Uber has had a rough few months in which regulatory and market challenges have mounted, resulting in rising concerns about the company’s ability to operate its business. Uber’s high-profile challenges are indicative of larger headwinds facing the gig economy, especially in ride-hailing and delivery. These headwinds include questions as to whether their business models can ever be profitable. As the bullishness of 5 years ago around the gig economy subsides, players are moving to be on the right side of how the industry shakes out.
Gig-economy firms are under the gun to achieve profitability in the face of rising regulation. Even if they win some of their key legal challenges, it’s unlikely they will be able to continue business as usual.
Jump to What It Means
Uber’s recent challenges
- In Oct 2019, Uber revealed that it may be facing a sizable tax bill in the UK, as the HM Revenue & Customs regulator seeks to classify it as a “transportation provider.” It would mean that Uber would owe 20% in value-added tax on every booking, both “retroactively and prospectively” – meaning it could owe as much as £1.1B in arrears.
- In Nov 2019, New Jersey’s Department of Labor slapped Uber with $642M in past-due employment taxes, interest and penalties due to alleged misclassification of drivers as contractors (rather than employees). Uber is contesting the determination of its drivers as employees. However, if it stands, Uber’s cost per driver could increase by over 20%.
- Later in Nov 2019, Uber again lost its license to operate in London, one of its top 5 markets. Transport for London (TfL) regulators found that at least 43 unauthorized drivers – including some uninsured and unlicensed – had colluded to pick up riders across 14,000 trips by uploading their photos to other drivers’ Uber accounts. TfL also found that dismissed or suspended Uber drivers were able to create new accounts and carry passengers again. Uber can continue to operate through the appeal process and is undertaking measures to prevent fraud, such as an audit of all its London drivers and instituting a real-time facial-matching process.
- Nov 2019 also saw questions being raised by Grubhub’s CEO as to whether its food-delivery rivals such as Uber Eats were charging the appropriate sales taxes. A WSJ report highlighted inconsistencies in how customers were being charged taxes (though some of the variance could be due to differences in operating model and contract terms between delivery service and restaurant). In at least one case in Pennsylvania, Uber admitted to a glitch that was being fixed. Uber Eats could face tax liability for past collections, in addition to having to make corrections going forward.
- In early Dec 2019, Uber disclosed in its first-ever Safety Report that nearly 6,000 sexual assaults on riders and drivers were reported in 2017 and 2018. While just 0.0003% of Uber trips during this time period reported a “critical safety incident” (defined as a sexual assault, fatal motor-vehicle crash, or fatal physical assault), the media blowback has been substantial.
- In mid-Dec 2019, a German court barred Uber from sending ride-hailing requests to licensed private-hire firms. It effectively bans Uber’s current operating model in Germany, which emerged after Uber’s crowd model was essentially outlawed there in 2017.
- Soon after in Dec 2019, a Colombian judge ordered Uber to suspend service in response to a lawsuit, saying that it violated competition norms. Uber is appealing the ruling and will continue to operate in the meantime.
- On Jan 1, 2020, California’s Assembly Bill 5 (AB-5) took effect, codifying the more stringent “ABC test” (see below) determining whether a worker is a contractor. Uber, along with Lyft, DoorDash, Instacart and Postmates, plan to spend $110M on a ballot initiative in Nov 2020 to exempt on-demand firms from AB-5. Uber and Postmates have also sued the state of California to block AB-5, saying the “arbitrary” exemptions violate equal protection and are unconstitutional. In the meantime, Uber plans to operate its business as usual under the presumption that its drivers meet the ABC test.
Regulatory hurdles for the gig economy
While freelancing or contract work existed before, consumer-facing digital marketplace platforms have changed the scale and politics. The gig economy has grown dramatically by offering consumers access to convenient on-demand services, while offering gig workers income and a measure of flexibility. As gig players have grown in prominence, they have drawn public criticism and regulatory scrutiny for their business and operating models that have disrupted norms around competition and employment.
In particular, regulators globally are throwing into question the validity of contractor classification, a key pillar of the gig-economy operating model. Gig players have positioned themselves as neutral providers of technology platforms and services, serving both sides of the market as intermediaries and market-makers rather than providers of goods and services. For instance, Uber argues that it is a digital platform rather than a transportation company, and includes its drivers among its “customers” in SEC filings.
