Yves here. For those of you who are late to this series, the underlying reason that Uber is not a bona fide tech success is that the fact that it has cars available at affordable (cheap) prices is solely the result of massive, unsustainable investor subsidies. There are no network economies in running any transportation network because beyond a baseline service level, there is an inherent tradeoff between service frequency (size of fleet and staff) and profits. Uber’s app is trivial technologically and does not create a barrier to entry or confer scale advantages.
Even though Uber’s long-term investment success would require it to achieve a monopoly or dominant position in an oligopoly, local transportation services do not have high barriers to entry. In fact, ironically, Uber’s war against local licensed cabs is lowering barriers to entry. But if Uber were to achieve a dominant position in some markets, its end-game would require it to jack up prices considerably to cover its full current costs plus recoup past losses plus achieve an adequate profit level. That level of price would drive many current users away plus create a price umbrella that would encourage new competitors to jump in.
By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants
Uber’s business model is radically different from past tech unicorns and has (and will continue to) massively reduce overall economic welfare
Most of this series has focused on the economics of Uber, and how the growth of Uber has, and will continue to massively reduce overall economic welfare. Earlier posts presented a wide range of evidence documenting Uber’s hugely unprofitable operations and how its growth had been driven by predatory behavior, its uncompetitive costs, its false claims about innovation and competitive advantage, and that investor returns always depended on industry dominance and anti-competitive market power.
The growth of Uber is massively misallocating resources because Uber is a less efficient producer of urban cars services than the operators it has been driving out of business. Uber cannot achieve sustainable profits or investor returns without achieving the quasi-monopoly industry dominance it has been aggressively pursuing and exploiting anti-competitive market power
The original growth of companies like Google, Amazon, Ebay and Facebook was driven by powerful competitive efficiency advantages and natural scale/network economies that generated massive consumer welfare benefits, although these welfare gains were somewhat offset by the ability to exploit market power once they achieved industry dominance.
Uber is radically different from these past unicorns because its business model is focused entirely on the second (exploit anti-competitive market power) part of this equation[1]. It skipped the difficult first part, which requires creating a totally new product that consumers value, or finding major efficiency breakthroughs so consumers can enjoy much more service at much lower cost.
As a result, Uber required a massively greater investment base than any prior unicorn in order to fund years of predatory subsidies. Amazon could fund much of its growth out of the positive cash flow generated by legitimate competitive advantages and scale/network economies. Uber’s growth required $13 billion in cash — 1600 times Amazon’s pre-IPO investment funding.
While these massive subsidies may have provided some temporary benefits to consumers and drivers they are not sustainable. In reality, they are hugely welfare-reducing because they are designed to destroy more efficient industry capacity and create the anti-competitive market power Uber’s investors need in order to eventually earn returns on that $13 billion.
Achieving sustainable profits requires going beyond taxi “deregulation” so that Uber’s investors seize full control over the laws governing taxi markets
Since its inception, Uber has understood that its biggest challenge was not the marketplace battle between Uber and Yellow Cab over taxi passengers, but between Uber’s Silicon Valley investors and local citizens over control of the laws governing the urban car service market. Given the billions in profit improvement Uber needs just to reach breakeven, its investors cannot take the risk that cities respond to Uber dominance by reimposing pricing and service requirements, or other steps designed to restore meaningful competition.
Many have incorrectly referred to this process as a fight for taxi deregulation. In past transport deregulation processes, industry and government officials debated whether alternate industry structures (levels of competition and government oversight) would maximize overall economic welfare. Past reforms considered the needs of operators (taxi owners and drivers needed to make money) but also recognized that unregulated taxis would underprovide welfare enhancing benefits such as safety, insurance and access to jobs and housing that were poorly served by public transit.
In certain cases reforms designed to increase competition between independent providers subject to “level playing field” rules were judged to be the best way to increase industry efficiency and overall welfare. However, the importance of the government oversight to protect the public interest in maximizing welfare was never questioned.
Uber’s objective was not to maximize competition subject to “level playing field” rules, but to seize control of the entire playing field and to eliminate meaningful competition. Uber was not presenting evidence showing how an unregulated monopoly provider would greater overall economic welfare than a competitive industry subject to regulations. It wanted to establish the absolute preeminence of its pursuit of shareholder returns over any public interest, such as protecting competition, safety, consumer protection, employee rights, or any other welfare enhancing benefits.
Uber’s quest for market control faces both “factual economic” and “democratic process” obstacles. No one can legitimately claim that consumers would achieve Google/Amazon type service/pricing gains under Uber dominance. Uber dominance cannot be defended as something that resulted from the impartial judgement of the “market” since Uber has not shown that it can profitably produce better taxi service under competitive conditions. A battle between fragmented, poorly capitalized incumbents and Silicon Valley billionaires supplying billions in predatory subsidies is not neutral market competition.
All independent academic analysis has rejected the hypothesis that Uberesque laissez-faire taxi competition would improve industry efficiency or consumer welfare, findings that were confirmed when test cases of milder forms of deregulation in 17 cities failed to produce any public benefits.[2]. No democratically elected city government accountable to voters would openly eliminate all citizen oversight of local taxi service (including protections against monopoly power abuses) and grant total control of that service to private investors.
How could Uber’s investors seize full control of urban taxi markets given uncompetitive economics, given the clear evidence that taxi deregulation would not benefit consumers, and given that no government accountable to voters would openly agree to major industry changes without compelling evidence of consumer pricing and service benefits?
The answer is that Uber is attempting to implement an innovative and disruptive strategy for achieving market control — a strategy radical different from every prior tech oriented startup — but those disruptive innovations have nothing to do with technology or the efficient production of urban car services.
From its inception, Uber correctly understood that the battle between its Silicon Valley investors and local citizens over control of the laws and regulations governing the urban car service market was a political fight, and had to be fought using the techniques that had proven successful in political fights.
Luckily for Uber, pro-corporate/libertarian/objectivist oriented think tanks had conducted a major taxi deregulation campaign in the 1990s advocating the same complete elimination of all forms of legal/regulatory restrictions on the freedom of capital accumulators that Uber is seeking, and laid out a detailed communication program that Uber copied, almost word-for-word, when it began its fight for market control.
