Uber is paying up to $100 million to settle class
action lawsuits in California and Massachusetts. Drivers in those
states will remain independent contractors rather than becoming
employees.
The settlement is pending approval by US district
court judge Edward Chen. A hearing could happen as soon as June 2,
according to court documents.
Uber has spent the last two and a half years
embroiled in a major legal battle over its business model. The company
considers its drivers to be independent contractors, but many of those
drivers believe they were treated more like employees. Uber drivers were
granted class-action status in the case by a federal judge in California last September.
The distinction is critical for both Uber and its
drivers. Hiring workers as contractors instead of employees is
estimated to save companies as much as 30% on labor costs,
because independent contractors aren’t entitled to the same safety nets
as traditional employees—i.e., benefits such as health insurance and
minimum wage protection. They’re also responsible for paying their own
business expenses. For Uber drivers, these include gas and car
maintenance, which really add up.
The $100 million
settlement is big—especially for a startup that burns money like Uber
does. For the first three quarters of 2015, Uber lost $1.7 billion on
$1.2 billion revenue, Bloomberg reported.
But forcing the company to reclassify its workers as employees would
also have been expensive, and would have ended the Uber model as we know
it.
Under the deal reached between Uber and the
plaintiffs, Uber is paying a guaranteed $84 million to drivers in those
states, according to a statement emailed by Shannon Liss-Riordan, the
lawyer representing drivers, late on April 21. While the class size was
never precisely specified, in California alone it could have covered as many as 160,000 people.
Uber will hand over another $16 million should it go public and, within
a year of its IPO, multiply its valuation 1.5 times from the $62.5
billion figure that was set during its December 2015 financing....MORE
Uber made a fateful decision early in the litigation of an antitrust class action against its co-founder and CEO Travis Kalanick. The company believed there was no way the Manhattan federal court complaint – in which customer Spencer Meyer alleged a price-fixing conspiracy among the hundreds of thousands of drivers who independently signed up with the online car service – would survive a motion to dismiss. The case was before U.S. District Judge Jed Rakoff, who has a well-earned reputation for moving his dockets quickly. So Uber elected not to move to invoke the arbitration provision in its terms of service.
That decision backfired Thursday when Judge Rakoffruled that the antitrust case can move forward. The judge held that plaintiffs’ lawyers from Andrew Schmidt Law and Harter Secrest & Emery pleaded adequate allegations of both a per se illegal horizontal price-fixing conspiracy among Uber drivers, including Kalanick, and a rule-of-reason vertical conspiracy between Uber and the drivers. In the opinion’s most quotable soundbite, which my Reuters colleague Jon Stempel cited in his report yesterday on the ruling, the judge warned, “The advancement of technological means for the orchestration of large-scale price-fixing conspiracies need not leave antitrust law behind.”
Uber told me Friday it’s confident that when the company and its lawyers from Boies Schiller & Flexner have a chance to challenge the complaint’s factual premises and to show the judge its economists’ analyses, Rakoff will agree Uber increases competition and lowers prices – exactly what antitrust laws are supposed to encourage. The judge certainly left open that possibility, writing that Uber’s alternative description of reality is “well worth a fact-finder’s consideration.”
I will admit that as a very occasional Uber customer and somewhat more frequent reporter on antitrust litigation, I thought Kalanick’s motion to dismiss should at the very least have been the end of the horizontal price-fixing claims under the Sherman Act, and probably the vertical conspiracy allegations as well. But I have to give plaintiffs’ lawyers credit for writing a responsethat piqued Judge Rakoff’s curiosity, using Uber’s self-description as something entirely new to persuade the judge to allow them to continue the litigation....MORE
And why this four-week-old story comes back to life, from naked capitalism:
I’vewritten beforeat this august site about how Uber’s business model is to arbitrage state and federal law and replace a monopoly with a different monopoly. They obviously placed a high value on the arbitrage. How high? About$100 million:
Uber has survived a major threat to its business model, settling two legal suits brought by drivers who sought to be classified as employees instead of independent contractors.
The ride-hailing firm will pay up to $100 million to the 385,000 drivers, but their employment status will not change.
The class actions were brought in California and Massachusetts. Uber, which is valued at up to $70 billion, is on the hook for a $84 million initial payment, and another $16 million if it goes public.
I’m not seeing much of a reason for Uber to ever go public, so I should amend to say the arbitrage was worth $84 million. And while a judge has to sign off on the settlement, with both sides in agreement on the resolution I can’t see that being a big hurdle.
This concerned two big employee misclassification lawsuits, which if successful would have turned Uber into just another car service. Now that Uber settled, they don’t have to worry about providing worker’s comp or expenses or overtime or the employer half of Social Security taxes or any other benefit given to a worker on staff. In other words, they got off cheap.
As Michael Hiltzik points out, this highlights a big problem with class action lawsuits, namely that they’re nearly impossible to get through the courts in this day and age, and even if they do, once the legal team gets their cut they provide nothing of value to the actual litigants:
The key question left unanswered by the settlement announcement is whether the drivers are receiving enough in return for what they’re giving up. As is often the case with class settlements, the big headline number obscures how little trickles down to the plaintiffs. In this deal, drivers with the most time and mileage recorded with Uber are in line to receive one-time payments up to about $8,000. (Though the typical driver will receive far less from a settlement that averages out to $218 per driver.)
Nothing fundamental in the balance of income and expenses will change as a result of the deal–drivers will still be on the hook for gas, insurance and wear-and-tear on their vehicles, and Uber will retain the right to set fares and extract fees and commissions of more than 20%.
There are a few more benefits for drivers in the deal. Uber cannot deactivate drivers at will; they now must show cause and give drivers a chance to shape up before dismissal. Not accepting enough rides cannot be a cause. Driver’s associations can be established to work with management on driver concerns, but this could undermine the efforts underway for drivers to unionize. Finally, drivers can solicit tips from their passengers for the first time. But this WSJ piece gets at a couple reasons why that’s not going to work. The entire appeal of Uber was that it was seamless: you summon a car on the app and the payment is executed there, without having to fish around in your pocket or purse for cash. Riders thought the fare included tips and it’ll be hard to change that behavior. Plus, Uber won’t put a tip tool on the app, meaning drivers will be reduced to begging their clients for cash only, which plenty of people just don’t carry anymore. Yes, rider ratings would be at stake for non-tippers, but so will driver ratings for those that demand tips.