These arguments have so far convinced the US federal Labor Department and the National Labor Relations Board, as well as some states such as Vermont. According to critics, however, gig players are using their platform-intermediary role as a shield against the regulatory burden borne by traditional employers (e.g. minimum wage, workers’ compensation, unemployment insurance, sick days), while retaining much of the control typical in an employment relationship.
While regulatory challenges run the gamut from taxes to safety to infrastructure impact to competitive norms, the most prominent issue is the classification of workers as contractors rather than employees.
- California’s AB-5 regulation, which was passed in Sep 2019 and went into effect Jan 1 2020, redefines and broadens the standard by which workers are considered employees of an organization and entitled to associated benefits. Under the ABC test, any California worker is considered an employee unless a business can show that the worker:
- A.Performs the work free from control/direction by the hiring entity
- B.Does work outside the hiring entity’s usual course of business
- C.Engages in an independently established trade, occupation or business in the same line of work
- While about 14% of California’s workers earn income from non-employee work, AB-5 allows 7 broad categories of exemptions. These exemptions cover many occupations and activities, such as doctors, lawyers, insurance agents, architects, accountants, salespeople, real-estate agents, and contracted professional services. Generally, exempted professions are characterized by their ability to negotiate and set rates directly with customers, earning at least twice the minimum wage.
- Ride-hailing and other platforms are generally not exempted in the current statute, though Uber, Lyft and Postmates do not plan to reclassify their drivers until they are forced to in court. If they lose in court and their lawsuit and ballot initiative also fail, they may be required to provide employment benefits at a cost of $3,625 per driver (Barclays estimates). With Lyft with 325,000 drivers and Uber with 200,000+ drivers in California, annual operating losses for just Uber and Lyft could collectively increase by nearly $2B based on AB-5. Uber itself has estimated that costs could increase by 20% if its drivers were reclassified globally. The question also remains open as to whether the law can be applied retroactively, which is a case set to be heard in the California Supreme Court.
- AB-5 will have ramifications beyond ride-hailing firms and newer gig-economy players. Lawsuits have been brought by the trucking industry (likely to go up to the California Supreme Court) and two organizations representing freelance journalists and photographers. Vox Media announced it was cutting 200+ freelance roles in California, replacing them with about 20 employee positions. Contract-writer platform Scripted also suspended the accounts of California-based writers. In some cases, out-of-state companies are opting not to hire California-based workers, with online want ads sprouting up that instruct Californians not to apply. Other occupations such as therapists, dog walkers and musicians have been left in a state of uncertainty.
While California’s AB-5 is particularly broad and strict, more than half of the US states use some form of the ABC test to determine whether a worker is an independent contractor. How the test is applied, however, varies by state. The purposes for which the ABC test is used might be different – e.g. for workers’ comp, unemployment insurance, wage-and-hour entitlements, tax withholding. The strictness of its application can vary as well – for instance, early-adopter state Massachusetts uses a less-strict version that allows any work that takes place off-premises to pass part B of the test.
- An active push is underway in New York to follow California with legislation similar to AB-5. New York City already has minimum-wage guarantees for drivers of $17.22 per hour after expenses, as of Feb 2019, in addition to capping the number of for-hire vehicles. New York drivers (currently classified as independent contractors) are part of the state-created nonprofit Black Car Fund, which is their legal employer paying out worker’s compensation from a 2.5% surcharge on all rides.
- New Jersey is also considering similar legislation to codify a 2015 state supreme court decision that would classify more ride-hailing drivers as employees. Its assessment of $642M in back taxes against Uber (see above) is based on the 2015 court ruling adopting the ABC test, which is effectively already law.
- In Seattle, legislators signed a bill in Nov 2019 establishing a minimum wage for Uber and Lyft drivers and instituting an incremental 51-cent per ride “Fare Share” fee to pay for city programs.
