Disruptive Innovation: Uber & Gig Economy Business Model
Section B/Topic 3 – Charu Arya, Ervis Bida, Joe Colombo, Christian DeFelice, Jessica Flaherty, Kyle Rusignuolo, Rajat Sinha, Tom Williams
The Business Model
- The Sharing Economy is a socio-economic system reliant on the sharing of resources.
- Reach clients through Peer-to-Peer (P2P) transactions where individuals interact directly to produce and receive goods and services.
- Reliant on information technology and digital platforms to distribute and share products.
- Disruptive Innovation is an idea/product that establishes a new market or enters an existing market, which then overtakes the incumbent products before it. It does so by providing new benefits which its predecessors do not and cannot provide.
- Example – The Ford Model T, introduced in 1908, made horse drawn carriages as a means of primary transportation obsolete.
- More recently, on-demand ride sharing services, such as Uber and Lyft, have utilized technology to shift the driver market away from taxi companies and limo services.
- Example – The Ford Model T, introduced in 1908, made horse drawn carriages as a means of primary transportation obsolete.
- Gig Economy is a labor market compiled with employees operating on short-term contacts or freelance work.
- Workers do not have permanent positions.
- Positions can range, such as drivers, journalists, educators.
- “Gig” taken from performance arts. Concerts, comedians, speaker appearances known as gigs.
- 2017 Reuter’s study reflected that 34% of the US workforce were gig employees.
- Technology has rapidly expanded the gig workplace, made possible by companies such as Uber, Care.com, Upwork, TaskRabbit.
How It Works: The Gig Envisioned:
- Following the 2008 financial crisis, the United States workforce was reeling and unemployment numbers reached levels not seen in the county since the Great Depression. But the emergence of a Gig Economy represented new opportunities for displaced workers and their families.
- For a long period of US history, professional success was characterized by one’s ability to remain at a position for an extended period of time, all while improving their own positional rank in order to accumulate wealth. To constantly change jobs and work off limited contracts was frowned upon and deemed irresponsible.
- Freelance and contract work is now much more welcomed by both workers and corporations.
- Organizations hire gig workers for limited roles to help solve specific issues. Also allows a business to save money by not providing a full-time and limited wasted time with no training or guidance provided.
- Allows workers to develop a strong work-life balance.
- Technology presents opportunities for a gig economy, allowing workers a place to interact and present their abilities.
- Founded in 2009, Uber, a “mobility as a service” provider, took advantage of the idea of a gig economy and emerging freelance workforce by establishing a unique business model.
- Despite initially beginning as just a rideshare platform, Uber did not own any cabs nor did the company hire cab drivers. Uber would allow anyone, after an extensive background check, to sign up to become a driver and operate on their own schedule. Uber’s app then conveniently connected the driver and their vehicle with a user needing a ride.
- Before Uber, the primary driving service market was cornered by limousine and taxi services, both of which relied heavily on schedules and cash payments, who at times only operated in very limited city markets.
- Uber’s accessibility with their application, along with the ability to hire drivers at any location across the country, has allowed them to operate in over 900 metropolitan areas across the globe.
- Has since expanded services beyond ride sharing, such as food delivery, package delivery, and expansions into electric bikes and motorized scooters through a partnership with Lime.
- Uber allows people to apply for a “flexible earning opportunity” as gig workers.
- Great independence for workers. Workers are left alone and have their own timetables to complete tasks.
The Critique –
The Trouble with the Gig
- Bhairavi Desai, a middle-aged woman without a driver’s license delivered emotional testimony in front of New York City’s Taxi & Limousine Commission about the mounting existential difficulties in the taxi industry.
- The disruption Uber brought to the Taxi industry resulted in many casualties among the taxi companies and its workforce. Annual bookings of full-time yellow-taxi drivers in New York, working during the day when fares are typically highest, fell from $88,000 a year to just over $69,000.
- Economic hardships caused by this deregulation resulted in less pay, longer work hours, loss of insurance and benefits for taxi drivers.
- Digital platforms are becoming increasingly important to Americans’ livelihood and the explosion of these platforms, enabling the gig economy, will fundamentally alter the future of work.
- Too much attention on these platforms distracts from the real problems in America: low minimum wage, lax overtime rules, weak collective-bargaining rights, and excessive unemployment.
- 85% of UberX drivers are part time (meaning they work fewer than 35 hours per week).
- Uber drivers represent significantly less than 0.1% of all full-time-equivalent employment. Based on the fact that uber is the biggest player the gig economy is not as large as portrayed.
- The rise of Uber has convinced many pundits, economists, and policymakers that freelancing via digital platforms is becoming increasingly important to Americans’ livelihood.
- With more smartphone apps being developed and deployed, reliance on the gig economy workforce is becoming greater and forever changing the fundamentals of our future workforce for all companies.
- The following are the central features when discussing work in America – When it comes to the future of work, these are the aspects of the labor market that deserve the most attention.:
- a disappointingly low minimum wage
- lax overtime rules
- weak collective-bargaining rights
- excessive unemployment
- Competitive advantage is measured by profit share – a company’s share of an industry’s profits. This definition means that a competitive advantage is impossible if an industry lacks profitability
- Reason for market saturation is mostly due to low barriers to entry and the switching costs are low on both the supply side; the drivers – and the demand side; consumers.
- As a result, the industry features “numerous players offering virtually the same services. They are in a spending arms race to draw new drivers and consumers, bidding up ads on Facebook and Google and forking out hefty bonuses to new drivers,” according to the Wall Street Journal.