I guess Lyft allows tips and most people do it, so it’s not impossible. But I also don’t think it’s a huge step forward for drivers when they’re not getting a single benefit afforded an employee. The class action was an imperfect opportunity to help workers, but outside of a small cash payout the drivers really didn’t get much, and Uber kept its model virtually intact.
However, in an almost cosmic bit of justice, among the other legal actions, union drives, and National Labor Relations Board investigation is a gem of a lawsuit that actually relies on Uber’s boasting that their drivers are independent contractors. The case asserts that Uber’s drivers – including its CEO, Travis Kalanick, who has driven a few times – are engaging in price-fixing collusion. Allison Frankel laid it out earlier this month:
Uber argued that it’s simply not plausible to claim hundreds of thousands of drivers assented to a price-fixing conspiracy. (Uber does not disclose an actual number of drivers.) According to the company, the most plausible explanation is that each driver made an independent decision to sign up with Uber, not that these strangers conspired with each other and with Uber to inflate charges for customers. In the company’s depiction, it has increased competition by offering customers an alternative to taxis, car services, mass transit and even walking
[…]But the plaintiffs said Uber can’t enjoy the benefits of its disruptive business model without suffering the consequences. Because Uber drivers aren’t traditional employees, but independent contractors who assented to Uber’s anticompetitive terms, they are plausibly co-conspirators under the U.S. Supreme Court’s 1939 ruling in Interstate Circuit v. U.S., according to the plaintiffs....MORE
THREADING THE NEEDLE Uber investors aren’t paying for innovation anymore
When Ayda Valilar first read that Uber was losing billions of
dollars, she couldn’t believe it. She’d been driving for the ride-share
service for nearly five years, and had tried unsuccessfully to organize a
union in Los Angeles with other Uber contractors. How could a company
that had so adamantly played Goliath to the drivers’ David be so deep in
the red?
That was the reaction among many casual observers when Bloomberg
reported in late August that Uber had lost $1.6 billion in the first
six months of 2016, hemorrhaging capital on subsidies designed to make
its pricing more competitive. It was the latest in a string of bad
headlines for Uber. A week earlier, a federal judge ruled the company could be on the hook for more than $1 billion in labor costs. And just before that, drivers in Seattle beat back a legal challenge to dissolve the first-ever Uber drivers union.
Taken together, the summer’s events brought into sharp focus two of
Uber’s fundamental challenges: labor and competition. The company is
primarily engaged in buying a monopoly to justify its status as the
highest valued start-up on the market. Meanwhile, it’s devoting many of
its substantial resources to keep driver disputes stretching across the
country from California to New York at bay—at least for now.
While the ride-hailing giant has provided the blueprint for a new
generation of on-demand startups, its woes point to simmering
contradiction in that gilded space. On one hand, venture investment in
the on-demand economy multiplied
15-fold between 2013 and 2015. But increasingly, these investors are
paying less for innovation than they are for gaming the market.
A plan to transform transportation
Since Uber’s founding in 2010, it has attracted more pre-IPO funding than any technology firm in history. The company is on pace to haul in at least $4 billion in revenue this year, with operations in more than 400 cities around the world.
Everyone agrees that Uber’s towering valuation can’t be justified by its current business alone. A full 85% of Americans have never used
a ride-sharing service in their lives. Uber has convinced investors
that the company won’t just disrupt the taxi business, but the broader
universe of auto transportation.
Arun Sundararajan, a professor at New York University’s Stern School of Business and the author of The Sharing Economy,
thinks it’s a possibility. “If they can shift 5% of US spending on
buying cars toward on-demand, they’d be generating $50 to $60 billion in
revenue a year,” he said. “It’s worth making deep investments now in
order to be the one to capture that shift.”
As consumers grow accustomed to e-hailing services, the theory goes,
car ownership will naturally fade—particularly if taking Uber becomes cheaper than having wheels of one’s own. Meanwhile, Uber is plotting its way into public transit and shipping.
The battle for market share
While we all wait for Uber to transform industries it has yet to
penetrate, it’s worth taking stock of how Uber spends its money now.
Uber’s goal is to convert investor money into muscle, edging out any
potential competitor—including public transportation. Thanks to subsidies financed by investors, an UberPool ride in Manhattan costs as low as $5 a pop, nearly rivaling the subway.
The battle for market share isn’t cheap. Uber reportedly lost $2
billion in 2015, and as much as $1.27 billion in the first half of 2016,
chiefly from subsidizing rides, according to Bloomberg.
Uber’s competition was stiffest in China, where the company was reportedly
spending $1 billion a year battling rival Didi Chuxing. Uber lost the
war, but ended up winning a stake in Didi when the Chinese competitor
bought up Uber’s Chinese division in July.
Losses have mounted stateside as well. Uber eked out a profit in the
US in the first quarter, but sank back into the red in the second.
Dean
Baker, a longtime Uber critic and economist at the Center for Economic
and Policy Research, compares Uber to Groupon, the over-hyped web
discount company whose valuation fell from $13 billion in 2011 to less
than a quarter of that today. “It’s not surprising that VC guys are
getting really excited about something, but don’t have a clear idea of
what it will look like, and how it will be profitable,” Baker said.
But if you listen to Uber’s investors and management, the big losses
are all part of the plan. Disruption costs money and attracts enemies.
Most startups take a while to post profits. That Uber has managed to
corner roughly 85% of the ride-share market and achieve a $69 billion valuation are proof enough that things are going well.
“Uber is a unique beast for which there is seemingly insatiable
investor appetite,” says Nikhil Krishnan, tech industry analyst at CB
Insights. “These investors seem perfectly willing to finance this growth
even with large losses.”
Riding out a worker revolt
What is clear is that Uber is in a new phase of development. The
initial innovation phase, in which Uber’s engineers built the core of
its ride-hailing product, has largely passed. Then there was a rapid
expansion phase, gave way to slower, grinding turf wars.