A more stringent ABC test means that more workers will now be subject to minimum-wage laws. Increases are set to take effect this year in 24 states, plus DC, in some cases designed with gig workers in mind. Some cities have their own higher minimum-wage guarantees for ride-hailing drivers, like New York City, Seattle and El Monte, California. Los Angeles is also undertaking a study that is considering a minimum wage for drivers. Uber itself offered a $21/hour minimum wage during its fight against AB-5, though only for ride time (which comprises around 54-62% of miles driven). Overtime salary thresholds are also set to increase in some states, further complicating matters for gig players who might have drivers working longer hours.
One response to the gig economy has been legislated mechanisms that allow workers to take their benefits with them – i.e. “portable benefits.” Philadelphia recently passed a “bill of rights” for domestic workers that includes a portable benefits provision. Like the New York Black Car Fund, employers would pay 2.5% into a fund. Washington has a similar bill being considered in 2020 that would apply portable benefits to gig workers.
Congestion taxes are on the rise. While ride-hailing companies support congestion pricing applied broadly to vehicles (since it would likely encourage ride-sharing), some cities such as San Francisco, Chicago and Boston are targeting Uber and Lyft specifically with per-trip fees. Other major markets may follow suit. Some markets like Milwaukee are considering per-order fees on food delivery services to cover infrastructure costs.
- In the UK, ride-hailing firms have faced regulatory scrutiny, with Uber most recently losing its license in London for the second time (see above). Uber is appealing to the UK Supreme Court a 2018 ruling that would give drivers employment status, with entitlements such as minimum wage and paid vacations. The ruling has broader implications for taxation. If Uber loses the appeal, ends up on the wrong side of this ambiguity and is labeled a “transportation provider” (direct supplier) rather than a marketplace, it could result in as much as £1.1B in VAT tax arrears and 20% VAT on future bookings.
- Other markets have also created conditions challenging for ride-hailing firms, in some cases specifically targeting Uber, such as in Germany, Colombia, Hungary and Bulgaria. Turkey instituted new transport licensing requirements, Australia’s Northern Territory instituted a $300 license fee per car, and Denmark required mandatory fare meters and seat sensors (similar to taxis). Uber’s typical model in the US, with unlicensed private cars – called UberX or UberPop – has been challenged and struck down as illegal in many parts of the world, especially Europe.
- Arbitration clauses are under fire globally. Canada’s Supreme Court is deciding a case that will determine whether Uber arbitration clauses, which require driver disputes to be mediated under Dutch law (costing $14,500), are valid. In the US, a federal appeals court threw out an order enforcing Uber’s arbitration clause in Sep 2019. A Philadelphia court also just determined in a passenger injury suit that Uber can’t force arbitration because it failed to ensure the passenger read the terms and conditions. Legislation like AB-5 also gives drivers room to claim their case is in the public interest and escape arbitration clauses. Arbitration clauses have previously served as one barrier making it harder for plaintiffs to bring their cases.
Profitability struggles and cooling investment
The opportunity in the gig economy might seem self-evident. In the US alone, it has attracted 57M+ participants across nearly every industry – representing 35% of the American workforce. Mastercard projects that the global gig economy is about $250B (more than half of which is ride-hailing or other transportation).
Profitability has remained out of reach, however, for most of the large gig players. While Uber and Lyft are still growing by 30-60% year over year, they have racked up billions in losses as they have grown. Markets globally have become more competitive, with consumers demonstrating limited loyalty and switching between service providers to find the fastest, cheapest service. In addition to promotions, Uber and Lyft have also had to invest in driver and rider loyalty programs with tiers and incentives. Over the last 4 reporting quarters, Uber saw $13B in revenue and $8B in losses. Even without the $3.9B one-time charge for stock-based compensation from its IPO, Uber is still seeing sizable losses every quarter.
Both Uber and Lyft have committed to becoming profitable by 2021 – a fast-approaching timeline. According to Uber, its core ride-hailing business might be considered already profitable if non-operating expenses such as interest, depreciation and stock-based compensation were excluded. It’s not a high-margin business, however, with sizable expenses such as sales and marketing and insurance. Investments in diversifying its business – e.g. Uber Eats, Uber Freight, Uber Works, Uber Money, Uber Advanced Technologies Group (autonomous vehicles), Uber Elevate – are also still incurring losses. New regulation will likely involve costs as well, though according to CEO Dara Khosrowshahi, the impact of California’s AB-5 is to some extent already factored in to Uber’s target of profitability by 2021.
