What’s happening with Uber?

19th Jun, 2015

This week’s news about Uber and whether its drivers are contractors or employees is raising alarm bells about prospects for the “sharing economy”. Love or hate them, Uber and the rest of the sharing economy are changing the markets they touch from transport to accommodation – but is today’s news the beginning of the end for the sharing economy, or just the end of the beginning?

The Economist defines the sharing economy assharing sites that let individuals act as an ad hoc taxi service, car-hire firm or boutique hotel as and when it suits them. Just go online or download an app” Source: The Economist: The Rise of the Sharing Economy 2013

Growth expectations for the sharing economy are huge: PWC estimated in 2013 that the five main sharing economy sectors generated $15bn in global revenues… by 2025, they forecast that these same five sharing economy sectors could generate $335bn.

This is resulting in some monster valuations, including Airbnb at c$20bn and Uber at c$50bn. Less well-known names are also attracting large amounts of investment money: for example, TaskRabbit which offers “taskers” for odd jobs and has not yet made a profit, raised $40m of venture finance recently from US investors.

So back to today’s news – why are investors so concerned? Not surprisingly given the growth prospects “regulators, tax collectors and big companies have been sniffing around the model for a while” The Economist Technology Quarterly 2013 and the expectation has been that the initial, democratic, utopian model would be replaced by a more traditional capitalist ownership model. But today’s concern is more about the fundamental economics of the sharing economy business model.

Uber has always said that it is not in the transport business but is a logistic software company that brings together people with spare capacity in their cars with people who need a ride. A Californian Labor Commission thinks otherwise – in its ruling in March about one Uber driver it said

“The passengers pay Defendants [ie, Uber] a set price for the trip, and Uber, in turn, pay their drivers a non-negotiable service fee.…… By obtaining the clients in need of the service and providing the workers to conduct it, Uber retained all necessary control over the operation as a whole. The party seeking to avoid liability has the burden of proving that persons whose services he has retained are independent contractors rather than employees. In other words, there is a presumption of employment.”* 

This decision refers to just one individual and therefore sets no precedents but Uber has decided to appeal it. This means it will be looked at by the Californian Courts and of course, any decision there will have much bigger consequences – hence the concern in today’s news (or excitement depending which side of the fence you sit on).

So the critical question is do Uber and other sharing economy companies offer truly better experiences than their competitors in the traditional economy? Or are they simply succeeding because they’ve avoided regulation so far and therefore, have a lower cost base? If Uber drivers are employees, that opens Uber up to higher costs, including Social Security, workers’ compensation and unemployment insurance.

We believe that only the real game changers will be winners in the long term in the sharing economy. Those that are mere game shifters, will eventually be hit by regulation and will lose much of their appeal.

*(Labor Code 3357; Borello)