X Close

When will Uber feel the techlash? Toothless regulators have propped up the platform long enough

The "Fearless Girl" statue, outside the New York Stock Exchange ahead of the Uber IPO. Credit: Johannes Eisele/AFP/Getty

The "Fearless Girl" statue, outside the New York Stock Exchange ahead of the Uber IPO. Credit: Johannes Eisele/AFP/Getty

June 2, 2019   7 mins

Uber offered its shares to public equity markets for the first time on 10 May – and the value of the company dropped by $20 billion within days.

Then, with impeccable timing, on Tuesday, 14 May, the National Labor Relations Board released a month-old letter finding that Uber drivers are not legally employed by the company and are therefore ineligible for federal protection for collective bargaining. The company’s fortunes turned on a dime, the share price was in free-fall no more, and as of this writing, its value is above where it began. Tens of billions of dollars hinged on that favourable regulatory decision.

Back in 2012, when Facebook’s IPO started badly, there was an epidemic of hand-wringing about the gullibility of financial markets in valuing big-name tech stocks. But the situation was easily remedied – $1 billion was all it took to shut down the competition from upstart Instagram and seal Facebook’s domination of worldwide social media, to the tune of over $50 billion a year of revenue.

Coming hot on the heels of global euphoria about the liberating power of social media in the Arab Spring, Facebook looked like that rarest of species, the company that does well by doing good. With the floatation the public was offered a piece of the action.

But the value in Facebook turned out not to come from global emancipation but from its opposite – global dominance of the social networking market. It is a service that claims to foster human connection and interaction, but for a price – and that price is one that users, and governments, are increasingly unwilling to pay. There seems to be a disconnect between Facebook’s value to investors and its value to society – they push and pull in different directions. Uber is in a similar place now.

Uber, like Facebook, experienced a long train of popular congratulation as the globally disruptive innovator shaking the dust out of urban taxi markets. It offered to revolutionise local transportation, and investors couldn’t wait to get involved. Uber raised $11.5 billion through nearly 20 funding rounds, ultimately valuing the company at $68 billion.

But a reckoning is coming. As indeed it is for Facebook.

The “techlash” is highlighting the degree to which tech’s business models consist of running roughshod over everyone else’s privacy, security, democracy, environment, and livelihoods, and cashing out in spectacular Wall Street fashion before the public truly understands what hit them and how much autonomy they’ve lost.

Uber is no different – though its model has its own peculiar quirks. The platform’s value depends on its ability to charge what it wants to riders, whilst paying as little as possible to its drivers. It classifies the drivers as independent contractors, so as to escape adhering to labour standards, avoid contributing to social insurance, and enabling it to offload the cost of capacity it doesn’t use. It relies on there being as many drivers logged on at peak times as possible – for customer convenience – without having to pay for their availability. The drivers bear the risk of a quiet night.

Uber, and other gig economy ‘platforms’ have been celebrated as creating venues for individual entrepreneurship, a new path for upward mobility. In the case of Uber this seems a stretch. The driver may differentiate the service offered by providing riders with bottles of water, ambient music, good conversation, or no conversation, according to tastes, but the most they can hope for is a higher rating, which does not automatically translate into more rides and revenue. Rather, high ratings are needed to maintain Uber’s strict minimum to stay on the platform. It’s more like the scores of Roman scribes, dutifully copying down set texts, being told that they are the authors of history – Uber drivers control very little of their individual “enterprises”.

Alex Rosenblat’s book Uberland details how Uber’s business model works: bonus-based driver compensation directs drivers to work where and when Uber needs them, whilst penalising them for time spent logged into any other ridesharing platform. The bonus-based pay schedule closes off any other opportunities they might have: if they log-off before they earn the bonus, then the whole shift will turn out not to have been worthwhile. Even with the bonus they just barely break even.

Uber has, for the most part, escaped regulatory intervention to force re-classification of drivers as its own employees, which would compel them to absorb some of the risks that drivers currently bear. Just recently, both the Department of Labor and the National Labor Relations Board issued opinions highly favourable to gig economy platforms, holding that such platforms don’t exercise sufficient control over drivers to qualify as their employers.

The NLRB’s general counsel stated: “The drivers had… complete control of their cars and work schedules, together with freedom to choose login locations and to work for competitors of Uber.”

As Rosenblat and other scholars’ work has shown, this statement is empirically false – the fact that Uber drivers can operate outside the bounds of what its compensation system incentivises is a dead letter if they can’t make a living by doing so. The UK Court of Appeals also found that the categorisation of drivers as independent contractors engages a “high degree of fiction”.

Meanwhile, the company has also challenged its drivers’ right to collective bargaining even outside federal protection. When Seattle tried to grant Uber workers that power, the city was sued by the Chamber of Commerce at Uber’s behest. It argued that such a union of independent contractors would violate the US antitrust laws.

The federal antitrust agencies weighed in on Uber’s side, and a federal appeals court agreed. As a result, the ordinance was amended to exclude collective bargaining over wages. But Uber continues to claim that the whole concept of driver collective bargaining on any matter violates the federal antitrust laws.

