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Will Uber Go Under?

Monday, August 08, 2016 By Dean Baker, Truthout | Op-Ed
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An Uber driver behind the wheel in Munich, Dec. 22, 2015. (Laetitia Vancon / The New York Times) An Uber driver behind the wheel in Munich, December 22, 2015. (Laetitia Vancon / The New York Times)

Uber, the huge taxi service, is undoubtedly still reeling from its defeat in China. After investing $2 billion to get a foothold in the Chinese market, Uber sold out to its competitor, Didi Chuxing, and agreed to be a junior partner in China.

While this is a dramatic story that made headlines across the country, a less covered story could have a far more impact on Uber's future. This is the story of Uber's departure from Austin, Texas.

Uber, along with Lyft, stopped operating in Austin in early May after the city's voters endorsed a requirement that drivers for these services had to be fingerprinted and undergo background checks. The companies complained that the requirement placed an onerous burden on them and instead said that they would just stop operating in the city.

As a practical matter, the real issue almost certainly was not the difficulty of fingerprinting. After all, taxi companies across the country have complied with similar requirements for decades and it is unlikely that the management of these old-styled cab companies are much more competent than Uber's management.

Rather, the issue was likely that Uber is worried about its drivers being labeled as employees. Uber claims that its drivers are independent contractors, not employees. As independent contractors, Uber is not responsible for paying Social Security taxes, nor is it liable for workers' compensation for drivers who get hurt in traffic accidents. It also doesn't have to withhold income taxes. And, independent contractors don't have the right to unionize.

Uber has been involved in several lawsuits over the classification of drivers as independent contractors. It is worried that background checks and fingerprinting will be factors that could tip the balance from independent contractor to employee. Therefore Uber decided it was best just to leave Austin.

The immediate impact of Uber's departure was to take away jobs from thousands of drivers. It also left Austin without a transportation service that many residents had come to depend upon. However this situation did not last long. Within a month six new services were filling the void, apparently they have the ability to fingerprint drivers.

This raises the issue of whether Uber will really be able to monopolize the taxi industry, or at least capture a very large share. The experience in Austin indicates that it may be very difficult to maintain a monopoly or near monopoly in the taxi industry. What Uber seems to be counting on is a mix of regulatory uncertainty and political power to give it an advantage over competitors. (It hired on David Plouffe, President Obama's top political strategist, as an adviser.)

The belief that Uber will be able to obtain a near monopoly explains its $66 billion market capitalization. Such a price would not make sense for even a very large actor in the traditional taxi industry.

While Uber's political connections probably protect it from any anti-trust actions coming out of the Obama administration, Austin's experience suggests a very simple way to rein in the company. Other cities could impose the same reasonable requirement as Austin; they could require that Uber and other taxi companies do background checks and fingerprint their drivers. If Uber follows the Austin precedent, then it may have to shut down in many other cities in the not too distant future. This would open up these markets to new competition, just as was the case in Austin.

This will likely be a very good economic development strategy for cities that go this route. Uber has been willing to lower fares to drive out competition, even if this has meant losing money. However the end goal has been to secure a monopoly or near monopoly in the market, which clearly is the basis of its enormous market value. No one pays a huge price for stock in a company that they expect to keep losing money.

By driving Uber out of the market, cities can help to keep their taxi industry competitive. They are also likely to be opening up opportunities for locally-based taxi services. This will mean that instead of sending profits out to the billionaires of Silicon Valley, they are more likely to be generating income for local entrepreneurs. And, they are more likely to have taxi companies that will seek to work with regulators rather than fighting and/or ignoring them.

Who knows, if this trend catches on it may deflate Uber's market cap, helping to rebuild the middle class in the Bay area. And if a deflated Uber brings the stock price of some other high-flying tech companies down to earth, it could even help the cause of affordable housing in San Francisco. This is clearly a win-win all around.

Copyright, Truthout. May not be reprinted without permission.

Dean Baker

Dean Baker is a macroeconomist and codirector of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is a regular Truthout columnist and a member of Truthout's Board of Advisers.

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Will Uber Go Under?

