By Rene Paula, Operating Partner
[The media doesn’t seem to be covering this, so allow me to play journalist for a sec…]
If you’re tuned into the tech world, you have probably heard about the recent passage of AB5, the bill signed last month in California that will require gig economy apps to treat many contract workers as employees. Uber, Lyft, and others face a difficult choice: should they consider drivers full-time employees — which could mean setting schedules, providing benefits, and raising prices — or should they find a way to keep drivers as contractors?
AB5 comes a year after California’s so-called Dynamex decision, which ruled that companies that claim that a worker is not a formal employee must be able to prove that the worker can set her own prices and have control over the performance of her services; that her services are outside of the business’s normal workplace; and that she engages in an independently established role. If you’re having difficulty seeing how these apps could check even one of those boxes, Uber issued a statement saying that neither AB5 nor the Dynamex decision is relevant to Uber because providing rides is not Uber’s primary business. Instead, Uber argues, it exists to provide digital marketplaces for a variety of services. Along this track, Uber recently launched Uber Works, a platform that connects workers with businesses that need to fill available shifts. Many are skeptical that Uber Works can really differentiate itself and succeed in this already crowded field. And since Uber is spending heavily to lobby against the applicability of AB5, Uber’s sudden acceleration into the digital marketplaces space makes you wonder whether all of these initiatives are just to support its legal position.
It also makes you wonder whether Uber (and the industry) is looking at this all wrong.
As an original poster-child app for the gig economy, and certainly as shorthand for all ride-share companies, Uber has significant pricing power. You may recall from Economics 101 that the ability to profitably raise prices without reducing demand is what business dreams are made of. And Uber’s pricing power is destroying the traditional taxi industry, arguably shortchanging drivers, and certainly confusing everyone with its surge pricing model.
I would argue that Uber’s ability to set prices (and specifically surge prices) is infinitely more important to it long-term than its ability to classify drivers as independent contractors. Questionably though, while Uber cannot get away with both labelling drivers as independent contractors and also setting their prices, that is exactly what it will be arguing tomorrow on October 23 during an antitrust case that has gotten less attention but is just as critical to the company’s future. The case will explore the entire business model of controlling the prices hundreds of thousands of independent contractors are permitted to charge.
A regulatory regime that affects all players equally, such as drivers’ becoming employees, will be quickly adopted by the industry and accounted for in financial analysts’ models. Determining whether surge pricing will occur because drivers decided to stay home, a local event was more popular than anticipated, or simply because the black box algorithm wants to eke out more profit, however, is very difficult for any external stakeholder to figure out. It’s also what will ultimately drive Uber’s financial results.
As AB5 affects Uber, it will also affect Lyft, DoorDash, Postmates, and others in the space. Uber’s fight with a law that aims to protect the rights of its drivers wastes massive amounts of time and energy while running over its own foot because it weakens the company’s defense in the vertical conspiracy pricing antitrust case. If Uber loses its decade-long grip on pricing power, then what advantage will it actually have?
Uber needs to throw in the towel on AB5 and stop lobbying against it — Uber must accept that all drivers are employees. Doing so will allow Uber to argue the case for keeping its ability to set pricing, and, from an economic perspective, maintaining that control is infinitely more valuable in the long run. As Sun Tzu would say, “The greatest victory is that which requires no battle.”