Now Uber is in its latest phase: monopolization. Its capital flows
increasingly to market maneuvers and labor struggles. Instead of paying
for new innovations and capacity building, investments in the most
highly valued private company in the world primarily exist to give
customers cheap rides until Uber comes out on top....MORE
Days after Uber began selling stock, the National Labor Relations
Board’s top lawyer gave the company a huge gift. In an advice memo, the
general counsel’s office determined that Uber’s drivers are independent contractors, not employees.
If drivers are legally determined to be employees, it would throw
Uber’s entire business model into question by giving drivers, among
other rights, the ability to collectively bargain for pay and working
conditions.
While the memo itself is not a court ruling with
legal authority, it’s yet another influential voice weighing in on a
vitally important legal distinction for Uber and other gig economy
companies like it.
But
a ruling in the company’s favor would paradoxically expose the
ride-hailing giant to a separate legal challenge, one that has gotten
far less attention. It poses an even greater existential threat not only
to Uber, but most if not all the gig economy businesses: price fixing.
“Uber
is effectively trying to have it both ways,” says Sanjukta Paul, a law
professor at Wayne State University who has been writing about the gig
economy’s vulnerability to price fixing regulation for several years.
“They’re setting a price for a product they say they don’t sell.”
This
legal argument is deceptively simple, but to understand it requires
laying a lot of groundwork, not just to understand the argument itself
but why the American legal system has largely stopped paying attention
to these kinds of antitrust concerns. It’s also important to break down
why price-fixing is central to the employee/contractor distinction on
which so many companies depend in the first place.
A warning
upfront: this stuff gets confusing, sometimes intentionally so on the
parts of companies that want to muddle the distinctions between workers
and contractors, customers versus vendors, and other distinctions very
important in the legal realm but rarely of interest to ordinary people.
But understanding all this is key to grasping the nature of work in the
internet age and how the law lags woefully behind.
Nearly all the
important distinctions in American labor law were determined before the
internet. As such, one of the most important differences in American
labor law is between who is and isn’t an employee. All workers are equal
under the eyes of the American court system, you see, it’s just that
some are more equal than others. Among other perks, American labor law
grants a number of protections to workers who are “officially”employees, including—but hardly limited to—the right to organize and collectively bargain.
However,
independent contractors, who can have limited liability corporations or
other incorporated entities in their own right, do not have many of
those rights, including the right to collectively bargain.
But if
ride-hailing drivers are “independent contractors” and not “employees,”
and thus they are all “different corporations” for the purpose of this
legal argument, that brings up a big problem.
This is because we
have a different label for when different corporations get together and
determine the cost for their services. We call it price fixing. And
price fixing, under the Sherman Antitrust Act, is illegal.
In
other words, by labeling drivers independent contractors, it prevents
them from getting together and determining how much they should charge
for their services, in the same way that every locksmith can’t get
together and agree to a minimum price for getting you into your
apartment when you lost your keys....MORE
Update below. Original post:
The first thing I thought of when I started digging into Uber:
"From all our legends, mythology, and history (and who is to know
where mythology leaves off and history begins – or which is which), the
first radical known to man who rebelled against the establishment and
did it so effectively that he at least won his own kingdom – Lucifer."
-Page ix of Rules for Radicals.
That's Alinsky seemingly quoting himself and the way I read it he's saying the Devil challenged authority and won his own kingdom.
That emulating the methods of Satan using any means fair or foul, including lying, cheating and stealing is the way to get riches and power.
And that was the moment when I stopped thinking of Uber as frat boys making stupid boob jokes and started thinking of them as nasty little political operatives.
If you're into this kind of stuff Rule 12 appears to be the approach Uber management favors:
RULE 12: Pick the target, freeze it, personalize it, and polarize it."
Cut off the support network and isolate the target from sympathy. Go
after people and not institutions; people hurt faster than institutions.
(This is cruel, but very effective. Direct, personalized criticism and
ridicule works.)
I should note we are fans of Alinsky's tactical brilliance, oftentimes struggling to resist employing rule #5:
#5 Ridicule is man’s most potent
weapon. It’s hard to counterattack ridicule, and it infuriates the
opposition, which then reacts to your advantage....
...However, in Smith's story, there was something that was more
than just theoretical, and it's a good reminder of the scary power Uber
has over its users.
Here's what Smith reported: "The
general manager of Uber NYC accessed the profile of a BuzzFeed News
reporter, Johana Bhuiyan, to make points in the course of a discussion
of Uber policies. At no point in the email exchanges did she give him
permission to do so." If that's not clear, Smith is
saying that Uber accessed the profile of a journalist to see where that
journalist had traveled while using Uber. Uber did this without
permission. For the thousands of people who use Uber, this should be the
most alarming thing in Smith's report.
Uber knows where its users are going and when they are going there. That is powerful, potentially damaging data to control.
An Uber spokesperson told Smith this was against Uber's policies: "Any
such activity would be clear violations of our privacy and data access
policies. Access to and use of data is permitted only for legitimate
business purposes. These policies apply to all employees. We regularly
monitor and audit that access."
Here's more from Buzzfeed:
“God View:” Uber Investigates Its Top New York Executive For Privacy Violations In the wake of a BuzzFeed News story, the transit company is looking into the official’s tracking of a journalist’s location.
BuzzFeed News
Uber said Tuesday that it is investigating its
top New York executive for tracking a BuzzFeed News reporter without
her permission in violation of what the transit giant says has long been
its privacy policy. The company also published its privacy policy for
the first time on Tuesday, though it said the policy had always been in
effect.
Uber took both actions in the wake of a BuzzFeed News story
that revealed that the reporter’s ride had been tracked without her
permission and that another Uber executive had suggested the company
might smear journalists who wrote critically of Uber. The executive who
suggested digging into the private lives of journalists, Emil Michael,
said his comments were “wrong” and that he regrets them.
Tracking customers is easy using an internal company tool called “God
View,” two former Uber employees told BuzzFeed News. They said God
View, which shows the location of Uber vehicles and customers who have
requested a car, was widely available to corporate employees. Drivers,
who operate as contractors, do not have access to God View.
Early this November, one of the reporters of this story, Johana
Bhuiyan, arrived to Uber’s New York headquarters in Long Island City for
an interview with Josh Mohrer, the general manager of Uber New York.
Stepping out of her vehicle — an Uber car — she found Mohrer waiting for
her. “There you are,” he said, holding his iPhone and gesturing at it.
