Will Regulation Kill Uber and Other Gig Economy Platforms?
In this second part of the series, we will examine how regulations can lead to additional hurdles for companies to manage and how this can lead to a reduction in investments. It is becoming increasingly difficult for companies trying to build their businesses off of contract and gig economy workers due to continuing efforts by States to enact rules requiring them to reclassify their contractors as employees. For many of these companies, the costs associated would easily add 25% to its operating costs due to requirements that employees have set schedules planned weeks in advance, health insurance, unemployment insurance, payroll taxes, and other miscellaneous fees on top of the current compensation. For companies that already are operating at a loss from quarter to quarter, like Uber (NASDAQ:UBER) for example, these costs could very well be enough to put them out of business because their major investors like SoftBank (TYO:9984) may decide to cut losses after investing over $7 billion.
The reason this is a distinct possibility is that the start-ups are operating based on investments from venture capital, based on the idea they will be able to turn a profit in the future. Since Uber and Lyft (NASDAQ:LYFT) are operating at a loss currently, you can look at the way these firms are operating as subsidizing the customer’s costs in exchange for market share. The way this strategy typically works is that companies will attempt to gain market share and try to build a monopoly by putting competitors out of business. One tool that companies will use to try to remove competition, once they are a market leader, is to lobby the government for regulations. These regulations are structured in a way that they benefit the incumbent and require such expensive implementation, they cripple their competitor's ability to grow and compete.
However, what is happening right now for these companies, is that they are seeing a drying up of capital due to these regulations before the company has fully matured and produced profitability. Examining Uber, the company operates at more or less a billion-dollar loss each quarter. Based on third-quarter financials, they lost $1.162 billion (or $585 million in adjusted EBITDA) which is going to be simply unsustainable without massive cash infusions to keep the company afloat. This is also a company that has approximately 70% market share in the ride-sharing industry with Lyft as the only other major competitor at 30% market share. The question I would like to ask is: how much of a price increase would it take to turn the company to profits? And what is the cost the consumer would bear before they would make the decision to avoid using these services?
The reason I ask this is that no one is being forced into driving for Uber or Lyft, they are making the decision, maybe even in desperate circumstances, to engage in this activity, to be able to earn an income. Right now the regulations being proposed in California, with AB5, and being looked into in other States, are not helping the drivers of the company. They appear to be much more on the vindictive side, to try to punish the company, rather than to help the drivers. The inevitable consequence of this is that drivers will not be able to work part-time to supplement their incomes, they will not be able to work for other companies that are competing for attention from the drivers, and they will not have the flexibility to refuse to accept riders they would prefer to avoid. For the customers, this is going to mean that they will not have a driver available or the prices will be increased to the point they choose to forego the service entirely.