5

Even Unicorns Get the Blues

Heretical Judge Rules that Uber Can’t Externalize its Labour Costs

As I briefly covered in my AxisOfEasy tech digest this week, Uber and Lyft were bracing themselves for a ruling by a California judge that threatened to force them into treating their wage slaves drivers as employees. Lyft said if the ruling went against them it would cause “irreparable damage”. Uber CEO Dara Khosrowshahi penned an op-ed in the New York Times that just so happened to run Monday, pining for a fair shake for gig economy serfs workers.

Khosrowshahi, whose compensation package last year clocked in at $45,000,000 USD, waxed pensively, ‘There has to be a “third way” for gig workers.’ . Ideally one in which Uber wouldn’t be on the hook for their benefits and would be able to continue apace as a Silicon Valley unicorn: posting billions of dollars a quarter in losses and jockeying for Federal bailouts. Meanwhile the early stage backers, the VC’s and the private equity funds, would continue to live large off of financialization, not having to worry about the consequences of being the driving force in a race to the bottom for everybody else (even Uber’s lümpenvestors who bought into the IPO are still underwater).

As it turned out, Judge Schulman ruled that these gig economy workers are to be treated as employees in the State of California, and sure enough, Uber is now threatening to pick up their ball and go home.

People following my writings may be surprised that I’m not approaching this as yet another government inflicted wound against capitalism, like how laws mandating higher minimum wages actually increase unemployment. It’s a fair point.

But we’re not talking about countless mom-and-pops and other main street businesses having their costs jacked up by economically illiterate career politicians. Even in a climate of government mis-micromanagement and overreach, the so called “free enterprise” participants should be competing under the same conditions. If an independently owned and operated driver service in the state has to operate under onerous taxation and terms, then being a Silicon Valley unicorn shouldn’t exempt you from suffering the same conditions.

In this case we’re talking about Cantillonaires who feel entitled to special privileges and exemptions but the reality is this:

These companies were never intended to be economically viable.

Uber and Lyft started the year with $11.3B and $2.8B in cash on their balance sheets respectively. They posted TTM losses of $10B and$ 2B respectively.  They are valued around $54B and $9.2B

The only thing that mattered from the outset was to cannibilize the entire market, driving down prices and wages while operating at a loss so that they could garner the next financial event, be it a series D, E or F up-round and then eventually some monster acquisition or IPO. Within truly un-manipulated, free market competition, Uber and Lyft would have either had to compete, viably, with numerous entrants and competitors all fighting under their own steam, or else be snuffed out by economic reality.

The truth is that you can’t actually build a business where every transaction and input is subsidized, ultimately by central bank stimulus, while  all normal course responsibilities of operations, like expenses, are externalized.

With the Everything Bubble finally looking to pop, and pent up reality s-l-o-w-l-y beginning to reassert itself, these Unicorns will have to face the same situation that every other non-unicorn, non Silicon Valley funded business has to face: Whatever your “boil-the-ocean” big idea is, you’re gonna have to do it in an economically viable way, or it’s not going to happen.

To follow my work sign up for the Out Of The Cave mailing list, or on Mastodon or Twitter 

Print Friendly, PDF & Email
Mark E. Jeftovic
 

Mark E. Jeftovic is the founder of Out Of The Cave and CEO of easyDNS.com, a company he co-founded in 1998 which has been operating along the lines described within these pages. No stranger to competing with 800 lb gorillas, easyDNS has consistently "punched above its weight" in a field dominated by behemoths such as Godaddy and Web.com. Since 2013 the company has successively achieved YoY all-time high revenues and profitability despite the entry of Amazon, Google and Oracle into the space as direct competitors.

Click Here to Leave a Comment Below 5 comments
David Barnett, Ph.D. - August 13, 2020

In a marketplace where many of the players make no risk provision because they have no appreciation of the risks, they will underprice their services. In a world which emphasises headline price over everything else, that is when you get the “race to the bottom”.

About 30 years ago, I was living in Austin, Texas, when we had a freak cold spell just before Christmas. A Canadian will laugh: Austin was not prepared for a week of temperatures below 10 °F (-12 °C). When the thaw came on Christmas Eve, there were burst pipes all over the city. Some apartment blocks had a single water cutoff valve for the whole building, meaning that a burst pipe anywhere forced a water cutoff for everyone.

Needless to say, there was an excess demand for emergency plumbers, and few to be found on Christmas Eve! By luck, my building’s property manager was one of the best in town. They had our water back in the early hours of Christmas morning. I know many people who were without water for weeks. I was very grateful that our HOA had paid for a top quality management company.

