Lifts and Shifts (aka: Ride Hailing and the Gig Economy)

The old joke used to be: “What’s worse than it raining cats and dogs?” “Hailing taxis!” The joke’s going to get robbed of its punchline when the next generation goes: “What’s a taxi?” But that’s getting ahead of the story.

Talking about robbery and being taken for a ride, let’s get to some recent news about Uber and Lyft. (I'm kidding of course, but as you will see below that’s just a matter of perspective.)  

Uber and Lyft made headlines recently on two fronts not related to their IPOs. 

(Lyft went public in March and Uber went public last week (Friday, May 10th, 2019). Lyft’s stock is down by almost 30% since the IPO, and one can envision Uber will follow the same course, since it ended its IPO day down almost 8%.)

The first article, a report from NPR, with the following headline—"Uber And Lyft Drivers Are Striking — And Call On Passengers To Boycott”—is about how "drivers in 10 cities across the country took action Wednesday to draw attention to what they say are decreasing wages for drivers and a distressing lack of job security — and some are calling on passengers to temporarily boycott the ride-hailing services, too."

Decreasing wages and distressing lack of job security! And this without adding in self-driving cars. The Feds (the US Department of Labor) ruled that gig economy workers are contractors and cannot be classified as employees. 

The second article, also reported by NPR, with the following headline—"Uber And Lyft Caused Major Traffic Uptick In San Francisco, Study Says”—is about a major study conducted by the University of Kentucky and the San Francisco County Transportation Authority seeking to answer the following question: "Do ride-hailing companies like Uber and Lyft make a city's traffic worse or better?” The study finds that the amount of time it takes to get to a place during congestion went up by 60% between 2010 and 2016 because of ride hailing, which is three times the normal or expected increase. These findings of course run contrary to the views presented by the ride hailing companies themselves that they reduce congestion, car ownership, etc. The problem goes deeper as the article points out: two thirds of ride hailing cars are new and would not have been there otherwise; ride hailing is displacing public transit options; and the congestion is most pronounced in the already congested areas at the peak congestion times (i.e. the where and when congestion happens, according to the study).

Let’s look at the first part: wages and job security in a gig economy

Ride hailing was built on a simple but powerful premise (and we are now feeling the effects of that): drivers using their personal vehicles and on their personal time would offer services, mostly as gigs, to passengers in what was typically the province of taxis and limos, mediated by an online platform. (People familiar with Uber’s history will know its origins from founder Garrett Camp—joined by Travis Kalanick—trying out ideas for cheaper alternatives to traditional taxi or limo services in the San Francisco Bay Area and launching this service. So it’s only been 10 years from concept to launching one of the largest IPOs—approx. $80 billion—in the stock market.) A market held captive by taxi and limo operators was unlocked to the gig worker. And the convenience of using the phone for search and transactions took care of major sources of friction. 

The Feds treat this as a virtual marketplace connecting consumers and providers. As the article referenced above explains, the Department of Labor looked at the following key dimensions: the degree of control the employer has over the workers and the permanence of the relationships. Also at workers skills needed (nothing specific), the workers' potential for profit and loss (they control their own) and—what is likely to prove to be a pivotal question—'how "integrated" into the business the workers’ services are' (the platform is simply a referral service enabling them to connect with consumers).  

In essence, looking along these dimensions, the very nature of the gig economy strips away the typical protections accorded to labor. If it’s a gig, you’re on your own.

The inference we can make from the above protests is that the gig economy is now acting as a partial substitute for the traditional taxi/limo workforce but without the attendant benefits. The taxi and limo operators displaced by ride hailing knew this was coming.

The nature of the ride hailing model is such that the more the driver participation the more attractive the service for the consumer (with instant matching and quick arrival). But free entry makes it hyper-competitive and rapidly drives down personal profits. In fact, every move to provide a cheaper alternative (e.g. pooling) drives the take down even further. The taxi industry was organized the way it was to counter this phenomenon—medallions, tests, etc., prevented free entry; the drivers were accorded labor protections, as the workforce of taxi companies; and as a labor group they were able to organized/unionize. The personal franchise nature of the gig worker with rapidly shrinking territory of undifferentiated operations shows the fundamental challenges of the gig economy. 