Most tech companies have “origin stories”; Uber usually points to times when Garrett Cook and Travis Kalanick could not immediately summon a taxi (a Paris tech conference, the Obama inaugural) when the idea “push a button, get a car” crystalizes. Brad Stone points to the time Cook noticed the graphical tracking software on James Bond’s phone in the movie Casino Royale.
But Uber’s growth was not driven by the user interface on its app; it was driven by its political strategy to take over an industry that it could not win on the basis of competitive economics. Thus Uber’s real origin dates to the political strategy these think tanks established when they set out to eliminate all forms of government oversight over the taxi industry.
The 90s think tanks based their campaign on the type of political propaganda commonly found in large scale partisan campaigns, designed to obscure underlying agendas and motives. Relevant definitions of propaganda include a deliberate, systematic attempt to shape perceptions, manipulate cognition and direct behavior in ways that block interactive discussion in order to further the objective of the propagandist,[3] and communications designed to win over the public for special interests through a massive orchestration of attractive conclusions packaged to conceal both their actual purpose and lack of sound supporting reasons.[4]
Other tech companies convinced the world they would achieve industry dominance by providing independent outsiders with objective evidence of huge efficiency and scale advantages and demonstrating that they could profitably produce better service at lower cost.
Uber used its massive predatory subsidies to create the appearance of better service at lower cost, and a propaganda narrative that convinced journalists and industry analysts that not only was it hugely competitive but its eventual success was so inevitable that there was no need to investigate its actual competitiveness or financial results. Uber supplemented its propaganda narrative with actions establishing a hyper-ruthless corporate image, designed to convince any competitors, local governments or unconvinced journalists that any efforts to resist Uber’s inevitable dominance would be futile.
The think tank taxi deregulation campaign blocked discussion of industry reforms based on economic evidence of potential impacts on efficiency and welfare with an emotive/tribal battle framing that precluded compromise.
Neither the think tank campaign nor the earlier 17 city deregulation push was the result of local citizens organizing to address local transportation issues. Both were entirely organized and financed by external interests who systematically repeated its key messages across a range of contexts and publications.[5]
The descriptions of the think tank taxi deregulation campaign below are based on twenty-nine articles from this period, twenty of which were published between 1993 and 2000.[6] Twenty-two of the pieces were published by pro-corporate/libertarian/objectivist oriented advocacy groups that received major funding from Charles and David Koch, including 6 by Reason and 5 by the Institute for Justice and 8 by similar state-level groups.[7] The others were opinion pieces in mainstream outlets that uncritically publicized the claims of those advocacy groups.
The higher-level political objective these papers was defined as the “liberty principle” ,[8] a belief that only a very narrow range of governmental activities were legitimate, fully consistent with the Uber/Silicon Valley political view that any governmental actions limiting the freedom of capital accumulators are illegitimate.[9]
The campaign worked to shift all industry discussion from a technical economic efficiency/consumer welfare frame based on industry economic evidence to a narrative where a single simplistic change could solve all industry problems. Attractive conclusions were highlighted — their central claim that regulation is the cause of all of the industry’s problems is endlessly repeated – but none of the papers presented any supporting evidence based on actual taxi industry economics. For instance: “…[M]ore could be done to improve the quality of urban transportation and perhaps abate the current fiscal shortfall through the process of deregulation than through almost any other policy strategy.”[10]
The papers all claim that ending economic regulation of taxis will lead to better quality service, lower fares, shorter wait times and increased employment. But since none of the papers even mentions concepts such as operating efficiency, utilization or productivity, they fail to consider, much the less explain, where these gains will come from, or how existing regulations might have caused these problems.
The papers assert that deregulation will solve the problems of long wait times in peak periods and poor service to lower-income neighborhoods, but none of the authors had any understanding of the actual costs of those services and nor made an attempt to explain how deregulation would reduce those costs. Regulation is attacked as an obstacle to innovation, but no one can cite any specific innovations that have been blocked.
The papers reframed all industry issues around an emotive black-and-white, us-versus-them ideological/tribal battle narrative. The fictional hero was the “entrepreneur”, often portrayed as a struggling immigrant anxious to embrace the free market, who would transform taxi service but for the evils of regulation. This reimaged a fight for greater corporate freedom, funded by billionaires, into a fight to help an oppressed underdog. The impact of regulation on these storybook entrepreneur wannabes “is devastating. It impairs their ability to earn a decent living for themselves and for their families. It limits their opportunity to work for themselves, instead of for others. It destroys their dream of a brighter future.”[11]
In reality these thwarted entrepreneurs were close to non-existent and consumers had not been harmed, since the few that did enter were not competitive with incumbents and quickly went out of business.[12] The fictional villains were the malicious forces of the “Cab Cartel” working in cahoots with corrupt government regulators. “The current regulatory scheme in Boston benefits no one but the existing medallion holders, their lobbyists, and their lawyers”.[13] Framing the “heroic entrepreneur vs corrupt regulator” fight as a battle for progress, innovation and economic freedom precluded reasoned, factual discussion about alternate paths forward based on actual industry economics.
Having first reframed regulatory issues into a moral battle where data was irrelevant and compromise was unacceptable, the think tanks then expanded the scope of supposedly deleterioius regulations from the pricing and entry restrictions that had been the focus of every previous “deregulation” debate to any rule that might ever constrain the freedom of capital.