How does one re-educate a marketplace to accept and provide for risk, when we now bring people up to expect none?

Reply
Robert Fisher - August 13, 2020

Mark, regarding your comment about the minimum wage:

https://medium.com/@rafisher/the-space-to-proceed-6ac29c2c7dc7?sk=6d0f4872891c2d3462c040a2369f9d12

Reply
    Mark E. Jeftovic - August 13, 2020

    What does that piece have to do with minimum wage?

    Reply
Jon Weban - August 20, 2020

There is something untenable about the ride-sharing services operating without the onerous government fees and regulations that taxi services in the US typically have, which helped spawn Uber and Lyft in the first place. Both sides of this situation began at opposite extremes, and eventually there should be something in the middle, that works somewhat better than what we had before Uber and Lyft were invented. Such is the nature of innovation and its interplay with government.

But like every other attempt by the government to reclassify contractors as employees, it really comes down to only two things: (1) the much greater ability of government to enforce collection of taxes/fees (and power) through a few large businesses vs. collecting from a zillion individual contractors/gig workers, and (2) the ability of politically-connected unions to enlist and collect dues (and power) from employees vs. from independent contractors/gig workers — esp. in Dem-controlled states and cities.

[Note that (1) is a lot like what your linked articles refer to with the Cantillon effect and trickle-down aid from the FED during this pandemic, just in reverse. The FED cannot possibly buy bonds from every small business in the US — that is what business/payroll tax cuts are better for, which the Trump administration has also tried to implement. Also, the Fed has to keep its investments safe and stable. So if they are going to help stabilize the economy this way, they have to pump stimulus into big stable companies, who then have more and cheaper capital to invest in smaller businesses they utilize, and/or pass savings to consumers, etc. It often isn’t fair, it is picking winners and losers in a sense, there are some abuses, and it doesn’t help small competitors; but from a practical sense, they have no choice. Ideally, in stable non-pandemic economic times, the FED should interfere very little through such measures. Ideally. We must be vigilant, as always, to watch for government abuses and excesses.]

Reply
Jeremy T. Gibson - August 25, 2020

Dollars to doughnuts that anytime a company threatens to go out of business as a result of a supposedly controversial decision of a court, it’s because the court made the one that is in the best interests of everyone.

There’s a lot to be said about the risk of a fully deregulated market, and it’s no mystery that *very* rich companies are in favour of one — it’s the Altered Carbon of monopolisation, funnelling profits to the top without even subsistence-level compensation at the bottom — but this is almost certainly not the correct venue for a debate on that. So I’ll just skip defending that standpoint and let people make up their own minds there.

Really, the issue with ridesharing services is the fact that they address the real and major problems with the existing taxi industry:
1) the drivers are anonymised and are not driven to provide meaningful service.
2) the drivers are incentivised to commit petty frauds to try to acquire a greater share of profit.

The anonymity of taxi drivers is a huge problem, because taxi drivers aren’t encouraged to offer good services to their customers and are often nepped/word-of-mouthed into the profession by other drivers, creating cliques that have demonstrably been racialised and exclusive — so much so that massive proportions of city taxi codes are devoted to denying drivers any right to refuse passengers.

The anonymity and fare structure also encourages petty frauds — taking longer to drive to the same destination by taking an alternative route (which taxi codes attempt to address by offering the passenger full veto authority over the route taken, though this doesn’t help tourists against predatory drivers), pretending the credit card machine is offline and demanding cash only (which taxi codes address as “well, free ride then!), etc.

Then of course there’s the sheer robbery — I almost used the word “barbarity” — of taxi licences, where the city can charge upward of 50 to 60% of the car’s total fares just for a single medallion, to say nothing of the fees and taxes they layer on top.

The ridesharing system solves many of these problems, but also creates new ones: the massive cash grab of the higher-ups versus the lower-downs, and the very real danger of having a driver with serious criminal intentions. That latter problem is partially solved by the feedback system, but certainly not solved entirely — taxi drivers certainly aren’t immune to crime themselves, but there is nowhere near parity.

Really, the ideal result is simply a world where rideshare is the operating model, taxi medallions are gone, and employees are given mandatory protections, benefits, and wages in addition to the digital model’s incentives and perquisites for higher performance and surges.

Reply

Leave a Reply:


Join the G-Cap mailing list and receive this e-book, free.

"Pictures of the Socialistic Future", by Eugen Richter. Written in 1891. Foreword by Mark E. Jeftovic.