“I was tracking you.”
Mohrer never asked for permission to track her....MORE
Finally, recovering V.C. Peter Sims in his viral September essay on trust, 'God View', information and Uber: Can We Trust Uber?
Some observers have postulated that one reason Uber is defying the state is the permit requirement that in exchange for being able to test on the public roads they would have to turn over data to the state including data on accidents.
Which, if you think about it, is a bit ironic considering how much data Uber collects on their passengers.
It's also an excellent shorthand for the mindset at the top levels of the company.
First up, the c|net, Dec. 16 to catch us up:
Uber keeps self-driving cars on the road, challenging the law The ride-hailing company brushes off California DMV, announcing it won't
pull its autonomous cars from San Francisco streets. Now the state's
attorney general is getting involved.
Uber and the state of California are in a standoff.
Uber kept mum for two days, but has broken its silence.
"The
cars are on the road today," Anthony Levandowski, Uber's vice president
of self-driving technology, said in a conference call with reporters on
Friday. "We're intending to continue."
Which, in turn, prompted a
letter from California's Office of the Attorney General to Uber saying
the company must "immediately remove its self-driving vehicles from
California public roadways until it obtains the appropriate permit" or
else the attorney general "will seek injunctive and other appropriate
relief."
Uber made its name by pairing passengers with drivers via a phone app.
Over the past six years, it's grown from small startup to multinational
company with operations in more than 400 cities in 72 countries. The
company has a history of launching products and features before getting
the required permits. And, Uber's rollout of self-driving cars in San
Francisco is no different. But, in doing so, lawmakers worry the company
could be forsaking public safety and transparency.
Uber says the reason why it's not getting the permit is because the
law doesn't apply to its self-driving cars. The company says that
because humans constantly monitor its vehicles while driving and can
take over control at any time, they aren't yet autonomous vehicles. Uber
also says its self-driving cars aren't yet "capable" of driving without
monitoring or active physical control.
"While these are
considered state of the art today, they still require monitoring by a
vehicle operator at all times," Levandowski said during the conference
call. "We believe they are no different than any other car on the road
today."...MORE
The problem with that as legal reasoning is that Uber is still subject to the traffic laws that say the driver has to be in control of their vehicle, it's why a traffic cop can pull your 16-year old over for driving "hands-free".
Uber's most recent large acquisition, Otto, the autonomous trucking Co. did the same defy-the-law-and-don't-make-the-info-public thing in Nevada, see Backchannel's:
Finally, the usually fashion-forward Los Angeles Times editorial board makes the simple realpolitik argument about the $150.00 (yes, $150, so it's probably not the money, except it's all about money) permit:
Editorial
If Uber doesn’t like California's rules, it can test its driverless cars elsewhere
Uber
is at it again. The company, famous (or notorious, depending on your
point of view) for flouting regulations as it built its disruptive,
multi-billion-dollar business, rolled out a fleet of autonomous cars in
San Francisco this week despite an explicit warning from the Department
of Motor Vehicles that testing on public roads was illegal without a
permit.
Never mind that 20 of Uber’s competitors
in the race to develop autonomous cars have followed the California
DMV’s rules and gotten testing permits. Never mind that new federal
guidelines for the safe operation of autonomous vehicles anticipate that
car companies will get a state’s permission before testing driverless
technology on its public roads. Never mind that Uber’s executives were
told by DMV officials before the launch that the company would need a
permit to operate its autonomous vehicles.
Instead, Uber — in typical Uber fashion — found an
apparent loophole in California’s rules and chose to drive its
driverless vehicles right through it. The regulations say a permit is
required if the vehicle can drive itself “without the active physical
control or monitoring of a natural person.” Defending the decision to
forgo a permit, an Uber executive wrote in a blog post that “it’s still early days and the company’s cars are not yet ready to drive without a person monitoring them.”
Of
course they aren’t, but that’s not the point. No autonomous vehicle,
including those covered by testing permits, can be driven in the state
without a human monitor. The state requires that an operator
sit behind the wheel during testing, ready to take control at any time.
Why? Because the technology is unproven, and state regulators don’t
believe it’s ready for uncontrolled operation on public streets — which
is why California created, with industry input, a permitting process.
DMV officials didn’t buy Uber’s argument, nor should they
have. Less than a day into Uber’s new venture, the DMV threatened legal
action if the company didn’t halt testing. But Uber has refused to back
down, insisting again on Friday that the “driverless” Ubers it has
touted do not need permits because they are not really driverless, but
rather vehicles equipped with advanced driver-assist technologies.
Uber
built its business by challenging regulators and entrenched assumptions
about how best to assure public safety. It successfully evaded
the strict local rules that the taxi industry faces on fares, licenses
and driver background checks by arguing that smartphone-summoned rides
were different from taxis and should be regulated under new
state standards. It has also avoided a variety of mandates on employers
by classifying its drivers as independent contractors, not employees....MORE
That headline from one of our 2010 posts was the first thing I thought of when I started reading Izabella Kaminska's latest.
Here's how that long ago story begins:
KEEP IT PIMPIN’
Speaking of great amateur literature,
here’s a detailed business plan from a pimp that outlines his strategy
to expand business and “take care my bitches more better” titled,
“Keep it Pimpin’.”...
...Judging from this guy’s lofty goals, we can only assume he’s small time
and probably deals primarily in broken-ass hoes who don’t yield a high
rate of return right now, but if he follows through with his plan to
“discover hoes from all over (jail house, small cities),” and stays
“high in pursuit, looking for a prostitute,” his goal–to take his “game
to the next level (from the concrete streets, to executive suites)”...MORE
Now, insert Travis Kalanick into the above and compare/contrast with some seriously insightful analysis from FT Alphaville:
Talk of war chests and global expansion abounds. But perhaps what the
above really implies is that Uber’s famous capital-light model is about
to get much more capital intensive — especially as it moves towards
rolling out the much hyped self-driving fleet.
If that’s the case, investors need to pay attention. Along with capital
intensity come limitations to the exponential growth rates investors
have come to expect.
So
far, of course, the genius of Uber’s business model has been all about
transferring capital costs to partner drivers. Uber terms and conditions
do their utmost to ensure you the customer understands the
service-providing relationship is between you and the driver, not Uber.