These papers specifically rejected calls “for more or “better” regulations [but] that an improved taxicab market can arise by removing regulation”[14] including regulations designed to prevent monopoly or protect public safety.[15] The think tanks insisted that giving the owners of capital complete, unfettered control of the industry would automatically eliminate any externalities and inefficiencies, implying there was no actual need to protect competition. “If it weren’t for government interference, the laws of supply and demand would govern the taxi trade with almost frictionless efficiency: cabs would be plentiful, fares would be reasonable, and service would be available nearly everywhere it was wanted.”[16]
The think tanks claimed they were just like the airline deregulation reforms of the 80s in order to obscure their much different objectives and to falsely imply taxi deregulation would produce the same large efficiency and consumer benefits. The papers included assertions such as “eliminate medallions and fares would drop, just as they did when the airlines were deregulated”[17]and “there is no reason, however, why the same [airline deregulation] principles cannot be successfully applied to urban transportation as well.”[18] In addition to the false claim that medallion values had been directly extracted from consumers[19] (claims refuted in part six of this series), it claimed that the failed 17 city taxi deregulation test had actually been a great success.[20]
The 90s think tank taxi deregulation campaign failed to generate any support outside the ideological/political circles already predisposed against most forms of governmental activity, and thus failed to overcome the “democratic process” obstacles. Local governments and taxi industry participants may not have grasped the radical nature of the changes proposed in these papers, but knew that past deregulation efforts had failed to produce any benefits, knew that these papers had not provided any credible evidence of potential public benefits, and knew that any explicit political decision to totally abandon public oversight of taxis would be rejected by the public.
Uber adopted the think tank propaganda approach almost word-for-word as the foundation for its market control battle
Uber immediately adapted the 90s think tank propaganda narrative as its communication template because it directly addressed the obstacles Uber would face in its pursuit of full market control.
Uber needed to reframe all public discussion around an emotive, ideological/tribal narrative that would limit scrutiny of its uncompetitive economics and would also enlist a base of dedicated supporters, who would see Uber’s battle against longstanding laws and regulations as a moral battle where compromise was unacceptable.
Uber needed a simple regulation-based explanation for the industry problems it would allegedly solve, but did not want anyone to reexamine the actual history of taxi deregulation, or to understand the huge difference between pricing/entry liberalization and the total market control they were seeking.
Uber needed to establish the image of a battle between cutting-edge technologists fighting to disrupt a backward industry so that people outside of its core of supporters would view Uber as the heroic good guys.
Uber needed to create a strong association between its disruptive innovation and its meteoric growth in order to create the impression they were following the proven model of Amazon and other successful unicorns and thus would inevitably achieve strong profitability and industry dominance just as they had. Establishing Uber as an innovative good guy with a business model just an innovative as Amazon would eliminate the need to investigate whether they actually had similarly powerful inventions, or to figure out why the losses investors were subsidizing were so large and persistent.
To build a base of ideological/tribal supporters Uber CEO Travis Kalanick emphasized the company’s affinity with the tech industry and its libertarian/objectivist values. He highlighted his famous Silicon Valley investors, his use of Ayn Rand as his Twitter avatar, and described himself as a “trustbuster” and a “freedom fighter.” “It’s like Braveheart. Like, ‘freeeeeduuuuuuuuum.”[21]
Uber evoked the same us-versus-them imagery with entrenched and corrupt political forces, but substituted the heroic technology innovator for the heroic entrepreneur the think tanks had used. Kalanick described Uber as an avatar of progress “a transportation technology innovator, boldly going where no man has gone before;” its loyal supporters would be amply rewarded in the end because “ultimately, progress and innovation win.”
Despite massive funding from Silicon Valley billionaires, Uber faced overwhelming disadvantages in its battle against a powerful “Taxi Cartel” (alternatively the “Taxi Medallion Cartel”). “Over the years, what I’ve come to realize is that this controversy exists because we are in the middle of a political campaign and it turns out the candidate is Uber” and the opponent is “an asshole named taxi.” “Our opponent — the Big Taxi cartel — has used decades of political contributions and influence to restrict competition, reduce choice for consumers, and put a stranglehold on economic opportunity for its drivers”. “When we do so, we don’t do so fighting anybody. The fight is brought to us by those who don’t want to have to compete, don’t want to innovate and who like the status quo for what it is, which is not to the benefit of consumers or drivers.”
Given the long-term objective of total market control, the propaganda narrative made the uphill battle with the evil Taxi Cartel into a struggle over core values where total annihilation of the enemy was a moral imperative. “Nobody likes him, he’s not a nice character, but he’s so woven into the political machinery and fabric that a lot of people owe him favors…We have to bring out the truth about how dark and dangerous and evil the taxi side is.” Kalanick made it clear that truth and justice were totally on Uber’s side and any accommodation with incumbent operators or taxi regulators was out of the question. “If you’re operating from strong principles, you can compromise when the person on the other side is operating from principles you respect,” he says.
Despite Uber’s transparent interest in destroying all incumbent operators in order to establish global industry dominance, Kalanick insists Uber is just trying to increase competitive options. “When it’s about protecting incumbent industry, when it’s about providing less choices for citizens to get around the city, then there’s less to talk about.”
Following the think tank template, Uber emphasized attractive outcomes (e.g. hiring Uber would soon be cheaper than buying a car, Uber would eliminate waiting for cabs on Saturday night, and the company had “generat[ed] 20,000 new driver jobs every month” that had no factual basis and were totally inconsistent with actual industry economics.
Uber insisted that the emergence of an unregulated, Uber dominated industry had nothing to do with multi-billion dollar subsidies but was strictly the result of the free choices of consumers in a competitive market and therefore must reflect the efficient results that markets always produce. But as law professor Eric Posner points out, “…[this] is a response that any monopolist could make…But whether or not Uber does overcharge people now, sooner or later — once it displaces taxis and dominates markets —it will.”[22]
Echoing the struggling immigrants in the think tank narrative, it valorized its “driver-partners” as “small business entrepreneurs” who had been generously granted a unique opportunity. Uber forced drivers to bear much greater costs than traditional taxi drivers faced, could fire their “driver-partners” at will, and aggressively lied to them about their true earnings potential. In 2016, once drivers were locked into vehicle financing obligations, Uber slashed their compensation by over $1 billion.[23]
But Kalanick perversely defended a business model whose economics and service standards are controlled tightly by Uber as a way to empower workers. “When you empower drivers to own and operate their own vehicles, they can take control over their own income, their hours, and they can improve their lives.”
