Uber and Lyft Get a Lot of Hype -- But Ridesharing Is a Parasitic Business Model
Ridesharing companies like Lyft, Uber, and Sidecar use the ubiquitous ownership of smartphones to connect casual drivers and passenger clients through their proprietary applications. Like any broker they take their cut of the revenue in these transactions, (Lyft, for example, skims 20 percent off each payment made by a passenger through their smartphone.) Ridesharing companies encourage unregulated, hyper-privatized transactions among precarious laborers.
Their business model relies on marketizing formerly non-economic spheres of life, like giving a friend a ride in your car, and they have aggressively externalized costs like gas, insurance, payroll, etc. so that profits are maximized and expenses are as close as possible to nonexistent. In doing so they undermine the very existence of the taxi industry, but they also undermine public infrastructure in toto.
Taxis are not just some private sector dinosaur that should be hit from an innovation meteor. Taxis are an integral part of every major city’s transportation infrastructure. Taxis have been strictly regulated to ensure that the industry’s companies and contractor-drivers pay revenue into the city for the infrastructure they use: roads, signals, bridges, signs, sidewalks, etc. In San Francisco taxis generate over ten million dollars each year in revenue for the city to spend on maintaining transport infrastructure. The funds also pay for the costs of regulating the industry through the Taxi Commission. Regulators attempt to shape the industry in important ways to make it more accessible and equitable and therefore democratic. For example, San Francisco’s taxi fleet is 85 percent hybrid or CNG fueled, reducing the fleet’s carbon emissions and improving the health of city residents. This environmental standard is only possible because the industry is regulated, and ridesharing companies like Uber and Lyft undermine this effort. Taxis are also required not to discriminate among passengers, and to serve all parts of the city, among other things that might not be maximally profitable. It’s this public transportation infrastructure, a big part of which is comprised of taxis, that is being disrupted by the ridesharing companies who have inserted themselves as for-profit brokers in the transportation commons.
The people who will lose the most from the unbridled rise of ridesharing are those employed by the taxi industry which is seeing profits disappear. San Francisco’s taxi industry is very decentralized and highly competitive. There are about 31 cab companies today served by 10 dispatch companies, some quite big and some very small. No single firm is dominant. There are about 1,500 cabs authorized to drive within the city. The taxi industry employes several thousand workers. Taxi drivers are predominantly immigrants and people of color, and the average cabbie earns a very low yearly income.In 2000 upwards of 57 percent of San Francisco cab drivers were immigrants, with the largest groups having arrived from South Asia, East Asia, Russia and Africa. Of the 1,540 taxi drivers in the San Francisco, San Mateo, Redwood City metro region the hourly mean wage last year was $14.17, and the annual mean income was a mere $22,440.
When people say the taxi industry is “ripe for disruption,” what they’re saying, besides the real inefficiencies and problems affecting most big city taxi operations, is that it is a decentralized, highly competitive industry, most of whose owners and operators are low-income people of color, many of who are immigrants. They are susceptible because they are marginalized, and because they lack political and economic clout. In San Francisco the cabbies are definitely a noisy political lobby, but up against the tech and venture capital bosses and entrepreneurs, who are most influential in the Mayor’s office, the cab drivers are impotent.
That’s who is being disrupted, a competitive industry that is owned by, and which employes, working class people of color.
So who’s doing the disrupting? Who benefits from this attack on the taxi industry, and more generally on the principle of a regulated transportation sector?
The two biggest ridesharing companies in San Francisco are Uber and Lyft. Although they virtually didn’t exist until two years ago, between them they have raised about $390 million over the past 2 years according to securities filings with the state and SEC. Uber and Lyft are quickly expanding their ridesharing enterprises to New York, LA, Chicago, and other cities far beyond the laboratory of San Francisco.
Where is this money coming from?
Uber’s financial backers include Goldman Sachs, Google Ventures, and four other private equity groups. Perhaps Uber’s biggest financial backer isTPG Capital. Co-founder of TPG, David Bonderman, one of the wealthiest men on earth, is now on Uber’s board of directors. Bonderman’s personal net worth is somewhere in the ballpark of $2.6 billion. TPG reportedly has $55 billion in funds under management making it one of the largest private equity firms in the world.
Lyft’s financial beneficiaries are similarly elite members of the economic hierarchy. Earlier this year Zimride, the ridesharing company that developed Lyft, sold its Zimride ride-sharing application to Enterprise Holdings for an undisclosed sum. (Zimride was the equivalent of a combined craigslist ride-sharing bulletin board and Facebook.) Enterprise Holdings is a giant global corporation that booked $15.4 billion in revenue last year. As a private corporation, Enterprise is owned and controlled by the Taylor family of St. Louis. Jack Taylor, the family’s patriarch, is reportedly worth $11 billion. The Enterprise acquisition of Zimride is an example of how powerful corporate interest often respond to potential disruptors who might undermine their existing product; they purchase them and integrate them into their larger operations. In this case Enterprise, which peddles rental cars it owns, saw Zimride as something that could disrupt their profit stream, so Enterprise gobbled up the disruptor. The way Enterprise does business is changing as a result, but the distribution of economic power isn’t shifting.Uber’s other investors like Menlo Ventures, Benchmark Capital, and First Round Capital are pretty typical of Silicon Valley’s private equity network. The firms are owned and run by mostly white men with Ivy League college pedigrees, places like Stanford, Cornell, Harvard, Yale and other bastions of privilege. The partners at these firms are millionaires, and billionaires are not uncommon. They leverage pension fund, university endowment, and sovereign wealth dollars to invest in speculative ventures as well as established companies (and from their limited partners they extract hefty management fees). To call them members of the 1% would be inaccurate. Many of Silicon Valley’s private equity investors quality as bona fide members of the 0.1% due to the large sums of wealth and income at their command. While most are socially liberal, many of them make political investments with influential Democratic and Republican members of Congress to ensure the country’s tax code and business laws allow them maximally build their fortunes.
