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David Brodwin's blog

An Uber Problem

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.


Brick-and-Mortar Solution to Global Warming

Six months ago, the United States made strong commitments to address climate change at the U.N. climate conference in Paris. In another six months, our politics will decide whether we will honor those commitments or walk away from them.

If we stay the course, we will need to slash our carbon footprint without hurting our economy. Almost any action to cut carbon will make for good economics in the long run, since climate change will cost billions if allowed to continue.

But what approach to carbon reduction has the best economics in the short term? Probably the best solution is simply to make buildings more efficient, so they use less energy to heat and cool them and keep the lights on. A report just released by U.S. Green Building Council and American Sustainable Business Council (disclosure: I'm a co-founder) probed the economics of green buildings and their value in stopping climate change.

Buildings really matter. Buildings account for more greenhouse gas emissions than any other part of our economy – more than industry and more than transportation. Buildings produce carbon dioxide mostly because of the energy needed to heat them in the winter and cool them in the summer. (Lighting is a much smaller factor.) In addition, it takes a lot of energy to put up a building in the first place, mostly to make concrete, brick, steel and other construction material.

Chart on green building

Anything that can reduce the power consumption of buildings really helps protect the climate. A lot can be done to reduce power needs through more efficient heating and cooling systems, better insulation and taking advantage of natural light and natural heating and cooling. The most resource-efficient and healthy buildings earn official recognition in the form of LEED, which stands for "Leadership in Energy and Environmental Design," and EPA's Energy Star. The LEED standard, created by the U.S. Green Building Council, now covers more than 14.4 billion square feet of space worldwide.

Building improvements are probably the largest single opportunity for carbon reduction in our entire economy. A typical LEED-certified building uses about 25 percent less energy and belches out 25 percent less carbon dioxide than a comparable non-LEED building. With many LEED buildings in operation and under construction, the savings add up fast. According to the American Sustainable Business Council's analysis, if all new and retrofitted buildings were LEED-compliant, by 2025, we'd keep nearly 150 million metrics tons of carbon out of air. This reduction is nearly 7 percent of what the U.S. has pledged at the Paris talks. By 2050, LEED-related savings could cover nearly 10 percent of the entire U.S. commitment.

In addition to being perhaps the largest source of carbon reduction, building efficiency may also be the most cost-effective. Efficient buildings save money, primarily from needing less energy and maintenance.

Chart on LEED building
Recently, the Center for Real Estate at the Massachusetts Institute of Technology released a thorough study of the cost of LEED construction versus conventional construction. Researchers found that green buildings really don't cost more to build than conventional buildings. (They do take more time and cost more to design because they more complicated, but design costs are on average just three percent of total costs, so the difference amounts to is a rounding error.)

MIT's work is consistent with an extensive earlier study by the consultancy McKinsey & Company, which found that the economic benefits of reduced energy usage are much greater than the cost of making those buildings more energy-efficient. For example, looking just at local government buildings, McKinsey estimates it would cost $19 billion to upgrade them all, but the savings would be worth $36 billion – nearly twice as much.

Since energy-efficient buildings provide big savings in energy, and impose negligible extra cost to build, they are attractive to developers and property owners. As a sweetener, LEED certification brings cachet, and LEED buildings generally support higher rents than others. So it's no surprise that 13 percent of the total commercial office stock is now certified by LEED or Energy Star. In addition, many government entities at all levels are supporting these certifications. More than 30 states and many major cities have policies mandating or incenting LEED in government buildings.

Economists remind us that there's no such thing as a free lunch, but in this case they're

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 9, 2016.