Among gig workers, high turnover has always been a challenge but the tight labor market of 2019 saw more gig workers shopping around their services to find the best wages and working conditions. One industry watcher speculated that turnover might have reached as high as 500% – meaning that to staff 10 roles, a gig player might go through 50 workers in a year. In response, Uber and Lyft are collectively spending billions in driver bonuses and incentives, expanding driver rewards programs like Uber Pro/Uber Plus and Lyft Rewards for Drivers.
Investor interest is cooling as well with global investment in gig-economy startups down 22% globally in 2019 from the prior year, despite hotspots in Asia. Share prices are falling and capital is tightening for more established players, while smaller players are struggling to stay in business:
- Lyft’s share price has been on a slide since its IPO in Mar 2019, and has been called “one of the worst-performing IPOs of the year.” It is halting scooter operations in 6 cities, pulling away from smaller markets and undertaking targeted layoffs. It is facing its share of lawsuits and other legal challenges.
- Even Uber, with $12.7B in cash and equivalents in Q3 2019, has weaknesses in its balance sheet – $5.7B in debt and higher interest rates at 6.1-8.1%. It has notably been going through multiple rounds of layoffs in response to pressure to reduce losses. Even with Uber Eats, one of its priority non-ride-hailing businesses, it plans to cut back by leaving markets where it cannot be the #1 or #2 player. Last month, it announced it will sell its Indian Uber Eats business to Zomato for $400M, taking a sizable stake.
- Smaller NYC-based rideshare company Juno, which was valued at $1.4B in 2018, recently filed for bankruptcy. It attributed the bankruptcy to new minimum-wage laws in New York as well as legal fees defending itself from lawsuits from riders, competitors and drivers.
- Rumors are swirling that Grubhub, whose share price has been sliding since late 2018, is reportedly considering a sale. While there has reportedly yet to be a bidder, Walmart and other grocers have considered the option. Grubhub has struggled to grow as competition has eaten away at its market share, which declined from 70% in 2017 to 30%.
- Instacart’s plans for an IPO in early 2019 appear to be derailed by the reputational damage stemming from worker protests related to compensation (e.g. default tip percentage, tips that were previously applied to minimum base pay). A handful of workers are asking the US Dept of Labor to investigate.
- According to the WSJ, food-delivery market leader DoorDash has likely seen its valuation shrink since its round in May 2019. It is also facing a lawsuit from the DC attorney general based on accusations that it applied tips to minimum pay (similar to Instacart). DoorDash is reportedly considering a direct listing in lieu of an IPO, premised on its ability to arrange financing through other means based on its market-share growth.
What It Means
Our current environment around ride-hailing and delivery firms can, to some extent, be attributed to path dependence. Specifically, we can connect the dots back from where we are to the early decisions made by Uber, the first of its generation. Uber was more than the first modern ride-hailing app – over the past 11 years, it blazed a metaphorical trail in asking regulators for forgiveness rather than permission, slashing prices to undercut competitors, and burning through capital in pursuit of accelerated growth. As a slew of rivals have followed in Uber’s wake, the outcome is a vastly unprofitable industry fending off regulators, facing protests by its own workers – and not especially popular with the customers it serves.
It didn’t have to happen this way. There might have – at one point – been a workable solution space that involved real collaboration with regulators, better pay and provision for gig workers, greater responsiveness to stakeholders’ concerns, and more governance and controls. If we go back into our memory banks from, say, 2011-2012, the original promise of Uber was convenience and safety – not low pricing. However, it would have meant slower growth, more expensive rides, fewer customers, perhaps fewer drivers, and critically for Uber, a chance that rivals might have caught up.
The environment in which we find ourselves now is low on trust – a dangerous place to be for an economic and civil society. Trust reduces friction, streamlines networks of exchange, and facilitates marketplaces both offline or digital. While some people think that data is the new oil, some of the larger categories of data are becoming increasingly commoditized (3rd-party packaged data) and controlled (1st-party consumer data). It is actually trust that is the universal lubricant. Even Amazon is struggling these days with its 3rd-party seller marketplace (see our Nov 11 2019 brief), in which it offers services at nearly every stage of the lifecycle but offloads liability for counterfeit, expired, dangerous and defective products to the sellers. It’s becoming increasingly difficult for a technology firm to control the user experience without also taking on some of the responsibility when outcomes go awry. The lack of trust in the environment isn’t all Uber’s fault, but the ride-hailing firm and its cohort are on the front lines of the ramifications.