Uber’s public claims quickly coalesced into a PR/propaganda[24] narrative that can be readily summarized. Uber’s huge valuation was justified by its powerful business model that was based on cutting-edge technological innovation; it has created a totally new product category (“ridesharing”) an industry (the “on-demand” or “sharing economy”) that is totally different from traditional taxis; its meteoric demand growth was the result of consumers freely choosing their vastly superior product in open, competitive markets; resistance to Uber’s growth was due to the coalition of the evil Taxi Cartel and corrupt regulators who were willing to block major innovations and job creation in order to protect an inefficient status quo; that startup losses will soon give way to strong profits, just like past unicorns that rapidly grew into profitability; robust long-term growth is certain because its business model is so powerful that it can overwhelm competition in any city and any country and inevitably achieve global industry dominance and because it will become so efficient that it will significantly displace car ownership.
Uber’s PR/propaganda narrative was powerfully amplified by journalists following the tech industry
There is no legitimate, verifiable economic evidence supporting any part of Uber’s PR/propaganda narrative. But the effectiveness of propaganda campaigns does not depend on analytical rigor. It depends on their ability to get seemingly objective outsiders to amplify the message and give it greater credibility.
The media had completely ignored the 1990s think tank propagandists’ explicit attacks on all aspects of taxi regulation, but when the exact same narrative was repackaged in the context of an epic power struggle where cutting edge technologists backed by the best and brightest in Silicon Valley would inevitably overwhelm a backward industry, it became widely repeated in the tech industry and mainstream business press as if it was established truth that had been independently verified.
Uber’s narrative exploited the myopia of tech industry journalists embedded in a Silicon Valley tribal culture that sees itself as the avatar of economic progress, who readily embraced Uber’s framing of a heroic battle against a backward industry.
Given the awesome benefits that Silicon Valley-led “disruptive innovation” would inevitably bring, there was never any need to interview anyone knowledgeable about the industry being disrupted, or consider whether the Uber’s claimed innovations had ever transformed any other industry.
Journalists focused on the wealth and status of Uber’s Silicon Valley investors within the venture capital world. The presumption they must know what they are doing eliminated the need to find evidence that would explain how they had found tens of billions of economic value no one else had ever seen, or whether their interests coincided with any broader economic interests.
Part eight of this series uses Brad Stone’s recent Uber/Airbnb book as an example of tech journalist bias. Stone, the senior executive editor for technology at Bloomberg News, manages to endorse every element of Uber’s narrative while finding excuses for everything contradicting it (e.g. the massive failure of Uber China). Stone fails to mention Uber’s multi-billion dollar losses or any other aspect of its uncompetitive economics, and cannot explain where profits or returns to investors might come from. Part seven of this series provides examples of much more open-minded, independent tech journalists, willing to acknowledge contradictory evidence and obvious Uber flaws Yet even they maintained that Uber it an ideal example of how the tech industry is the avatar of innovation and progress.
Since Uber’s narrative provided a fully self-contained explanation of its inevitable success, even journalists without strong tribal tech industry ties had little need to undertake any independent investigation. Given Uber’s overwhelming financial advantage, one could assume the battle had been decided before it started, and thus there was no need to dig into complicated competitive issues. The press treated Lyft (with a mere $2 billion in funding) as an also-ran and the entire incumbent taxi industry as a complete irrelevancy. Given its rapid growth, journalists accepted the Uber narrative implication that it was following the exact model that Amazon and Ebay had followed.
The huge industry-wide losses caused by the massive increase in less efficient capacity was never considered newsworthy, and was never blamed on Uber; since Amazon and Ebay had converted large initial losses to sustainable profits there was no reason to doubt that Uber would as well.
Uber’s successful creation of the perception that it was the new Amazon/Ebay caliber tech winner created a virtuous circle, increasing the amount of highly favorable press Uber received. Aside from being locked out of access on one of the biggest stories on their beat, Silicon Valley journalists would also risk reputation in fighting the image version of a massive momentum trade.
It also meant that the press ignored the question of whether Uber actually had the Amazon-like scale economies needed to eventually achieve profitability, and ignored the arithmetic showing that an Uber recovery from its multi-billion dollar losses would constitute one of the greatest corporate turnarounds in history.
Uber’s us-versus-them narrative also provided built in-responses to critics; people who raised questions about reduced driver earnings or whether the app was actually a technological breakthrough or Uber’s eventual profitability could be dismissed as an Luddites who opposed empowerment and progress. Those who complained about Uber’s ruthless behavior and disregard for legal requirements were bleeding hearts who did not understand what was required to create billions in corporate value. The combination of Uber’s aggressive PR efforts, and a weak, disorganized and marginalized opposition created the impression that there was only one side to this story.
Of the thousands of Uber stories in the mainstream press, none included any interviews with independent experts on urban transport, none investigated the pros and cons of the longstanding taxi regulations Uber was disobeying, and none investigated whether “innovations” like Uber’s app or surge pricing practices had ever driven major competitive changes in any other industry.
Since Uber was popular (and traditional cab service was decidedly unpopular) with many of the urban elites who were a major audience for these media outlets, there was little motivation to expose the unsustainable subsidies that popularity possible, or to point out that the service they liked was reducing the already poor working conditions of drivers and also threatened affordable late night taxi service for low-wage workers.
Uber’s hyper-ruthless corporate behavior powerfully complemented its PR/propaganda strategy
Space does not allow the full story of Uber’s strategy for market control to be told here, but its highly effective PR/propaganda program was the key (in conjunction with its $13 billion investment base) to convincing the world that success was inevitable. By capturing the tech industry and mainstream business media, Uber rendered any local politicians that might have wanted to enforce longstanding regulations powerless, and ensured that outside critics questioning Uber’s business practices or competitive economics were never taken seriously.
To summarize briefly, the other key component to Uber’s market control strategy was the development of a highly ruthless corporate image. While the PR/propaganda campaign told the world that success was inevitable, Uber’s vicious behavior towards local politicians, competitors and critical journalists told the world that resistance was futile.