Ben Horowitz (son of the arch-conservative David Horowitz) was a founder of Opsware, a company Hewlett Packard bought for over a billion dollars back in 2007. Andreessen was a funder of that company. Opsware was possibly a disruptor to established tech companies like HP, so HP devoured it.Zimride’s Lyft ridesharing product which directly competes with taxi companies and bigger competitors like Uber received $80 million this year, mostly from theAndreessen Horowitz private equity firm.Again, Andreessen Horowitz is about as wealthy and establishment as you can imagine in American business. Marc Adreesseen, who half the firm is named for, got rich from developing one of the first web browsers. From the fortune he obtained doing that he invested in other big tech companies and became wealthy. Today Andreessen is a director of HP and Ebay, two Fortune 500 companies, as well as a director of Facebook.
Andreessen Horowitz manages probably upwards of $3 billion, and they have dozens of investments.They’re major backers of other disruptive tech startups like Airbnb and Udacity, two companies that are similar to ridesharing in that they are threatening the welfare and livelihoods of low-income communities and politically less powerful workers within the precariat.
Look across the other smaller ridesharing startups that are competing for market share in this gold rush sector and you’ll see similar stories, fast growing companies with very disruptive business plans backed by very powerful investors. The people whose lives will be most disrupted are going to be the less powerful working class who toil in the competitive and disorganized taxi and other transit industries. The public sector will be disrupted as it is partially privatized and as regulations are undermined in favor of new rules that allow tech companies to externalize costs as much as possible onto precarious workers. More and more parts of our lives will be transformed into relationships of market exchange. As San Francisco’s recent battles over ridesharing show, this is by no means a “natural” process. It’s politically determined as to what kind of economy we want, and how the rules of the economy will distribute wealth and income and provision for public goods.
“Disruption” is the zeitgeist of Silicon Valley’s tech industry, especially in the realm of startups. The mythos is this: small scrappy hackers with very little capital and a few computers can create new business models that will topple older fossilized companies, even whole industries. In the process the economy will become more efficient and everyone will have more choices. We all win thanks to the new Internet-enabled economy. That’s not at all what is happening in reality, however.
The ideology of disruption goes back a long way in the annals theorizing capitalism, but the current ideology really grows out of the work of Clayton Christensen, a Harvard Business School professor and devout Mormon who has built his academic career on case studies of disruptors. Christensen’s seminal 1998 article in the Harvard Business Review on disruption tells a story about dominant companies atop their industries —Firestone, Xerox, IBM— that were caught flat footed, and in several cases destroyed, by their smaller creative competitors. They failed to innovate and grow beyond their core markets. They failed to recognize the potential of a new technology that would make their existing products and services obsolete. This has fidelity with the actual history of American business.
Christensen, along with his son Matthew, manages a hedge fund that purports to bet on disruptors and short the stock of bumbling giants. Christensen also sponsors a think tank he named after himself, the Christensen Institute, which, according to its web site is, “dedicated to improving the world through disruptive innovation.”
California’s tech entrepreneurs have embraced Christensenian disruption. The big case studies in tech that seem to confirm Christensen’s theory are well known. Digital cameras destroyed film. Personal computers displaced mainframes as the core hardware business, and laptops have since eaten into a huge share of the personal computer market. Now mobile devices are eroding PC sales. None was ever seen as a threat to the existing dominant product and producer, but displacement happened nonetheless. Tapes replaced vinyl, CDs replaced tapes, but MP3s and iTunes-like services have replaced CDs. Cloud is displacing both the idea of storing your data on physical drives you own. Software as a service is chipping away at the idea of buying and owning software. And so on…
In a lot of cases disruption ends up being a battle of big corporations for market share. Consumers and employees within the industry aren’t necessarily better or worse off when the smoke clears and a winner emerges with a new technology and business model.
But the tech boom today is characterized by a another kind of disruption. It’s social disruption. New technologies and business models don’t just attack the existing dominant corporations; they attack social relations and transform non-business spheres of life into methodical instances of economic exchange from which the new tech innovators extract revenue. The tech boom is also characterized by disruption of smaller competitive markets by emergent tech monopolists backed ultimately by huge pools of private equity and giant, monopoly-seeking corporations.
The winners and losers in many cases of disruption are split along existing racial and class lines of inequality. Those with little economic or political power to defend themselves from the disruptors are seeing their livelihoods and communities turned upside down. Their small businesses are being destroyed. Their communities are becoming unaffordable. Those with cultural capital, and access to economic capital have a shot at being disruptive, at skimming some wealth off of deregulated industry and precarious labor. And the wealthy individuals and companies that should be disrupted by a clever tech startup —the tax dodging banks, the Fortune 500, the health care companies and insurance giants— have the resources to defend themselves, fend off the geeks, deploy an equally clever response to retain market share, or to just buyout the scrappy competitor and fold it into their existing empire.
The ridesharing phenomenon reflects all of this and more.