The alternative to trust, for a society facing greater connectedness and increasing externalities, is control – i.e. scrutiny and regulation. Regulation was always going to come down the pipe – society and policy lag but eventually catch up to technological breakthroughs. The sweeping nature of AB-5 and its kin, however, as well as the punitive subtext of market-level bans and per-ride fees will make it much harder for gig-economy firms – even beyond just ride-hailing and delivery – to operate. These new regulations are set to enact a massive restructuring in the gig economy, with the potential for cascading implications for a wide range of occupations and industries.
The pathways ahead
For gig workers, it’s not all good news. While regulators suggest that gig platforms could continue to offer flexibility under AB-5, business model considerations (e.g. liability, fixed costs per employee) will pressure firms forced into the employment model towards greater control. Gig workers who already work 40+ hours per week would enjoy the benefits and entitlements of being employees. However, 50-90% of ride-hailing drivers work less than 40 hours per week. The employment model would likely mean fewer options for those seeking “on-demand” work flexibility and/or a secondary income stream. While average wages may increase, there will be fewer roles available. For instance, Vox replaced 200+ freelance roles in California with just 20 employee positions.
For consumers, the employment model means they get safer, more controlled rides that will likely be more expensive. Assuming that firms would have fewer employee-drivers than they have gig workers today, consumers may also have longer waits for their rides depending on where they live. During periods of surging demand, they may not be able to find a ride at all since ride-hailing firms wouldn’t be able to readily flex their workforce up and down on demand using pricing. On net, the model would disadvantage riders who can’t afford higher ride prices and those who live far from urban concentrations.
The large gig players are mobilizing a defense of their existing business model. Uber, for instance, evidently believes it can meet the ABC test in court. Its case will likely be that drivers, like freelancers in other domains, perform the defined work using their own equipment with little additional control or direction; that the work of driving is outside Uber’s self-described domain of offering a neutral technology platform; and that the vast majority of drivers engage in an independently established occupation demonstrated by their driving for other ride-hailing companies. Certainly Uber can present evidence for each of these 3 prongs – for instance, drivers’ ownership and management of their cars, Uber’s other businesses (e.g. Uber Eats, Uber Works) that operate on a similar technology platform, and the 80% of drivers that drive for two or more services.
Uber’s case, however, has sizable holes – for instance, drivers’ inability to set/negotiate rates and fees, vehicles branded with the Uber logo, and deactivation of drivers unable to meet its requirements. It’s also not clear whether a court would buy that Uber is a platform provider rather than in the business of providing transportation, when fees are attached to the ride rather than directly to the use of the platform and Uber is the one providing customer service to the end-consumer.
Uber has recently been working to bolster its position, making California-only changes (“Project Luigi”) such as capping their service fee to 28% and giving drivers the ability to see estimated fares upfront and refuse rides without penalty. Its moves suggest that, at least in the near term, Uber’s trying to see if a regionalized “low-control contractor” model might be workable. Finding the right line might be tricky – too little control and consumers might push back, too much control and they’re forced into the employment model under the ABC test. There’s also still the possibility that Uber might win its ballot initiative in Nov 2020, which would result in ride-hailing and delivery firms being exempted from AB-5. Even so, it wouldn’t save them from ABC tests in other states and localities.
Even if gig-economy firms win some of their key legal challenges, it’s unlikely that they will be able to continue business as usual. First, investor money is drying up, which puts an implicit timeline on how long gig players can continue to lose money. Also, with the recent momentum behind it, the ABC test is probably not going away anytime soon. At a minimum, gig players can expect to see more regulatory action at the local and state level, driving higher costs (e.g. per-trip fees) and possibly less scale due to region-specific operating models.