Recent articles about Uber’s rogue culture, exemplified by Susan Fowler’s descriptions of systemic protections for sexual harassers within management, the Greyball software used to obstruct local law enforcement and the Google/Waymo intellectual property theft lawsuit treat this type of behavior as aberrant and fixable because they consider it totally outside the context of Uber’s operations. In fact, this behavior and Uber’s monomaniacal focus on total market control is an absolutely central part of its business model. Change the culture, and you destroy what made Uber’s growth to date possible.
In an ideal world, competitive markets help allocate resources efficiently because consumers, workers and investors respond to information indicating which companies have better products, efficiency and profit potential. Uber’s pursuit of industry dominance and market control has been based on massive distortions of market information. Its multi-billion dollar predatory subsidies grossly distort competitive pricing and service information. It has gone to great lengths to hide the financial and competitive information capital markets require, and in several cases it has resorted to blatant dishonesty about things like driver earnings potential and market performance. Its PR/propaganda program was designed to replace legitimate economic evidence markets need with a narrative explaining its inevitable success that had been manufactured out of thin air.
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[1] The outside returns Silicon Valley venture capital community that funded Uber seeks has always focused on the monopoly power that could support significant rent-extraction and supra-competitive profits. For example Peter Thiel said “Always aim for a monopoly. It’s one big transgressive idea, and you’re not allowed to talk about it… From society’s perspective, it’s complicated. But from the inside, I always want to have a monopoly.” Cook, J., Peter Thiel: ‘Always aim for a monopoly. I always want to have a monopoly’, Business Insider, 2 May 2015 Separately Thiel argued that “Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away.” Thiel, Peter, Competition Is for Losers, Wall Street Journal, 12 Sep 2014
[2] The history of academic taxi deregulation analysis and test cases, with citations to original sources can be provided on request
[3] Jowett, Garth & O’Donnell, Victoria, Propaganda and Persuasion, Sage Books, 1,6,24 (1999).
[4] Sproule, J.M., Channels of Propaganda ERIC Press Indiana University, 8 (1994).
[5] A review of deregulation in Seattle noted that no local consumer or civic groups had been advocating deregulation; the chief proponent was a libertarian-leaning City Council member who argued that “the best way to improve taxi service to the public was…for the government not to interfere with private industry” and justified the move in terms of the recent success of airline deregulation. Leisy, C., Taxicab Deregulation and Reregulation in Seattle: Lessons Learned, International Association of Transportation Regulators (2001).
[6] Berliner, D., How Detroit Drives Out Motor City Entrepreneurs, Institute for Justice, (1996); Boroski J, & Mildner G., An Economic Analysis of Taxicab Regulation in Portland, Cascade Policy Institute (1998); Bullock, S. G., Baltimore: No Harbor for Entrepreneurs, Institute for Justice (1996); Cervero, R., Deregulating Urban Transportation, Cato J., 5, 219 (1985); Corcoran, T., Taken For A $1 Billion Taxi Ride, Toronto Globe and Mail, 5 May1997 (author was employed by the Consumer Policy Institute); Filley, D., Taken for a Ride: How the Taxi Cartel and the State Are Disserving Denver’s Economy. Independence Institute Transportation Policy Center (1993); Goldsmith, S., Regulation and the Urban Marketplace, Regulation, 17, 76 (1994); Gordon, P. & Richardson, H. W., The Counterplan For Transportation In Southern California: Spend Less, Serve More, Reason Foundation (1994); Hardaway, R., Taxi and Limousines: The Last Bastion of Economic Regulation, Hamline Journal of Public Law and Policy, 21(319) (2000); Harris, L., Taxicab Economics The Freedom to Contract for a Ride, 1 GEO. JL & PUB. POL’Y, 195 (2002); Jacoby, J., Break Open The Taxicab Monopoly, Boston Globe, 5 Dec 1995; Kramer, J. E., & Mellor, W. H., Opening Boston’s Taxicab Market, Institute for Justice (1996); Lephardt, G. & Bast J., The Economics of Taxicab Deregulation, The Heartland Institute (1985); Lopez, N. Barriers to Entrepreneurship: How Government Undermines Economic Opportunity, Institute for Policy Innovation (1999); Mellor, W. H., Is New York City Killing Entrepreneurship?, Institute for Justice (1996); Mellor, W & Kramer, J., Open the Door To Portland’s Taxi Entrepreneurs, Cascade Policy Institute (1997); Moore, A. T. Indianapolis’s Road to Regulatory Reform: A New Path in Licensing and Permits, Regulation, 21, 49 (1998); Moore, A. T., Competition and Entry in the Market for Taxis, Limousines, For Hire Vehicles and Related Services, Liberty Justice Center (2013); Moore, A. & Balaker T., Do Economists Reach a Conclusion on Taxi Deregulation?, Econ Journal Watch, 3(1), 109-132 (2006); Moore, A., & Rose, T., Regulatory Reform at the Local Level, Reason Public Policy Institute Policy Study, (1998); Novack, J., Regulation at its Worst, Forbes (1988); Selzer, I., Abolish The Taxi Medallion System, American Enterprise Institute (1996); Seymour, D., The Case For Taxi Deregulation, Frontier Center for Public Policy (2009); Staley, S., Taxicab Regulation in Ohio’s Largest Cities, Buckeye Institute for Public Policy Solutions (1996); Staley, S., How Cities Put the Brakes on Taxicabs: Stifling Regulations Thwart Entrepreneurs and Economic Growth, Foundation For Economic Education, 48, 147-150 (1998); Staley, S., Toward A 21st Century Taxicab Regulatory Framework: The Case of Madison, Reason Foundation (2000); Staley, S., Taxi Regulation and the Failures of Progressivism, Foundation for Economic Education (2012); Staley. S.,Husock, H., Bobb, D. J., Burnett, S., Crasy, L., & Hudson, W., Giving a Leg Up to Bootstrap Entrepreneurship: Expanding Economic Opportunity in America’s Urban Centers, Reason Public Policy Institute (2001); Styring, William, How Indianapolis won the War of the Taxis, Indiana Policy Review, 31-35 (Spring 1994).
[7] The establishment of these think-tanks as political advocacy groups by the Koch Brothers is described in chapter 5 of Mayer, Jane, Dark Money, Random House (2016); the role of Mellor in the establishment of the Institute for Justice is described at 232-3.