Drivers utilise their own cars, pay their own costs including petrol,
maintenance, parking fees/fines, insurance, licensing costs. They run
their own risks too.
This indeed is how Uber gets away with calling itself an intermediary, not an employer.
Going against that, though, is Uber’s control of the prices
contractors get to charge customers and its reluctance to offer
exclusivity terms to drivers with respect to rivals (the driver network
is notoriously open-ended). As a result, contractors haven’t the power
to price their services according to demand, or even in ways that cover
their cost of operation.
Once costs are properly accounted for, many drivers contend Uber’s
pricing strategies and uncapped driver policy — which sees drivers added
irrespective of market demand — result in take home pay which amounts
to a minimum wage or less.
But there are other factors in play too.
Uber’s driver network, for example, has always been made up of
vehicle owners and vehicle renters. The distinction is important because
being able to draw on a large pool of pre-funded private capital (a.k.a
people who own cars and want to put them to use) has been key to Uber’s
price-cutting tactics in the market.
That pool of capital, however, is limited not least because the sort
of people who can afford the quality cars Uber demands for many of its
services are not the sort to be satisfied with minimum wage earnings for
long.
As the number of car owners who look to Uber for a means to a more
flexible type of employment or a means to bolster earnings runs dry, so
too does Uber’s capacity to undercut the competition and keep growing.
Uber’s growth model instead becomes increasingly dependent on attracting the latter sort: vehicle renters.
If Uber’s driver network is to keep growing on that basis someone
somewhere must put up the capital drivers can’t afford to put up
themselves — a service that’s unlikely to be offered pro bono.
In that context Uber’s rates simply can’t stay low forever: the aggregate earnings of the network must cover the aggregate operating costs of the network inclusive of insurance, minimum wage and capital interest owed.
So what does a capital-light app that wants to keep its driver
network growing without hiking ride prices to cover capital rental and interest costs to do?
Answer: deploy its reputation in drivers’ name so as to fetch them
better deals with manufacturers and credit providers than they could
fetch alone.
Uber is thus no longer a ride-hailing unicorn. It’s well on its way to becoming an auto-leasing company — complete with all the capital costs and credit exposures that come with it....MORE
This always seemed like a bigger story than most of the media was treating it as. Now that seems to have changed.
Some links after the jump.
From The Wall Street Journal:
Before accepting rides on his Uber app each day, Seattle driver
Fasil Teka
must first choose whether to listen to company-run podcasts on voting rights, collective bargaining and city council hearings.
He
and other drivers in the city have received text messages, meeting
invites and phone surveys from ride-hailing firm Uber Technologies Inc.
in an attempt, the company says, to sway them against unionizing.
Mr.
Teka said he isn’t persuaded. “Uber is telling us they don’t want us to
join a union,” the 41-year-old said, one of Uber’s 1.5 million “driver
partners” as the company calls them. “Uber also tells us we’re their
partners, but they don’t treat us like we are partners.”
Uber
is squaring up for a long fight in Seattle to block the nation’s first
real unionization effort for app-based drivers, pitting it against the
Teamsters labor union and Seattle’s city council. Uber says a union
threatens the freedom of its drivers to work as much or as little as
they wish and, moreover, isn't something its drivers want.
“We
continually seek to incorporate driver feedback on how their experience
can be improved,” said
Caleb Weaver,
head of Uber’s public policy in Washington state. “At the most
fundamental level in this business, we don’t succeed unless drivers
succeed.”
In
a series of podcasts,
Brooke Steger,
Uber’s general manager for the Pacific Northwest, interviews drivers
about how they would be affected by a union, concluding that it isn’t in
their best interests.
“It’s
totally impossible to know how the ordinance could limit who can drive,
when you can drive and where you can drive, as well as what you might
be required to pay in union dues,” Ms. Steger says in one podcast.
The
Seattle tussle is the latest challenge to Uber’s independent contractor
model, which pushes expenses such as fuel, vehicle maintenance and
insurance on to the drivers, in exchange for the promise of a steady
stream of riders and a flexible work schedule. The model is a chief
reason for Uber’s $68 billion valuation, though the company has faced a
near-constant stream of lawsuits challenging the classification as
nonemployees.
A
Seattle ordinance passed in 2015 took effect in January giving drivers
the right to vote to organize, meaning some 10,000 Uber contractors
could win the right to negotiate fares and benefits. The dispute has
taken on added urgency in recent days as the Teamsters seek access to
driver contact information from Uber and rival Lyft Inc. to help with
organizing efforts, even as lawsuits challenging the ordinance roll in,
including from the U.S. Chamber of Commerce and a group of 11 drivers
backed by the National Right to Work Committee.
Meanwhile, Uber has been buffeted by sexual-harassment claims by a former engineer, a lawsuit from
Alphabet
Inc.
alleging the theft of trade secrets, and a video leak showing Chief Executive Travis Kalanick
berating a driver.
The
company says a union could threaten drivers’ freedom and has suggested
it may leave Seattle if a union forms. Union advocates say it would
deliver more consistent wages and working conditions, and help prevent
Uber and Lyft from implementing sudden fare changes or shutting off
drivers’ apps....MUCH MORE
The very last thing the poobahs of Sand Hill Road want to see. They overwhelmingly prefer NO unions.
During the 2008* Democratic nomination campaign we pointed out that
although the self-anointed Silicon Valley aristocracy were solidly
behind Senator Obama, rank-and-file Dems in Santa Clara county went for
Hillary 54.8% to Obama's 39.3% in that year's primary.
The reason this gets interesting is a possible split between various constituencies.
For example the Teamsters union can't be very enthusiastic about the prospect of autonomous trucks.
The bad-apple cops responsible for repeat police brutality claims are
protected in their jobs by very strong unions. Who do you go with, the
protestors or the police unions?
I don't know how this all plays out but it seems easier to understand if
we dispense with party labels and go with a plutocrats/peasants
framework....
Not one of the good professor's most insightful blogposts but interesting because he puts the odds of Uber failing at only 5%.
And because you can feel his "I need numbers dammit" pain.
From Musings on Markets, June 21:
Uber's bad week: Doomsday Scenario or Business Reset?
