On May 9, Uber's bluff was called in Austin and a new chapter began in the global economy. Uber and Lyft got into an argument with Austin's government over fingerprinting requirements. The two companies spent at least $8.6 million to push through a local ballot proposition to get their way. When Austin voters spurned them, Uber and Lyft suddenly halted their service, stranding riders and depriving drivers of expected income. (Drivers are suing.)
Perhaps Uber thought that Austin residents would capitulate at the specter of life without them, but if so, they thought wrong. "Don't Mess with Texas" prevailed. Austin residents and drivers organized a Facebook group that provides a crude but effective way for riders and drivers to find each other. The group now has 36,339 members and demand has surged.
The Austin Revolution is not an isolated event. It has tremendous potential to boost incomes in a range of occupations, and change the nature of work far beyond driving. This is so because businesses like Uber (and others like TaskRabbit) can't succeed without recruiting and retaining drivers (and in the case of TaskRabbit, people who do odd jobs). All these businesses are vulnerable in the early stages as they recruit a workforce from scratch, but they know that once they get a commanding share of the workers, they will have power over them: As a company reaches critical mass, the workers can't afford to leave the platform where the majority of potential customers are shopping. They are trapped.
Companies of this sort start out like pussycats but end up like tigers. They're pussycats at the outset in the way they offer generous terms and flexible policies, and purr like pussycats with lofty language of empowerment and autonomy. But once they have recruited a critical mass of workers, their terms get a lot less generous and their policies in some cases get pretty tough. Uber cut fares 20 percent in 2014 and another 15 percent in February of this year. Data just leaked shows that Uber drivers in three major cities now earn less than $13.25 an hour after expenses, hardly something to celebrate.
As a result, a lot of drivers are all too ready to switch to another platform. And the power of social media means that a whole city full of drivers and riders can now switch platforms in the virtual blink of an eye.
Christopher David is CEO of Arcade City, a company that's playing a pivotal role in helping Austin's drivers switch platforms. Arcade City has organized a person-to-person approach to ride sharing under which the drivers have more flexibility and control, and they give much less money to the company running the platform. David says that driver recruiting and retention is the "Achilles heel" of Uber's model. Under Uber "drivers are slaves," he says, but "they want to be entrepreneurs."
The economics of Arcade City couldn't be more different than Uber's. David believes that a properly designed ride-hailing system needs to take only 10 percent of the fee on each ride. In contrast, Uber takes 20-30 percent of the revenue, according to David and others. David is not the only one with this vision. Kirill Evdakov of Fasten, a Boston-based company with a similar model, needs just a 99 cent flat fee per ride. Clearly, under Fasten and Arcade City, drivers stand to earn a lot more (and/or customers will pay less).
All of this raises a fundamental question about the future of work: If driver participation is crucial, and drivers can't be locked in, then they have considerable latent power. Why should these ride-hailing platforms be owned by investors whose motivation is to get drivers to drive as cheaply as possibly? The technology is simply not that hard to build. Why shouldn't drivers self-organize and control their own platform? They can set up business structure like a Cooperative, ESOP or partnership. They can source an app from a company like Arcade City or Fasten. If approached this way, a group of workers can more-or-less own the app, instead of the app owning them.
But what's good for the driver and rider is bad for the companies seeking to dominate ride hailing, and bad for the investors who are betting on stratospheric "unicorn" valuations. Valuations of $50 billion and up only make sense if the company that built and runs the app can prevent drivers and riders from leaving, and then start taking a much bigger share of the pie. This strategy requires what economists call "high switching costs" – in other words, you have to make it extremely difficult for drivers and riders to switch to a competing, lower cost platform. But switching costs have fallen dramatically thanks to social media and the low cost to build and deploy an app and back-end software. The disruptor gets disrupted.
Uber is widely believed to be unprofitable right now even though they're apparently taking 20-30 percent of the fare in total. Whether they can shift their economics enough to make money, let alone justify their valuation depends on the switching costs they can impose. Uber's assumptions about switching costs are probably incorrect. Austin has called the question, and we're about to learn the answer.
David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report June 24, 2016.