[8] The “liberty principle”, and the role these papers played in supporting it was defined by the editor of the Moore & Balaker paper (supra note 117) as the belief that any governmental activity outside the realm of police and military protections (including taxi regulation) must bear the full burden of justifying their existence, while any reduction in government activity (such as taxi deregulation) does not bear any burden of proof. “Certain interventions [including taxi regulation] that are hallowed and important to statist ethos and mythos are wrongheaded and fail to meet the liberal burden of proof.” Klein, D. B., The Forsaken‐Liberty Syndrome: Looking at Published Judgments to Say Whether Economists Reach a Conclusion. American Journal of Economics and Sociology, 71(5), 1250 (2012)..
[9] Supra notes 77 and 78.
[10] Cevero,
[11] Mellor & Kramer, but every article discussing “entrepreneurs” uses similar language.
[12] And could not have existed, given the dominant industry model of taxi owners leasing to independent contractors. When Indianapolis allowed open entry, only one person that wasn’t already working in the industry applied for a license.
[13] Kramer & Mellor
[14] Boroski & Mildner
[15] Berliner, Bullock and Kramer attack regulations for mechanical inspections of taxicabs and the requirement that cab drivers obtain commercial licenses.
[16] Jacoby.
[17] Seltzer and Hardaway also argued that taxi regulation was justified by the success of airline deregulation.
[18] Cevero
[19] Kramer, Hardaway, Moore & Balaker;
[20] Most papers ignored the 17 city tests, but the ones that mentioned them cited the initial expansion of capacity, but failed to mention that the new entry was unsustainable, and that almost every city restored previous regulations. Cevero, Moore (1998), Seymour, Styring,.
[21] Citations for Uber’s public statements are omitted here but are available on request
[22] Posner, Eric, Why Uber Will—and Should—Be Regulated, Slate, 5 Jan 2015. http://www.slate.com/articles/news_and_politics/view_from_chicago/2015/01/uber_surge_pricing_federal_regulation_over_taxis_and_car_ride_services.html
[23] See 2016 financial data summarized in part six
[24] The focus on “propaganda” is designed to highlight the enormous differences between Uber’s communication program, designed to serve broad objectives related to industry structure and control and “marketing-based” corporate communication, focused on tangible product attributes (price, features) serving much narrower objectives related to consumer purchase decisions in competitive markets, or investor decisions in capital markets. The term “propaganda” is often misused to disparage communication serving objectives one dislikes, even though it is commonly deployed on behalf of all types of political objectives, likeable or not. Edward Bernays argued that propaganda was simply the “mechanism by which ideas are disseminated on a large scale,” was central to all public relations practices, and (like all of education, business and politics) was not inherently ethical or unethical. Bernays, Edward, Propaganda, Routledge (1928) 20, 133.
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One positive aspect of all this propaganda is that, once Uber goes under, there will be plenty of material available for additional entries in this series.
Hacker News recently posted an article on the Google/Waymo debacle.
https://danielcompton.net/2017/03/14/uber-bombshell
Comments at HN seem to take as Gospel that Naked Capitalism asserted in it’s recent series that Uber’s pricing recovers only 41% of costs (the rest being subsidized by investors) and that this assertion was clearly wrong on available evidence.
I quote the following comment from Hacker News
https://news.ycombinator.com/item?id=13860890
“harryh 1 day ago [-]
….Uber passengers only pay 41% of the cost of trips, with investor capital making up the difference
FWIW this assertion (which isn’t really core to the central thesis of the post, but still) is wrong. That number comes from
https://ftalphaville.ft.com/2016/12/01/2180647/the-taxi-unic…
but the author of that story misread the data. Uber only counts their cut as revenue not the full cost of the ride
Despite this repetition (now corrected, thx!) of this incorrect data I find the overall thesis of the post compelling! As a disinterested bystander, it will be interesting to see how it all plays out.
EDIT: It turns out the original 41% statement comes from http://www.nakedcapitalism.com/2016/11/can-uber-ever-deliver… not from the Financial Times…..”
Having supposedly refuted NC’s figures in this instance makes it easier for the commenters to dismiss the remainder of NC’s critique
bwilli
It is not clear what point you are trying to make.
There were no data errors in the first Naked Capitalism piece, which laid out detailed tables showing every piece of post-2012 Uber financial evidence there.
That piece explained that there was a $2 billion gap between revenue Uber took in and expenses paid out. This was the heart of the ongoing story–Uber is incurring massive operating losses. This was a negative 149% profit margin; the mathematical inverse shows Uber’s revenue only covered 41% of its costs. These losses increased to $3 billion in 2016.
Uber drivers are not employees, so looking at the combined P&L of Uber and its independent drivers is a bit artificial but this would show the identical $2 billion loss and combined revenue covering 78% of combined costs. All those numbers are clearly laid out in the part 1 tables.
Did you have any comments to offer about this part nine piece?
Looking up Uber’s financing, I notice that in July 2016 Morgan Stanley delivered $1.15 billion to Uber, and the Saudi Arabia Public Investment Fund put in another $3.5 billion. This gives more support to this series conclusions about Uber’s program for driving competition out of business via underpricing (the equivalent of dumping in trade terms, which is generally cause for trade wars), with the eventual goal of establishing a monopoly and jacking up prices to record levels. Which is also how JD Rockefeller established the Standard Oil monopoly in the late 19th century.
Thank you for responding. The combined pieces are a wonderful public service. My comments were only to point out that one of the lines of defense of Uber at Hacker News seemed to be along the lines of asserting that the original articles could be partially dismissed because the 41% figure was allegedly derived from Uber’s gross (driver+Uber) rather than just Uber’s cut of proceeds.
>Uber’s monomaniacal focus on total market control is an absolutely central part of its business model
Well, Silicone Valley has done it – they’ve made the full transition to four legs good, two legs bad.
