Uber claims its founders aren't the only ones a little richer thanks to the taxi startup.
An UberX driver putting in a 40-hour work week with the company's app makes a median income of $90,766 in New York City, the company claimed on Tuesday. A San Francisco driver makes $74,191. Median household income in the New York City is closer to $51,000.
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A cab driver in New York City makes about $130 a day, twenty bucks less than in 2006. That comes out to $33,800 if a cabby works fives days a week for the whole year.
Those eye-popping numbers are a product of cutting out middlemen and allowing drivers to operate independently, Uber said. Meanwhile, the Uber platform gives consumers better service and price transparency, while operating on UberX allows driver to user their own cars and without expensive licensing such as medallions.
Claiming cheaper prices for customers and greater revenue shares for laborers through market efficiency is the ultimate in startup panacea talk -- a perfect market solution for a better world.
But if a cab driver making $90,000 a year through a startup valued at $17 billion seems too good to be true, it probably is.
How does a cab driver make $90,000?
The simple answer, as both Felix Salmon and Tim Worstall at Forbes have pointed out, is the medallion system. Medallions are permits from the city to operate a cab and are often rented out to drivers.
"Taxi companies that rent out access to the medallions have immense economic power over the drivers. If you’re not willing to basically become an indentured servant to get medallion access, well, you’re out of luck," wrote Rohin Dar, cofounder of the Pricenomics, a data gathering startup and economics blog.
In addition to the medallion owners, taxi drivers must also give a cut to the dispatch company, which often pairs drivers with those seeking a ride and facilitates other transactions. By eliminating two middlemen and providing increased price and demand transparency, Uber offers drivers a better platform while still taking a 20% cut from every fare.
"With a powerful technology platform, Uber delivers turnkey entrepreneurship to drivers across the country and around the world. In contrast, the nation’s taxi drivers are often below the poverty line, required to spend $3,500 per month, over $40,000 per year just to lease their taxi, so that wealthy taxi company owners can reap the benefits of drivers having no other option to make a living," the company wrote in its press release.
Uber's ability to pass more money to drivers is impressive, but seems a bit counterintuitive. How does a startup gain a $17 billion valuation while dramatically increasing the amount its primary contractors make?
The Amazon effect
A fairer system that gives more rewards to laborers is rarely criticized, particularly when it results in improved service for consumers. That $17 billion valuation, on the other hand, doesn't necessarily just come from abolishing medallions.
The promise of Uber mirrors the rise of another web giant. Amazon's roots began as a low-cost bookseller that cut out the need for middlemen and transferred more profits to authors. This article from Forbes in 2008 eerily mirrors the budding relationship between Uber and drivers.
"Let’s say, in the new world, Amazon becomes the retailer, marketer, publisher and agent combined and takes 65% of the revenues, offering 35% to the author–we end up with a much better, fairer world," the article states.
Uber has recently drawn comparisons to Amazon, offering services instead of products. Like Amazon, it could start with cabs and expand into other service industries.
"I can sum up the bullish case for Uber in one word: Amazon," wrote Kevin Roose in December for New York magazine." Once it has you summoning cars from your phone, the logic goes, it can use that same back-end technology to hook you in for all other kinds of deliveries — food, clothes, Christmas trees. And eventually, like Amazon, it can become something akin to an all-purpose utility — it'll just be a way you get things and go places."
Six years after the Forbes article, Amazon's massive share of the publishing industry has resulted not in the elimination of publishers but rather ongoing tension within the book industry. Amazon's ability to create an efficient market with low margins has given way to pressure from its investors to make more of a profit, causing it to have standoffs like the ongoing struggle with Hachette Book Group.
The book industry and the taxi market are, of course, two very different businesses. The warning, however, is clear: Companies that achieve massive scale by trying to eliminate middlemen and squeeze margins can become a new type of medallion owner.
I can't imagine the frustration of my friends published by #Hachette, being kneecapped by Amazon. Explain me how this is legal?
— gayle forman (@gayleforman) May 24, 2014
Competition looms
Right now, Uber drivers might be able to command lots of fares and a nice percentage of that revenue, but increasing competition looms -- both among drivers and other startups.
Uber has claimed it is already the cheapest ride service, but a brewing price war between Uber and Lyft adds to concern that fares could continue to decrease.
That $90,000 New York drivers make is great, but it comes with almost no competition.
"I've noticed that in cities where Uber competes with Lyft, the pricing is substantially lower than in markets where they don't compete," said Arun Sundararajan, professor of Information, operations and management sciences at New York University. "New York is one of the markets where they don't compete with Lyft."
Driver income will also be squeezed by an influx of drivers attracted by high wages. Add in insurances and car upkeep that UberX drivers will be required to provide, and the upside will begin to dwindle.
“New people are flocking to Uber in part due to the money that they can make and due to the flexibility you have, basically being able to decide when you want and where you want to work,” Rachel Holt, Uber’s regional general manager for the East, told the Washington Post.
Uber declined to provide additional data on driver income.
Flexibility and high wages combined with a low barrier of entry (an UberX driver needs only a car and to pass checks on their criminal and driving background to begin operating) means any drivers that take a stand against changes in the 80/20 spilt will have little leverage. Don't like the new terms? Uber will find a driver that will.
Cab drivers in Milan realize this and have protested the introduction of Uber, as have others in France and Spain.
Which is not to say that this is not how it should work. In a perfectly efficient market, drivers and consumers would constantly adjust the price of taxis based on demand and availability. That sounds a lot like Uber's surge pricing.
A fare deal
There are some reasons to believe in Uber's upside for drivers. Sundararajan said the local nature of service industries and the simplicity of the platforms should prevent any particular company from dominating a market. If Uber puts too much pressure on drivers in a particular city, they could just band together and start their own service.
The competition between Uber and other taxi services could also create a demand for quality drivers that services tend to hype.
"Long term, this looks like something that will be good for people who subscribe to the platform," he said.
An improvement for taxi drivers in this scenario does seem plausible, as the previous system is borderline horrific. The elimination of medallions at the very least will give drivers the opportunity to have greater control over their own labor.
But let's not act like it is sustainable to pay cab drivers $90,000 going forward. Cabbies making below the poverty level is just as illogical as them making more than the average mechanical engineer.
Like Amazon, Uber will need to keep prices low to attract customers while figuring out how to increase its revenue to please investors and justify its massive valuation. Driver income will certainly end up being part of that.