterization of the Amazon/Hachette issue as the exercise of a monopoly power over a helpless publisher is beyond ridiculous - Hachette is one of the five largest publishers in the U.S., with the Twilight books among their products, and Amazon only controls 50% of the market. What's next, a "monopolist" being someone who only controls 25% of a market? 10%? Amazon and Hachette are having a pricing dispute - nothing more. You can buy Hachette products at literally a hundred other websites, and Amazon can do nothing to stop them. While it may hurt them not to sell through Amazon, it hurts Amazon too. If Amazon was an actual monopoly, Hachette would have no choice - but it's incredibly obvious that they do.

      Further, if Uber was a such a bad gig, why are so many drivers and passengers switching to using it? If Uber and companies like it encourage discrimination, how would that avoid encouraging competition that doesn't? And how could Uber "sit in the middle and avoid the overhead of the taxi world", and still drive up prices? Does the author believe that price doesn't matter to Uber customers and cab customers? Does the author believe that it's an accident that the cab market isn't competitive, even though he clearly understands why the cab market isn't competitive? And why does the author think that cab companies going out of business is a bad thing, when even he notes their tendency to abuse passengers and drivers alike?

      This article is basically complete rubbish. If you're not happy with Uber, use a competitor - the cost of changing is almost literally nothing, and there are plenty to choose from. That's how markets work, and this one hasn't been broken yet by the politicians and their cronies - if left alone, will provide better service at lower cost.

    2. Uber is positioning itself to become a monopoly/monopsony rather than arguing that it has already attained that status.

      How can it do that without regulatory control?- see current taxi regulations.

      Without regulatory capture anyone can start a small competing company. I've worked in IT for a long time. Setting up a basic app/cart/DB isn't a large hurdle.

      It seems many people here a missing what makes Uber, lyft, etc. disruptive, or what it actually disrupts, namely government supported market control. That's all that's happening. Seems people would support it without question.

    3. Is Uber basically your backup for when a Car2Go isn't available nearby?

      But just for reference we are a one car household

      Yes, that makes sense. So, a personal car is available when it's needed.

      I probably only use either service once a month so its better than getting a second car and definitely better than trying to find a taxi outside of the core of downtown.

      That's sounds very reasonable to me in that circumstance. By having access to a shared car in your household along with Car2Go and perhap Uber as a backup for Car2Go, it would seem you've got a good system that beats the expense of a second car.

      It looks like it's a situation where YMMV depending externalities involved. (Yes, horrible YMMV pun intended.)

    4. Four decent programming friends can easily replicate Uber. You can offload the serve support to Amazon which will scale the price as you start to get usage. Apps are cheap to produce compared to basically everything else. I struggle to think of an industry that is cheaper. I can't just slap together a factory, or plop down a new TV station. Even an indie movie takes a pretty large cast. To make something like Uber? You can literally start 4 people and it scales smoothly. There is almost no other cheaper industry to jump into in this world, so get some perspective. Hell, just starting a boring old restaurant takes more staff and money than starting something like Uber. Granted, you need to scale up, and that takes money and manpower. However, if you and a few friends wanted to start a competing Uber in Chicago and were not afraid of having your kneecaps broken by corrupt politicians, you could.

      Again, those are all child sized barriers to entry. An app and a phone (which most people already have) is one of the smallest costs to entry I can imagine.

      They need to do a bunch of boring stuff that you have to do when you start literally any type of company. You need to wedge in, compete, get customers, etc. These are not magically high barriers. They are boring and normal barriers that are LOWER than most other barriers to entering a market. Look, I'm not saying it is easy. Companies will try, many will fail, this is how our system works. I don't start a company because I get a heartburn thinking about working that much and having that much stress. This isn't something special though. This is boring and mundane competition. Not only is it boring and mundane, it is way the fuck lower than almost any other industry you can imagine. I honestly struggle to think of industries easier to enter than one where you just manager connecting drivers and passengers. It will be hard, people will fail, Uber will have a first mover advantage, but it is hardly some massive unscalable monopoly.

      Vastly more importantly, is that a system with competition, even if people can envision a monopoly (which you can do for literally any other industry), it is better than what we have. What we have as a political bribing scheme. It is on par with how some nations have the military running industries. The system is setup to act as a method of bribery and serves absolutely no other public good. It actively hunts down public good and murders it. I'll risk a small upstart one day becoming a monopoly over a legalized form of corruption any fucking day of the week.

    5. I, personally, have far less problem with Uber as I do with Lyft or Sidecar. My view is Uber will survive, but Lyft and Sidecar will not. Let me explain why.

      I operate a transportation business, but I do buses, not the small scale rides like cars. They are not competitors to me, but I understand their model of operation. AND I know the legal situation... and how it became that way.

      The Taxi and Limo/Livery system started as a way for politicians to protect the "professional" drivers moving people for a living from any one with a car in the Great Depression. It is essentially a legal monopoly, but then, virtually every sort of business nowadays is a legal monopoly if it requires ANY sort of license. You can't braid hair without a cosmetology license in most jurisdictions, even if cosmetology never teaches hair braiding, for example. It is a legal monopoly for the people who can satisfy those requirements... often in the name of consumer protection, but often, the bureaucracy took over and the actual consumer protection mandate got ignored.

      Another view is even in licensed industry, there's often enough of dark economy that basically does things without the license, usually on a handshake and a promise. A friend needs a room or a couch to crash overnight and slips you a $10 for your trouble? A friend slips you a $5 for "gas money" after you gave him a ride to the bus station? Nobody's going to regulate that.