In some ways, the headwinds facing the gig economy may be a blessing in disguise, forcing the sector into hard but necessary decisions. The gravitational force of the sector’s business-model economics – such as low switching costs, limited economies of scale or scope, and price competition for drivers and riders – would have eventually dragged the individual players down to earth anyway. The pressure to move collectively towards the employment model means individual players’ decisions will be less punished by the market.
If the stringent version of the ABC test becomes widely adopted, ride-hailing firms’ strategic choices branch into a handful of business-model archetypes:
- Regional “super Uber” – regional consolidation through aggressive acquisition, local scale, dominant player, profitable unit economics per ride and per region
- Premium “black car” mobility – higher-priced rides, fewer customers, more scheduled pickups, premium experiences, additional revenue streams from add-ons
- Technology provider (e.g. Didi Chuxing’s opening of its platform) – disaggregation of services, horizontal platforms, ecosystem partnerships, less control over the end-consumer experience, could involve regional white-label services (e.g. “powered by Uber”) or referrals to local private-hire firms (similar to how Uber was operating in Germany before its ban)
While these archetypes are not mutually exclusive, they involve competing considerations. For instance, the infrastructure and support needed for “public transit” are very different than for premium “black car” mobility. A dominant “super Uber” might not necessarily want to white-label its platform to rivals. The choices available to each given player are also constrained – for instance, relatively few have the balance sheet or backing to undertake the “super Uber” strategy. In some cases, choices are constrained by the decisions of their rivals – e.g. if Uber decides to go on an acquisition binge.
Market shake-out and adaptation
The growth of the gig economy is not a scenario in which a rising tide will lift all boats. We will see a market shake-out with acquisitions and bankruptcies, as companies that lack scale and differentiation find that they are in an unsustainable race to the bottom. As the tide of funding goes out, companies with weaker balance sheets won’t be able to absorb the costs of growth – i.e. the higher bonuses and pay to acquire/retain gig workers (supply), and the marketing and promotions to acquire/retain customers (demand). Ride-hailing traditionally has been an “inherently low-margin business” with high operating costs. Consolidation will likely also come in the form of smaller undifferentiated players such as Juno washing away.
We will see 1-2 companies be confirmed as the leading players in any distinct service area or national market. Bigger players are more likely to win because their scale translates to a more efficient cost structure. In the US, the short list will include Uber, which has a 70% share there. In Asia, it might be ride-hailing giants Didi Chuxing (China), Grab (Singapore) or Gojek (Indonesia). Uber has recognized that consolidation is underway and opted, with Uber Eats, to cut its costs and exit regions where it cannot be among the top-two players.
The leaders are already adapting to the changing regulatory regimes and societal norms, with safety in the spotlight of late. For instance, Uber is scrambling to rectify issues with driver account-sharing – which has been an open secret and standing issue for some time. While the recent ban was in London, it almost certainly has experienced the same issue across other markets globally. Uber is also rolling out safety features such as audio-recording of rides in the US (and soon Brazil and Mexico), and use of Safety PIN numbers used to confirm riders are in the correct car. Similarly, Lyft is partnering with RAINN on mandatory safety training courses for drivers and with ADT to pilot safety features in 2020 (e.g. ability for users to send an emergency signal directly to ADT).
Even in markets outside the US with more lax regulatory regimes, safety is becoming an issue. Gig-economy players are investing in new safety features in markets like India and China. Other markets like Mexico and Brazil are getting attention for issues of driver safety, which have led workers to band together in WhatsApp groups to provide each other with support. Ride-hailing giants outside the US face similar issues on the business-model front as well, despite Asia being the hotspot in new gig-economy investment lately. Assuming their investment cycle is just lagging the US, they may have more time to respond and be able to fend off the type of stringent regulatory regime that we’re seeing in California.
Expanding the gig-powered experience
The few ride-hailing and delivery winners left standing will be able to tap into a wealth of consumer-facing opportunities – ranging from financial services to a broader range of gig-economy services (e.g. Uber Works, Gojek’s Daily Needs). Uber and the Asian super apps want to be “the operating system for your everyday life,” entangling consumers in their ecosystems. They recognize the need to expand their services to differentiate their platforms and create brand loyalty. As a result, they are building adjacent infrastructure such as payments and financial services (see our Dec 13 2019 brief), which they see as critical to achieving “digital flywheel” ambitions – i.e. ownership of the customer relationship, economies of scope, and economies of scale.