Uber just cannot seem to help itself, finding a way to get in the news,
and often in ways that leave its image in tatters. You could see this
pattern in full display last week, where Travis Kalanick, its founder
and CEO took a leave of absence to reinvent himself as Travis 2.0, and
David Bonderman, founding partner at TPG and Uber director, had to step
down after making a sexist remark at a meeting with Uber employees
about countering sexism. Today, Travis made his departure permanent,
throwing the company into chaos as the board searches for a replacement.
As someone who has been collecting stories almost obsessively about the
company since June 2014, this is just the latest in a long string of
news events, where Uber has been portrayed as a bad corporate citizen.
As with prior episodes, there are many who are writing the company’s
epitaph but I would not be in too much of a hurry. This is a company
that built itself by breaking rules, and while I believe that the latest
controversies will damage Uber, they will not disable it.
Uber: Retracing history
If you are just starting to pay attention to Uber, after the last week,
let me start by bringing you up to date with the company. Founded in
2009, by Travis Kalanick and Garrett Camp, in San Francisco as UberCab,
and going into operation in 2010, the company has redefined the car
service business, making the taxi cab a relic, at least for some
segments of the population. Uber’s initial business model, which became
the template for the ride sharing business, was a simple one. The
company entered the car service business, and did so without buying any
cars or hiring any drivers, essentially letting independent contractors
use their own cars and operating as match-maker (with customers). That
low capital intensity model has allowed the company to grow at an
astronomical rate, with almost no large infrastructure or capital
investments through much of its life.
My first brush with Uber was in June 2014, when I tried to value the company.
While many have since reminded me how wrong I was in my judgment, I
have no qualms about repeating the story that I said about Uber at the
time and the resulting valuation. Framing Uber as an urban, car-service
company with local networking benefits and a low capital intensity
model, I valued the company at about $6 billion. In fact, Bill Gurley, a
partner at Benchmark Capital and an early investor in Uber, took me to task for the narrowness of my story, arguing that I was missing how much Uber would change the logistics market with his offerings.
Bill was right, I was wrong, and I did underestimate Uber’s growth
potential, both in terms of geography and in attracting new users into
the car service business. In October 2015, I revisited my Uber valuation and
told a more expansive story of the company, incorporating its global
reach and the influx of new users, while also noting that the pathway to
profitability now faced far more roadblocks (as Didi Chuxing, Ola and
GrabTaxi all found investors with open pockets and ramped up the
competition). That resulted in a much higher revenue forecast, combined
with more subdued operating margins, to yield a value of about $23
billion for the company.
In August 2016, I took another look at Uber,
after it exited the Chinese market (the largest potential ridesharing
market in the world) ceding the market to Didi Chuxing in return for
Uber getting a 20% stake in Didi. I argued that this was a good
development, since China had become a money pit for the company, sucking
up more than a billion dollars in cash in the prior year. While there
was some positive movement on some of my assumptions (slightly smaller
losses and continued revenue growth), they were offset by some negative
movement in other assumptions, leaving my value at about $28 billion,
with almost all of the change in value from the prior year coming from
the Didi stake that Uber got in exchange for leaving the China market.
These are, of course, my stories about Uber and valuations and they
matter little in how Uber is perceived by the market. In fact, there is
clear evidence that notwithstanding all of the negativity around the
company, investors have consistently pushed up its pricing from $ 60
million in 2011 to $3.5 billion in 2013 to $17 billion in June 2014 to
almost $70 billion in the most recent capital round.
Uber: An Operations Update
The problem with Uber is that as a private business, albeit one with a
high profile, its financial statements are not public. For much of its
life, the only numbers that have been made public about the company have
been leaked and my valuations have been based on this leaked
information. Early this year, Uber finally departed from the script,
partly with the intent of drawing attention away from negative stories
about the company, and revealed selected financials for 2016. In
particular, it reported that it generated more than $20 billion in gross
billings in 2016, doubling its 2015 numbers, and that its share of
these billings was $6.5 billion (which represents its net revenues). The
latter number is puzzling since the company's stated share of the
billings is only 20% (which would have meant only $4 billion in
revenues) but part of the difference can be explained by the fact that
Uber reported its gross billings from UberPool, its car pooling service,
as revenues. The revenue growth has been dazzling but the losses
continued to mount as well. Uber reported a loss of $2.8 billion for
2016, but that number would have been worse (closer to $3.8 billion) if
losses in its defunct China operations had been counted. Overall,
though, like all of its financial disclosures, leaked or otherwise, the
number paint a mixed picture of Uber. On the plus side, they show a
company growing explosively, adding cities, drivers and gross billings
as it goes along. On the minus side, you are not seeing the rapid
improvements in margins that you would expect to see as a company scales
up, if it has economies of scale....MUCH MORE
I've been wondering what happens to the drivers if gasoline prices double.
Uber provides a credit card that gives drivers a minimum three cent per gallon discount but it appears there is a real risk to the driver's income if costs rise without an offsetting increase in fares, something Uber seems very reluctant to do.
From the Los Angeles Times:
If there's one thing the ride-hailing company Uber has become great at, it's identifying legal threats to its business model. That's the reality behind its $84-million settlement
Thursday of two federal class-action cases brought by drivers. The
cases could have forced Uber to classify its drivers as employees, not
independent contractors, a change that could impose billions of dollars
in costs on the company, eroding its potential profitability and its
supposed value.
The deal covers about 385,000 drivers, who pay
their own expenses while serving passengers sent their way via Uber's
mobile phone app. Uber sets the fares, regiments much of the drivers'
work activities and behavior, and takes more than 20% off the top. The
lawsuits asserted that these conditions make the drivers tantamount to
employees, despite Uber's contention that they're free to drive when and
where they choose.
If we had not settled, there were some serious risks that all we have fought for - and have achieved - could be taken away.
-Shannon Liss-Riordan, attorney for Uber drivers
The
settlement, which could rise to $100 million if Uber goes public at a
valuation well beyond its current private market value of more than $60
billion, doesn't resolve whether the drivers are employees. Other
lawsuits over that issue are pending, as well as union initiatives and an investigation by the National Labor Relations Board.
The settlement does, however, underscore that litigation can be a thin
reed for workers trying to redress inequities in the workplace. It's
expensive and time-consuming, and the outcome anything but certain.