Uber and Airbnb are simply fabulous if you think about it. Taxis and “hotels / housing” are two of the biggest local regulation enforcement pie slices. If you can gut local regulation here, then really why would local regulation be needed for anything? /sarc
Also if you can get local governments to pay for Uber service rather than building more parks and rides or buying government vehicles or even outsourcing public transportation or… well then you also have governments directly subsidizing Uber and deciding on who the winners are. Private / public partnerships here we will come.
So Uber is a two-fer: get rid of local regulations / controls / complaints and get the public to pay for it via taxes not just fairs. If Uber manages that, they aren’t just monopolizing the taxi marketplace.
http://www.theverge.com/2016/10/3/13147680/uber-new-jersey-free-ride-parking-lot-train-commute
http://wapo.st/1nodxkp
http://www.government-fleet.com/news/story/2017/02/ariz-official-urges-for-uber-over-state-vehicles.aspx
And I’m not sure that using Amazon as a comparison is a good thing. Amazon was certainly a seemingly kinder, gentler version but I don’t they were less ruthless about fulfilling their overall vision. They have economy of scale now but how much investor and government subsidies did they have to have to become what they are today? Is that really a good thing as far as the public good is concerned? e.g., If government had leveled the playing field and not required brick and mortar stores to collect sales taxes, would Amazon have gained the same dominance of the internet marketplace? How much does the US postal system subsidize Amazon or for that matter UPS / Fedex with the last local delivery bit? How much do small businesses and individuals subsidize Amazon’s shipping costs (higher rates to compensate from Amazon’s economy of scale package rates and now Sunday deliveries in certain markets)? etc. etc. etc.
I don’t know if Amazon is “good” overall but by embedding Amazon as the “good” into an article like this it makes seeing them as “good” much easier because it can pass by internal critical thinking filters. Why? Because this article isn’t asking the same type of questions about Amazon. It’s about Uber. To me that’s a bad thing since I see both companies’ end-goals of gutting local regulations and monopolization of their niches as being more or less the same. Amazon is just the bigger octopus at this point with much much better PR and internalized acceptance of their cultural messaging aka the stuff everyone just “knows.”
I agree. Why does Amazon get a free pass? If the Fed props up the Stock Market wouldn’t it appear an algorithm is out of whack? Amazon has exploded since 2010. If they are dumping money into Amazon why would they let Jeff Bezos pull a billion out?
Amazon is mentioned numerous times in this series; it is never a “good” guy, but is very useful in illustrating Uber’s much worse economics.
Amazon grew rapidly towards profitability because it actually had very significant product and efficiency advantages over the traditional bookstores it competed with; Uber actually has higher costs than the traditional taxis it has been driving out of business.
Amazon could fund its growth out of positive cash flow because it actually had superior efficiency. Uber funded its growth out of predatory use of its $13 billion in cash–1600 times more cash than Amazon needed to raise pre-IPO. Amazon moved quickly to become public and publish full, audited financial performance data. In year 7 Uber goes to enormous length to conceal financial data and has no intention of exposing itself to full capital market scrutiny.
Amazon actually created significant consumer welfare benefits (popular products and services that didn’t exist before at sustainably lower prices) while Uber is driving people from point A to point B in cars just like cabs always have. Its lower price and greater cab availability is a temporary benefit that is unsustainable and more than offset by Uber’s destruction of more efficient competitors, and the anti-competitive market power it is beginning to exercise.
Yes, Amazon has exploited market power once it became dominant, reducing the net welfare gain. But the Uber equation is entirely negative.
Yes, Amazon cut some corners as it was growing (the sales tax issue) but Amazon would have still been very successful if legislators had closed that loophole sooner–Amazon’s existence didn’t depend on those types of evasions, while Uber’s entire business model depended upon the ability to disregard any laws and regulations it didn’t like.
Amazon’s story is far more similar to Uber’s than it is different. It used regulatory arbitrage to gain cost advantage, it sustained itself on investor subsidies for years before it was profitable, and most of its profits now come from renting out server space.
Thank you for posting this, Yves. It’s an eye-opener.
Brilliant and in-depth summary, as always. Worth noting that first taxi apps existed even before Uber Cab Inc. (yes, that was Uber’s original name) was founded. Of course, back then regulators made sure laws and regulations apply to taxi apps and required new taxi apps to integrate with – taxi meter, taxi screens, taxi lights, taxi payment systems, etc. That took time…. Uber came much later in the game but refused to comply to said laws and regulations. That’s the reason for Uber’s perceived “growth”.
At the end of the day and regardless of right-wing think tanks, it’s the Democratic Party big-city gov’ts that gave Uber-Lyft-Airbnb the green light to flaunt the existing regulatory system.
(or were completely incompetent at enforcing their own ordinances—-the outcomes of malicious intent and incompetence often look the same)
And the big-city voters let it happen.
It is looking like Uber is going to fail and when it does, it will be on a scale of Enron, Worldcom, and similar failures.
It is not outright accounting fraud per se (since everyone knows t hat they are running huge losses), but an unsustainable business model that was passed off as “innovative disruption”. Silicon Valley these days seems to love this term “disruption”.
In practice, it doesn’t always work out. There are reasons why certain industries are run the way they are. Plus there are often huge capital costs to set up some industries.
Perhaps when Uber goes down, it will be a cold learning lesson for a lot of people.
Naw it’s a private company providing a completely replaceable service- nothing like either of your other examples. When it fails only its investors will lose and they are not many.
I have no idea about anti-trust law and the like, but do any of the resident legal eagles know if there is a case for traditional taxi/livery operators to sue Uber for predatory pricing? Or is the fact that they are reliant on “independent contractors” (scare quotes mandatory) and have no actual employees actually giving out rides a buffer that prevents that?
I posted this link yesterday, but it seems somewhat apt to today’s story.
I’m not an Economics person, so I cannot assess this well enough to compare and contrast what’s happening with Uber and Lyft.
http://statescoop.com/after-uber-lyft-left-austin-new-ridesharing-models-fill-the-gap
In Austin, TX, apparently the local govt required finger printing of drivers, so apparently Uber & Lyft left. Other non-profits/not-for-profits (??) are filling the gap. I don’t how or whether the 501 (c) (3) status will make these outfits: a) better for the drivers and/or b) workable/more profitable for the organization.