Let's look at the second part: the major traffic uptick caused by ride hailing. 

Having previously spent many years in urban infrastructure renewal (in the Boston Area), and now witnessing the infrastructure struggles of metropolitan areas nationwide, it’s clear (like the Malthusian principle) that exponential urban growth is far outstripping the arithmetic abilities of cities and states to add to capacity. The myopic view toward infrastructure renewal and public transit has made conditions chronic and the problem acute. The resignation with which urban/suburban dwellers now accept hour long commutes and congestion is simply unacceptable. It’s been clear now for many decades that the leadership that the US once demonstrated in building an unparalleled road and highway infrastructure is truly lacking now, and urban planners lack the tools to anticipate such trends and provide real options. Many see the impact of technology driven forces only too late. The fact that this study looked at the impact of ride hailing is significant, from the urban development context. 

Understanding technology trends is becoming a vital part of urban planning—for example, jobs, workplace, real estate, transit, services, infrastructure, etc—but it seems to be an afterthought at least in traditional curricula. A simple example should illustrate this point: Waze-directed traffic from the choked highways now flows through city streets, leaving city planners in many towns scrambling to put in place active measures to calm traffic and bring it down to manageable levels. By giving everybody the same information, the clogged highway just moved itself to the city streets, bringing dangers they were not prepared for. This is not a very smart application of technology. Like the efficient markets hypothesis, efficient information flow eliminates the opportunity for arbitrage. 

The study’s insights about ride hailing—significantly more congestion, more cars on the streets, reduced use of public transit, the extra burden to the existing congestion load and times — reflect the expansion of substitution that was seen for taxis. That is, the same service is now seeing expanded usage that frictions and availability in the other modes (like taxis, limo services and public transit) kept low. Meaning if lack of transit options prevented you from doing things, with ride hailing that is not a constraint any more.

To sum up Lifts and Shifts:

• The ride hailing business model is now under pressure: From loosely organized beginnings, the ride hailing revolution is now faced with the reality of maturity on all fronts. (a) Regulatory scrutiny typically lags behind technological advances but its arrival is inevitable and it could take many forms like bans, restrictions, protections, etc. (some of which we've already seen). (b) Having to pay for stuff that these companies took considered free, like the driver and the car, when this all started. The wage disputes and labor protections sought by drivers are a sign that costs are only likely to grow. Self driving cars will require significant investments to match the scale and reach of the current model where the driver and the vehicle come free in a simple referral model. (c) With the IPOs, these companies are now subject to the scrutiny of public markets, and the freewheeling times may be over.
• The directive for urban policy making is clear: Bruce Schaller, a transportation expert and former NYC deputy commissioner for traffic and planning, warns in the article: "without public policy intervention, big American cities are likely to be overwhelmed with more automobility, more traffic and less transit — and drained of density and diversity, which are indispensable to their economic and social well-being." This is a siren call, and all cities have to craft policies to ensure that the quality of life does not rapidly erode.
• Can venture capital address the really big problems of society? Matt Rosoff at CNBC Tech offers the opinion that "The Uber IPO caps an era of mediocrity and small thinking in Silicon Valley". He makes the following points: (a) these highly funded startups solve the problems of the wealthy young in cities, e.g. "how do I get around without a car"; (b) delaying maturity (with infusion of capital), which means there seems to be no pressure even for a decade to prove a sustainable business model; (c) exhibiting a profound lack of diversity that creates the inevitable problems (e.g. Travis Kalanick was ousted as Uber's CEO); (d) the attitude of "ask forgiveness rather than permission" that brushes problems under the rug; and (e) visible income inequality. His article ends with this view: "Silicon Valley has been the most innovative place in U.S. industry for the better part of 70 years. That innovation can serve the broader needs of society, rather than existing in an isolated bubble apart from them. But only if the people participating in the industry want it to go that way."

Look forward to your comments.

―Suresh