"If we chose not to settle this case, we faced risks,” said Shannon Liss-Riordan, the attorney for the drivers, in a prepared statement.
Among these was “the risk that a jury in San Francisco (where Uber is
everywhere and quite popular) may not side with the drivers over Uber."
Liss-Riordan also seemed to be rattled by a recent ruling by a federal
appeals court in San Francisco that placed the class designation in one
of the two cases under new scrutiny, with the possibility it could be
overturned. (The second case was filed in federal court in Boston.)
"If we
had not settled," she said, "there were some serious risks that all we
have fought for - and have achieved - could be taken away." She
added, "importantly, the case is being settled - not decided. No court
has decided here whether Uber drivers are employees or independent
contractors and that debate will not end here." We've reached out to
Liss-Riordan with questions about the deal, and will update if we hear
back.
The key question left unanswered by the settlement
announcement is whether the drivers are receiving enough in return for
what they're giving up. As is often the case with class settlements, the
big headline number obscures how little trickles down to the
plaintiffs. In this deal, drivers with the most time and mileage
recorded with Uber are in line to receive one-time payments up to about
$8,000. Nothing fundamental in the balance of income and expenses will
change as a result of the deal--drivers will still be on the hook for
gas, insurance, and wear-and-tear on their vehicles, and Uber will
retain the right to set fares and extract fees and commissions of more
than 20%.
Yet settlement of the cases is surely a good deal for
Uber by removing what it plainly regarded as a massive threat. Had the
litigation continued, it might have put the company's entire business
model on trial, exposing the degree to which the economic benefits of
the so-called "gig economy" flow heavily, even exclusively, toward
investors and executives at the expense of those providing the core
service...MORE
Imagine there's no Uber: Here's what experts think would happen next
Uber is reeling.
Allegations about its treatment
of women have hurt its brand among investors, riders and engineers. The
company is facing lawsuits on several fronts and has huge holes in
senior leadership, which could make it hard to raise more funding, while
shares of Lyft are suddenly in hot demand among investors.
And as previously reported, Uber burns a lot of cash — a reported $2.8 billion in 2016 alone — to keep drivers and riders on its app.
What happens if Uber can't go public, can't raise another round of funding, and disappears?
We asked three investors for their take. Here's what they said.
Investors would be fine — but others would suffer.
Waze and Moovit co-founder Uri Levine said, "It's not investors you
should worry about, but Uber's employees, drivers and users."
Seven-year-old Uber now employs
about 12,000 full-time. Millions of drivers rely on its platform to find
fares and generate income as independent contractors. And the company
has boasted that 20 million people have downloaded its ride-hailing app.
If Uber fizzles, employees would
lose their stock options at a minimum. If Uber folded entirely,
employees and drivers would face unemployment, and riders would be left
waiting for other services to fill the void in transportation.
Tech investor Bedy Yang, a managing partner with 500 Startups, said, "If
Uber failed, investors would be hurt only if they paid a high price for
their shares, and have Uber as the single standout in their fund. But
that's not how investing works, generally. Investors generally learned
that lesson in the dotcom bust. Firms do not bet everything on a single
company."...MORE
If Didi expands out of China the Ubester had better watch out. Here's
the problem in a nutshell, Uber can't raise any more money.
They've already done the venture capitalists.
They've gone the debt route, last year they sold a $1.15 billion leveraged loan at 5%, not cheap money.
They tapped the Saudis for $3.5 billion including who-knows-what liquidation preferences and other terms and conditions.
Finally they've done the scoundrel's topper-upper, usually used by VC's
to set the immediately-pre-IPO valuation, going to accredited investors
to sell a sliver:
This is a very bad sign.
Venture Capitalists will use the dumbest money they can find to get a
late round to bump the valuation as high as they think they can get away
with. More* after the jumps....
With that background, here's the latest from c|net...
I still can't get the picture of Didi Chuxing's President, Liu Qing
(anglicized to Jean Liu), commenting on Travis Kalanick and Uber's
efforts in China as cute. Then when Uber proclaimed the $3.5 billion
investment from the Saudis she laughed and said she had more than that
on the way.
Didi then announced the completion of a $7.3 billion fundraising.
Uber better be on top of their game in Southeast Asia because they weren't in China and got run out of the country....
If I were a late stage Uber investor the following story would terrify
me. Long time readers can gloss over some of the details, and the
failure to put the Financial Times' Izabella Kaminska*
at the top of the list of journos covering the Ube raises some doubts,
but the point raised, "What happens if Didi goes international?" is
important or as Kalanick might say, existential....
Uber fined $650 million by New Jersey over driver classification The ride-hailing company is challenging the fine and says "drivers are independent contractors in New Jersey and elsewhere."
New Jersey is the latest state to say Uber's
drivers should be classified as employees rather than independent
contractors. The state's Department of Labor and Workforce Development
said that because of this misclassification, the ride-hailing company
owes it roughly $650 million in unemployment taxes and disability
insurance, according to Bloomberg Law.
The
Department of Labor reportedly has been trying to get unpaid employment
taxes from Uber going back as far as 2015, according to documents
obtained by Bloomberg Law. It said the company owed the state $523
million in overdue taxes along with another $119 million in interest and
penalties for the last four years. Uber disputes these findings.
"We
are challenging this preliminary but incorrect determination," an Uber
spokesman said in an email. "Because drivers are independent contractors
in New Jersey and elsewhere."
Driver classification is an issue that government regulators have
been taking a closer look at over the past year. California passed a law
in September that could require Uber and other on-demand companies to reclassify their drivers as employees instead of independent contractors. The law is set to go into effect Jan. 1. New York, Oregon and Washington state have considered similar legislation.
Uber, Lyft
and several other tech companies have vowed to fight the California
law, collectively putting more than $90 million behind a ballot
initiative that'll take the issue to voters next November. Many drivers
have said this move is a slap in the face as they struggle to earn a living wage....
Readers who have followed the Uber story over the last few years, especially if you read Izabella Kaminska at FT Alphaville, know that despite posting on the lurid details from time to time (us more than she) our (and her) focus has been on the business/finance/econ aspects of Uber, although the political economy and other social science stuff can't help appearing, because what Kalanick built was in his own image.