      Yet the former is basically AirBNB, and the latter is Lyft / Sidecar, aren't they? And if they are formalized into a business arrangement, can they expect to STAY under the regulatory radar?

      Furthermore, is taxi and livery transportation industry such an industry where consumer protection mandate is being ignored in place of bureaucracy, and is Uber, and Lyft/Sidecar disruption actually helping to innovate the industry?

      Let us however, discuss the legal situation first. I am in California, so I'll primary go by California law, and as the Public Utilities Commission, i.e. PUC had already fined all three companies before, I know exactly where PUC stands.

      First, in California, AFAIK, a limo / sedan / black car / town car is PROHIBITED from making curbside pickups. They can only be CHARTERED, with origin and destination clearly defined on the "waybill". Uber gets around this by treating an Uber order as the waybill itself. Taxis can be flagged down on the street, limo cannot be. That's illegal, as it'd be basically a Taxi service. However, keep in mind that taxi is governed by local Taxi Commission (city / county level), and livery is governmented by PUC (state level). Furthermore, this separation is rarely if ever enforced, as you can often find idle sedan drivers hanging out near major hotels hoping for a "referral" from the concierge desk (they get a kickback, of course). It's gotten so bad, some major hotels operate their own courtesy fleet to discourage this.

      Second, IIRC, carrying people or goods for money requires commercial drivers license. This is part of California Vehicle Code (CVC).

      You can see how Uber complies with PUC as Uber only hires Sedan drivers with their own PUC authority to operate. They are already commercial drivers. AND they need at least 1.5 million in insurance to operate as required by PUC (larger vehicle companies require 5 million in coverage). AND companies are supposed to subscribe to "pull notice", which is a driver record monitoring service operated by California DMV on commercial drivers.

      That's something Lyft and Sidecar do NOT have. You can literally have any yahoo off the street driving any decent looking sedan join Lyft or Sidecar in minutes and start making money, regardless of their driver license status.

      And I haven't even covered driving record and insurance yet.

      Yet Lyft and Sidecar are not really competing against the black cars, but rather, taxicabs, which is ruled by local taxi commission. And the taxi system is... to lack of better word, medieval. The average taxi driver makes little money, yet takes tremendous risk. It is allegedly the 2nd most dangerous job (just behind convenience store clerk, IIRC). They have to pay "gate" just to take the keys and drive out their yard to start their shift. "Gate" in San Francisco for one shift depends on weekday or weekend, but it's estimated to be between 115 and 150, and there are surcharges, both clear and hidden. Hybrid vehicles, due to fuel savings, has a surcharge. There is also a "dispatch" fee (the dispatcher / phone order takers have to be paid too). There are rumors that for the older radio-dispatched cars bribing the dispatcher may help. Probably why the computerized dispatch systems went to an expanding circle system: the free cabs are notified closest to the location, and was given X seconds to respond, first to respond gets the fare. If nobody volunteers, the circle is expanded, and the process repeats until someone accepts the fare. it's supposedly bias-free. The truth is the drivers pay for the gasoline, so they minimize travel. They sit at popular locations and go nowhere, not to waste gas, and wait for fares to come in, and this makes them all wait in the downtown area, basically, leaving the rest of the city barren. There are also computer flash news like "Show X just finished and people are coming out" and such. AND most drivers don't own the vehicles. They are are driving a company vehicle, and the company "rented" someone else's medallion (i.e. taxi license) to operate such. That person only drives the bare minimum hours required to stay qualified as a taxi driver. The rest of the time he sits at home watching TV and wait for money to roll in while doing no work.

      I don't hate Lyft at all. Indeed, I've tried both Lyft Plus (premium cars) and Lyft. The allure of making 30-50 per hour is luring people outside the area to San Francisco. Both times my driver claimed he was not too familiar with San Francisco streets and is relying on GPS / Google Nav. I've tried taxis and I really do often wait 30 minutes or more before. Yes, it is very convenient. And I just drove by a huge recruitment event by Lyft today, with people waving signs around major intersections directing them to check out a chance at $500 bonus (and free tacos).

      But overall, I think Lyft and Sidecar has little chance in fighting the bureaucracy and the existing infrastructure, while Uber was more careful in working WITHIN the existing legal frameworks.

      This "sharing economy" is not what it cracked up to be. While it is supposedly more efficient use of resources, the actual implementation was really anything but.

      In the case of AirBNB, instead of people renting out their spare rooms or just during their vacation, you are seeing people buying up properties and turn them into microHotels using AirBNB, without ANY of the protections that a real hotel would provide (whether you need them is something else), but consider yet another cost... they are taking the property off the NORMAL rental market. People in San Francisco complain about Googlers turning San Francisco into a bedroom community. You don't really see them complaining about the hidden AirBNB rooms that only a tourist can afford to rent, do you? And that sort of "tax evasion" attracts the regulators, which is why AirBNB is now collecting hotel tax for most jurisdictions.

      Something similar is happening with Lyft / Sidecar (but not Uber, as they are already sedan drivers)... Instead of San Franciscans with spare time and their car, it's out-of-towners (the Lyft Plus guy was driving a very fancy SUV customized by Galpin Auto Sports! so new it doesn't even have a license plate yet!)

      So my problem with Uber is minimal: it stayed within the legal framework (at least in California, IMHO), and it is actually the LEAST disruptive of such companies. The main objective to them is going to be from the taxi people, NOT the CPUC.

      IMHO, OTOH, Lyft and Sidecar will end up in trouble with the CPUC unless laws are changed, quite fundamentally, carving out vast exemptions that legalized all these "dark economy" that was previously deemed too small scale to govern (and tax), and it will face opposition from the taxi people as well.

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