Monday, August 08, 2016 By Dean Baker, Truthout | Op-Ed
  • font size decrease font size decrease font size increase font size increase font size
  • Print

An Uber driver behind the wheel in Munich, Dec. 22, 2015. (Laetitia Vancon / The New York Times) An Uber driver behind the wheel in Munich, December 22, 2015. (Laetitia Vancon / The New York Times)

Uber, the huge taxi service, is undoubtedly still reeling from its defeat in China. After investing $2 billion to get a foothold in the Chinese market, Uber sold out to its competitor, Didi Chuxing, and agreed to be a junior partner in China.

While this is a dramatic story that made headlines across the country, a less covered story could have a far more impact on Uber's future. This is the story of Uber's departure from Austin, Texas.

Uber, along with Lyft, stopped operating in Austin in early May after the city's voters endorsed a requirement that drivers for these services had to be fingerprinted and undergo background checks. The companies complained that the requirement placed an onerous burden on them and instead said that they would just stop operating in the city.

As a practical matter, the real issue almost certainly was not the difficulty of fingerprinting. After all, taxi companies across the country have complied with similar requirements for decades and it is unlikely that the management of these old-styled cab companies are much more competent than Uber's management.

Rather, the issue was likely that Uber is worried about its drivers being labeled as employees. Uber claims that its drivers are independent contractors, not employees. As independent contractors, Uber is not responsible for paying Social Security taxes, nor is it liable for workers' compensation for drivers who get hurt in traffic accidents. It also doesn't have to withhold income taxes. And, independent contractors don't have the right to unionize.

Uber has been involved in several lawsuits over the classification of drivers as independent contractors. It is worried that background checks and fingerprinting will be factors that could tip the balance from independent contractor to employee. Therefore Uber decided it was best just to leave Austin.

The immediate impact of Uber's departure was to take away jobs from thousands of drivers. It also left Austin without a transportation service that many residents had come to depend upon. However this situation did not last long. Within a month six new services were filling the void, apparently they have the ability to fingerprint drivers.

This raises the issue of whether Uber will really be able to monopolize the taxi industry, or at least capture a very large share. The experience in Austin indicates that it may be very difficult to maintain a monopoly or near monopoly in the taxi industry. What Uber seems to be counting on is a mix of regulatory uncertainty and political power to give it an advantage over competitors. (It hired on David Plouffe, President Obama's top political strategist, as an adviser.)

The belief that Uber will be able to obtain a near monopoly explains its $66 billion market capitalization. Such a price would not make sense for even a very large actor in the traditional taxi industry.

While Uber's political connections probably protect it from any anti-trust actions coming out of the Obama administration, Austin's experience suggests a very simple way to rein in the company. Other cities could impose the same reasonable requirement as Austin; they could require that Uber and other taxi companies do background checks and fingerprint their drivers. If Uber follows the Austin precedent, then it may have to shut down in many other cities in the not too distant future. This would open up these markets to new competition, just as was the case in Austin.

This will likely be a very good economic development strategy for cities that go this route. Uber has been willing to lower fares to drive out competition, even if this has meant losing money. However the end goal has been to secure a monopoly or near monopoly in the market, which clearly is the basis of its enormous market value. No one pays a huge price for stock in a company that they expect to keep losing money.

By driving Uber out of the market, cities can help to keep their taxi industry competitive. They are also likely to be opening up opportunities for locally-based taxi services. This will mean that instead of sending profits out to the billionaires of Silicon Valley, they are more likely to be generating income for local entrepreneurs. And, they are more likely to have taxi companies that will seek to work with regulators rather than fighting and/or ignoring them.

Who knows, if this trend catches on it may deflate Uber's market cap, helping to rebuild the middle class in the Bay area. And if a deflated Uber brings the stock price of some other high-flying tech companies down to earth, it could even help the cause of affordable housing in San Francisco. This is clearly a win-win all around.

Copyright, Truthout. May not be reprinted without permission.

Dean Baker

Dean Baker is a macroeconomist and codirector of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is a regular Truthout columnist and a member of Truthout's Board of Advisers.