The irony seems lost on Uber that while it has used antitrust regulation against its drivers, it has managed to avoid any antitrust scrutiny on its own account, even as it fixes prices and wages for these supposedly independent businesses. A private class action against Uber on those grounds was set to go to trial in New York in 2016, but the company successfully sent the case to arbitration, where it hasn’t been heard from since.

No public enforcer has yet alleged that Uber’s non-employment of its drivers constitutes grounds for price-fixing antitrust liability. In fact, if anything, antitrust enforcers have viewed Uber’s business model as introducing much needed competition into urban taxi markets, and have encouraged local officials not to question it. So, between lax labour law and lax antitrust, Uber is able to operate a business model that depends on controlling drivers without being responsible to them as an employer.

In this way, Uber’s profitability hinges on continued regulatory forbearance, as the market response to the NLRB letter showed. Far from being an innovative company challenging comfortable monopolies hiding behind state power, Uber is itself dependent on government regulators for its continued success. The intricacies of labour law and antitrust law, developed in a time before the platform economy, continue to be debated. But at the heart of the controversy is the question of who should have the power to determine drivers’ working conditions – the government, through employment law, drivers themselves, through union participation, or – as now – Uber.

But even with the deferential treatment it receives from regulators, Uber is operating at an enormous loss and has no immediate way of reversing the hemorrhage. Given its cheap ride strategy, it doesn’t generate enough operating revenue to both pay drivers enough to stay on the platform in the long run and generate a return for shareholders. It is already trying to increase the prices its habitual customers are used to, but that has not yet come near to solving its basic cashflow problem.

The fact that it has enjoyed privileged access to investors and their wealth is also a big part of the company’s success at acquiring market share at the expense of legacy taxi companies. At least so far, these investors have viewed Uber’s aggressive pricing and the trampling of local regulations as likely to pay off in the long run, with a dominant market share and significant pricing power, or through the ability to phase drivers out entirely and move to full automation.

For most of the big-name tech IPOs, the companies aren’t looking primarily to raise cash. That’s because the public equity market has transformed from a source of capital with which to finance investment, expansion, and growth, into a means by which insider shareholders can diversify their risk: an IPO gives founders and early venture capital backers the big exit they have been waiting for, and a way to cash-in before the true costs of the business model catch up with them.

That dynamic is certainly at play in Uber’s case: should regulators go the other way on the employee/contractor categorisation – which the UK Supreme Court may well do if Uber loses its appeal – then it is useful to have already cleared a way out for investors. In the meantime, investors can take advantage of market optimism (and well-timed letters of support from the US regulators). Unusually, Uber also actually needs the money. In the real world, as opposed to in the purely digital realm, the runway to world dominance is a little rougher, though no less assured as long as investors are willing to strap down for the bumpy ride.

But even though it needs the money, Uber has not been willing to cede control, nor has it had to. The typical Silicon Valley IPO retains total control over operations among the insiders through a dual-class share structure: the insiders retain full voting power in their ‘old’ stock, and the ‘new’ stock they sell on the public markets comes with no voting rights. No matter how much of the company is ultimately made available to the public, no outside investors can ever challenge the founders’ control over their company. The company is still run in the interests of shareholders – and often at odds with the interests of society – but it is a sub-set of privileged, insider shareholders, whose interests are even less aligned with the average public-facing pension fund and institutional shareholder.

For as long as it remains in need of infusions of cash, Uber’s management and core group of founders may not be able to maintain the complete independence enjoyed by other tech behemoths such as Facebook, Amazon, and Google. Otherwise, it would need to raise fares, potentially curtail its geographic coverage, and lower its world-bestriding ambitions for autonomous vehicles. It probably has not yet tested the patience of late-coming partners such as Softbank and the Saudi Arabian Investment Authority, if only because these investors aren’t necessarily seeking the highest return, but rather American companies where they can stash their wealth. Others might not be so forgiving.

Uber’s long-term viability as a going concern will depend on whether the regulatory rope-a-dope it has played to date is permitted to continue. The recent backlash in the form of drivers’ strikes and policy-makers worried about the ability of gig economy platforms to exercise control while evading responsibility may also start to put pressure on the company. Perhaps they will finally constrict the legal grey area where it has been permitted to grow with a great deal of deference and little in the way of limits.

But in the meantime, the IPO has simply confirmed that the real Silicon Valley business model is the concentration of wealth and power at the top. And it reminds us there are few protections for those who rely on the permission of powerful gatekeepers to earn a living.

Marshall Steinbaum is Assistant Professor of Economics at the University of Utah, a labour economist by training whose research focuses on deviations from perfect competition in labour markets and the policy implications of employer monopsony power.


Join the discussion

Join like minded readers that support our journalism by becoming a paid subscriber

To join the discussion in the comments, become a paid subscriber.

Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.

Notify of

Inline Feedbacks
View all comments