Does this model pose a significant threat to the Uber/Lyft model? I don’t know.
FYI.
An additional motivation to start Uber might have been these 1997 guidelines by the IRS defining the taxable status of a taxi/limousine company’s chauffeurs:
https://www.irs.gov/pub/irs-utl/limo.pdf
It says a driver who owns their vehicle can be defined as an ‘independent contractor’ with a ‘self employed’ tax obligation. Where this gets ugly is that changing a workers classification from employee to ( self employed ) independent contractor removes legal protections preventing worker exploitation, which goes beyond a determination of tax status. This is because the vast body of labor laws we’ve accumulated ( many in response to the Industrial Revolution and Great Depression ) is designed to protect “employees” from employers. Changing a workers classification from employee to independent contractor, means they are self-employed and exempt from most labor laws on the principle that a self-employed person can’t exploit themselves. This maneuver has technically reversed employee protections because its ( self employed ) workers have lost legal protections against employee exploitation, and Uber is now a customer who is defended by consumer protection laws against their ( self employed ) workers. It’s a contradiction which allows them to sidestep over a century of laws enacted to stabilize and protect our society.
My guess is Uber’s founders understood these guidelines might allow them to build a company of ‘self-employed’ workers ( with no legal protections ), who would be required to pay for the cost of their vehicles. No worker benefits, and workers help pay for overhead. Thankfully this model has been legally disputed in civil suits, and unprofitable. Hopefully when there is enough public outcry, regulators and prosecutors will decide to challenge these interpretations of existing laws and force businesses back in line regardless of their political influence.
In two words Uber’s fucked . Good and thank you NC for running this series bringing to light the realities if this nasty, inhumane business. When it does finally go down maybe it’ll take a dozen hedge funds with it. Now wouldn’t that be a success.
These “hedge funds” are gambling with chump change, not the kids future college tuition. They’ll be around until we change the “rules” in a capitalist society.
Not exactly related to today’s article, but I thought others might be interested in this interview with famed pilot “Sully” on the topic of autonomous cars:
http://www.thedrive.com/tech/8300/can-sully-transform-the-world-of-self-driving-cars
I would note that the thesis of Uber being created as a libertarian monopolistic market dominate isn’t quite correct.
Uber started out as a “dark” black car utilization scheme – essentially that limo drivers could deliver rides between chartered passengers. In this incarnation can be seen the seeds of Uber today: the black car drivers generally worked for a limo company so operating costs are covered by the limo company. Naturally, Uber Black could offer a much cheaper limo ride than the actual operator of the vehicle.
The second synergy to this scheme is that Uber allowed limo drivers to tap into the flag down market which they are normally prohibited from (licenses are different).
So here can be seen both core concepts behind Uber: break the licensing regulations preventing black car/limo drivers to pick up riders on the street, and charge less by free riding on the limo company. Replace black car with taxi, limo company with driver, and voila!
Lastly I’d note that Uber Black is a major revenue driver for Uber – and that segment is likely profitable if for no other reason than it benefited from the ongoing 1% income growth divergence.
Outstanding! Thank you, H.Horan, for showing so clearly how central Uber’s PR/propaganda campaign is to its
investor pyramid schemehigh perceived valuation, and also the centrality of its systemic corporate ruthlessness to its corporate plans.The background about the 1990s gambit, and how its libertarian messaging was later adopted by Uber but this time with the clear aim for total industry domination, is chilling in its implications.
This ongoing expose helps me understand many things better, including the culture of tech journalists and Silicon Valley.
I feel sad for the drivers who were seduced by the Uber PR and are now in dire straits after Uber changed the payment rules. I feel sad for people on the “outskirts” who need affordable transportation, whose service is going to be cut back and made more expensive once Uber has destroyed its public & private competitors. I hope the ghastly Uber corporate organism will collapse on its bloated, putrid, disgusting self before it causes more serious damage to communities.
…and so it goes. Each generation takes awhile to learn the devastation of “unfettered” capitalism.
Well, the so-called financialized public markets are not even markets anymore but a gambling parlors. In true markets any independent decision of the individual buyer seller or investor-trader cannot and do not have any major influence on the overall condition of the entire market and definitely cannot be a sole force for certain strong market trends. And what we do have now? Now the FANG gang of four stocks dictate massive market movements and capital flows under eyes of the casino owners from the FED. In fact more and more it looks like the market deteriorated to a poker game of four whether private or public.
In fact it is a game of poker with no betting limits as a fundamental corporate strategy.
That’s what allows Amazon to survive in public market and UBER in private markets. The market controlling investors borrow 0% interest from central banks directly or indirectly obtaining equivalent of perpetual refinanced loans with effective 0% cost and use the money to increase their bet higher and higher to the level that competition cannot match and hence they win (monopolizing market share) by opponent game default while having the weakest hand.
So UBER can run an outfit (not a business) with massive losses of the investment since it undercuts the completion. Long time ago it was a crime called dumping of products or commodities that resulted in sharp reaction and court indictment .Now the same is happening as before with exception of addition to it a dumping of a services like transportation or hotel services to kill the competitors and all of parasitic behavior is called proudly disruptive innovations.
Like this libertarian angle, the deployment of the rhetoric and abstract just-so stories, but isn’t there also a neoliberal angle? ie., that there must always be a parasite at the top of any organized or organizable human activity that sucks profit out of the busy little ants below it?
In other words, why do we need this uber parasite sticking its vampire squid tentacles into these essentially local business markets anyway? And why are these investors so religiously convinced that it just simply must be possible to squeeze out their own take? Why are the local ants obliged to sustain the uber parasite?
Marketing. Sheer marketing. People believe that they need these “Job Creators”, so they do.
But Uber doesn’t create jobs. If it went public, the social rationalization for its uber parasitism– its extraction of profits at the expense of other stake holders– might be that its stock helps feeds pension funds. Which its drivers won’t even nominally have because they’re not employees.
Sure, they could bank their money for retirement as independent contractors, but so can any other independent contractor. This is no thanks to Uber, in other words.
Freedom!