While in theory and under certain assumptions, the business model seems valid, Uber has struggled to achieve regional scale in other verticals outside ride-hailing. This is partly due to management distraction stemming from regulatory and economic challenges, as well as its having to rebuild customer trust and loyalty. It has to convince customers vertical by vertical that the value they get from each new offering is worth using and sharing their data with Uber. Even its efforts to build an advertising business within its consumer-facing apps are impacted by users’ willingness to engage in advertising on Uber. There’s an entire universe of “trusted advisor” information-services businesses that Uber, by all rights, should be able to tap – if it could only solve its trust problem.
The “big elephant” in the room as we look ahead to the future of ride-hailing and delivery is autonomous vehicles. Self-driving cars will transform, break and re-form these markets in ways that are hard to predict. The economics of self-driving transportation and delivery vehicles will be dramatically different – driven by intellectual property, asset utilization, and operational considerations rather than the aggregated human labor of the gig economy. Prices for an Uber or Lyft ride could fall by as much as 80%.
On the one hand, autonomous vehicles will offer an extraordinary step-up in the art of the possible – offering access to healthcare for the elderly and infirm, saving parents time in dropping off kids at school and activities, allowing people to make productive use of time during commute, and lowering the effective cost of housing near metropolitan areas by reducing the impact of living further away. On the other hand, disruption is no longer a sexy word now that we know the costs – i.e. lost jobs and sectors, societal unrest and polarization, reskilling and early retirement. Self-driving vehicles have the potential to devastate a large part of what we know now as the gig economy. Even some of the lower-paying roles in the gig economy currently being challenged will no longer be available – and we should expect a societal and regulatory response.
It may not be the gig-economy players that become the leaders in the “on-demand” space that they created. Despite years of investment, they are still not among the leaders in autonomous vehicles. In the early days as autonomous vehicles become “useful” – which could be as soon as this coming year in narrow use cases – the owners of the leading autonomous IP will capture much of the value. However, as commercial self-driving technology will become more commoditized, the value will accrue to those who build businesses on top of it. Walmart, for instance, is testing autonomous delivery of grocery orders with several startups, building upon its past investments in ecommerce. We may also see new entrants – Amazon, notably, is working to finalize its $575M investment in UK delivery player Deliveroo. Google/Alphabet’s Waymo is also a threat to the ride-hailing firms, given its leadership in autonomous vehicle technology.
The ecosystem beyond gig players
We can expect to see gig-economy players seeking new ecosystem partnerships. Some like Lyft with ADT will be looking for support in bolstering up business priorities like safety. The need to create customer stickiness will also drive them towards relationships that help them build out new verticals and service offerings – e.g. partnerships with banks to help develop new financial-services offerings. We may see gig-economy companies looking to disaggregate elements of their businesses and offload those pieces to outside players, as they seek to focus their business models. Incumbent companies and software vendors should explore how their offerings and market positioning could be advantageous for a leading gig player.
The employment model is not a foregone conclusion, even though regulation is putting pressure on players in that direction. The market, society, and regulators will adapt – for instance, with new models for portable benefits that offer gig workers some of the advantages of employment while retaining flexibility. Talent models for the gig economy so far have largely been focused on serving the resourcing needs of the hiring entities (e.g. worker-acquisition and on-boarding platforms like Fountain and GreenLight), rather than serving the needs of workers. There are a growing set of startups (e.g. Catch, Icon, Trupo), however, emerging to offer HR-like services such as health insurance and retirement plans to gig workers and freelancers.
The regulatory shifts above also have implications for how big companies use independent contractors more broadly. For instance, Google had 121,000 contractors as of Mar 2019 (outnumbering its full-time employees), though many of these are technically employees of staffing agencies. After criticism about a “second-class” workforce, Google began requiring that its contracting agencies provide certain benefits such as a $15 minimum wage, health care, paid sick days, paid parental leave, and tuition reimbursement. There may be an opportunity for a new kind of modern staffing agency or professional services firm that combines on-demand flexibility, employment-like benefits and support, and digital infrastructure and work tools.
Disclosure: Amazon and Google are vendors of 6Pages.
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