The first thing I thought of when I started digging into Uber:
"From all our legends, mythology, and history (and who is to know
where mythology leaves off and history begins – or which is which), the
first radical known to man who rebelled against the establishment and
did it so effectively that he at least won his own kingdom – Lucifer."
-Page ix of Rules for Radicals.
That's Alinsky seemingly quoting himself and the way I read it he's
saying the Devil challenged authority and won his own kingdom.
That emulating the methods of Satan using any means fair or foul, including lying, cheating and stealing is the way to get riches and power.
And that was the moment when I stopped thinking of Uber as frat boys
making stupid boob jokes and started thinking of them as nasty little
political operatives.
If you're into this kind of stuff, Rule 12 appears to be the approach Uber management favors:
RULE 12: Pick the target, freeze it, personalize it, and polarize it."
Cut off the support network and isolate the target from sympathy. Go
after people and not institutions; people hurt faster than institutions.
(This is cruel, but very effective. Direct, personalized criticism and
ridicule works.)
I should note we are fans of Alinsky's tactical brilliance, oftentimes struggling to resist employing rule #5:
#5 Ridicule is man’s most potent weapon. It’s hard to counterattack ridicule, and it infuriates the opposition, which then reacts to your advantage....
So yeah, although the focus has been on the quantifiable, the soft science stuff is there as well and may be the thing that takes Uber down. At least that's the charitable interpretation, that Kalanick, blinded by hubris didn't see the flaws in the business plan.
The less favorable interpretation is that he knew all along and kept pushing in the hope that magic would happen.
That would be a fraud.
Anyhoo, here's one of the best automotive websites on the net talking Uber.
From Jalopnik:
If there is one quote that sums up the ethos of Uber,
it might be this cut from the company’s firebrand CEO Travis Kalanick:
“Stand by your principles and be comfortable with confrontation. So few
people are, so when the people with the red tape come, it becomes a
negotiation.” But after a month marked by one disaster after another,
it’s hard to see how Uber’s defiant, confrontational attitude hasn’t
blown up in its face. And those disasters mask one key, critical issue:
Uber is doomed because it can’t actually make money.
After a discombobulated 2016, in which Uber burned through more than
$2 billion, amid findings that rider fares only cover roughly 40 percent
of a ride, with the remainder subsidized by venture capitalists, it’s
hard to imagine Kalanick could take the company public at its stunning
current valuation of nearly $70 billion.
Yet even when those factors are removed, it’s becoming more evident
that Uber will collapse on its own. Barring a drastic shift in the
company’s business—an implausible rollout of self-driving car fleets across the U.S., an increase of fares
by three-fold, or a complete monopolization of the taxi and
ride-hailing markets—Uber’s lifeline is shrinking. Its business model
could collapse if one court case, and there are many, goes against it. Or perhaps more pressing, if it simply runs out of cash.
That
Kalanick quote about confrontation may be as innocuous as a random
sound bite, but it’s representative of the ride-hailing giant’s
methodology since its founding in 2009: a perpetual resistance to
regulatory oversight; a belief that, ultimately, an unfettered market is
the key to prosperity.
At first glance it seems like Kalanick’s libertarian ideals have paid off. Most recently valued at a reported $69 billion, Uber has captured a majority of the ground transportation market and flipped the taxi industry—a sector Kalanick once famously and snidely referred to as the Big Taxi Cartel—on its head. His philosophy mirrors the mindset of one of his favorite authors, the laissez-faire Ayn Rand. In 2012, Kalanick proffered
that Uber’s battle against government regulations has an “uncanny
resemblance” to the Randian philosophy. A billionaire fighting The
System—and prevailing. It’s a good story for those who find truth in Atlas Shrugged.
Uber’s long had skeptics, and it’s not innovative to paint Kalanick,
40, as the boogeyman of Silicon Valley, where unseemly savants exist in
vast supply.
The precarious moment in the company’s eight-year history falls on
Kalanick’s lap. It’s his baby after all—a startup founded on seemingly
nothing more than a vague idea, without much regard for the workforce to
make it possible, or even a clear idea of what business model it
actually wants to pursue. Uber has jumped from one idea to the next:
UberX, UberEats, autonomous cars, and now flying cars, of all things.
The impact of
Uber’s death would probably be as much of a rebuke of Kalanick’s vision
of running on a scatterbrained dream, not so much a solid business model
and philosophy, that you could muster.
It would also be devastating for some. The livelihood of 11,000 employees across the world
rests on Kalanick’s decision to submit to that philosophy—which, at its
core, is a ruthless way of doing business. At the very least, drivers
in the pre-Uber market could earn a decent living. Conversely, for
example, Uber drivers taking advantage of new “vehicle solution” pilot
program in Boston — renting cars by the hour through Zipcar — will earn less than Massachusetts’ minimum wage. How innovative.
The Contractor Problem
One
of the biggest issues that has left Uber’s business model hanging in
the balance is its resistance to classifying its drivers—there are reportedly600,000
in the U.S.—as employees, not contractors. If Uber is a house of cards,
this is a key part of the foundation that, once removed, would demolish
the structure.
Indeed, the company has said
reclassifying drivers could “force Uber to restructure its entire
business model.” The result of its opposition to readjust has been
entirely expected. Without the perks and protectionsthat an employee may enjoy—health care, benefits, gasoline and work reimbursements, vehicle maintenance, all of which could reportedly total as much as $730 million—complaints
from drivers have piled up, ranging from low pay to new services like
UberEats (a loathed food delivery service that’s reportedly
set to lose over $100 million annually) and UberPOOL, its carpool
option which increases the company’s take per-ride, lowers the take-home
pay for drives, and is understood to be quite a drag for drivers and
passengers alike. Drivers themselves said as much in a recent, disastrous question-and-answer session with Uber’s president....MUCH MORE
If interested, we have an awful lot of posts on Uber; here's the Google search of the site:
So
far, of course, the genius of Uber’s business model has been all about
transferring capital costs to partner drivers. Uber terms and conditions
do their utmost to ensure you the customer understands the
service-providing relationship is between you and the driver, not Uber.
Drivers utilise their own cars, pay their own costs including petrol,
maintenance, parking fees/fines, insurance, licensing costs. They run
their own risks too.