Legal Troubles: Courts And Legislatures Push Back
- In 2018, New York became the first major American city to pass legislation that will cap the number of for-hire vehicles for a year. This bill also allows New York to set a minimum pay rate for drivers.
- This has led to a clash amongst interest groups with the taxi industry officials saying Uber was dooming their business, while Uber was making a case that yellow cabs have a history of discriminating against people of color.
- Due to this new legislation, Uber warned riders that there could be higher prices and longer wait times for passengers.
- Uber planned to propose congestion pricing. Congestion pricing is to toll drivers entering Manhattan’s busiest neighborhoods. Experts believe that congestion pricing is the best way for New York City to fix congestion and secure the funds needed to fix the subway.
- The taxi industry has been decimated by the rise of Uber. The price of a taxi medallion plunged from more than $1 million to less than $200,000. Taxi workers support the cap and are hoping that the taxi business improves.
- California lawmakers rewrote the rules of employment in legislation that could grant hundreds of thousands of workers new job benefits and pay guarantees.
- Assembly Bill 5, which curbs business’ use of employees as independent contractors, was approved in the state Senate
- Considered one of the most controversial of the year, it could strain relationships between bosses and employees in a variety of service-based industries such as ride sharing, nail salons, and construction.
- Contractors, including many in multibillion-dollar technology companies, are not covered by laws guaranteeing a minimum wage, overtime pay, sick leave, family leave, unemployment and disability insurance, workers’ compensation and protection against discrimination or sexual harassment. Nor do businesses pay into Social Security or Medicare for contractors.
- Other states have adopted rules to extend benefits such as unemployment insurance and workers’ comp to independent contractors. But California’s bill is arguably the strongest in the nation.
- Thousands of Uber, Lyft and DoorDash workers have filed misclassification lawsuits and mounted public protests over slashed wages and arbitrary terminations. Others, however, fear that employee status would encourage the companies to curtail their hours and prevent them from driving on multiple platforms.
- In the 2020 election, California voters gave Uber and Lyft a big victory and it caused a big setback for labor unions. Voters approved a measure that would allow the drivers to continue to be classified as independent contractors. This is known as Proposition 22.
- Drivers who did not want the rules to change were featured on TV, radio, and internet ads speaking about why they support the way things are.
- Uber, Lyft, and DoorDash spent more than $200 million in support of Proposition 22. The opponents of Proposition 22 raised less than a tenth of that amount and their campaign was backed by free publicity and driver protests.
- The drivers who were not supportive of Proposition 22 felt that drivers were being taken advantage of and that their working conditions needed to improve. The proposition was also opposed by labor groups that helped create the state law that Uber and Lyft were rejecting.
- Organizers are not going to back down and they will still continue to organize drivers and push for greater labor protections. Uber and Lyft are still facing a lawsuit from the California government. Labor groups are also looking beyond California and other states that are facing off with Uber and Lyft over whether drivers are employees.
- A California Superior court judge invalidated a 2020 ballot proposition that allowed Uber, Lyft, DoorDash, Instacart and other app-based businesses to classify their workers as independent contractors.
- Proposition 22 claims to protect Californians who choose to work as independent contractors, but it also “obliquely and indirectly” prevents them from bargaining collectively, he wrote
- Uber vowed to appeal in a statement: ““This ruling ignores the will of the overwhelming majority of California voters and defies both logic and the law”.
- The ruling comes at a time when the companies are battling efforts in Massachusetts and other states to classify their workers as employees rather than independent contractors.
And European Courts
- In February 2021, the United Kingdom’s Supreme Court ruled that the country’s Uber drivers must be considered workers rather than self-employed. This decision leaves Uber drivers with the potential to receive minimum wage salaries and paid federal holidays.
- The court’s decision served as the ending to a long-running legal battle dating back to 2016 brought to the courts by Uber drivers seeking employment rights.
- The Supreme Court considered Uber drivers as subordinates to the company, who could only increase their pay by working egregious hours. The following elements influenced the Court’s decision:
- Uber sets the terms of each ride on their app, which determines how much a driver can earn.
- The company has the ability to penalize drivers who reject too many rides.
- Driver relationships are measured through a star-rating system, where Uber may terminate drivers if their rating diminishes and/or does not improve.
- Ruling could have larger implications on gig economy, and the benefits gig workers (drivers, delivery drivers, couriers, etc.) currently receive.
- Tim Vickers, a sociology lecturer at Nottingham Trent University, believes the ruling goes beyond company control over labor, but ensure that an organization is responsible for the conditions and wellbeing of their staff.
- In 2017, the European Court of Justice determined that Uber must be classified as an actual transportation service, leaving the company open to stricter city imposed regulations and laws. Uber, who considers itself a digital platform rather than a transportation service, would not be forced to employ certified drivers and strengthen their background checks on workers.
- Previously, Uber had utilized their classification of an on-demand service to skirt the region-specific laws, allowing them to strengthen and expand their market position across the globe.
Covid… Gig Workers Strike back:
- Gig economy forces workers to extremes in order to make ends meet.
- Many out-of-pocket expenses (health and car insurance, gas) while working long hours due to the minimal pay.
- To take a day off would mean lost wages many cannot afford.
- COVID-19 pandemic has put an extreme reliance on gig workers.
- Delivery workers help provide supplies and groceries to people quarantining in their own homes.
- Deemed “essential workers” by many cities on lockdown.
- The 20th century economy saw workers spending a long period of time with one company.
- Adopted policies such as unemployment insurance, employer-sponsored health care, and FMLA (Family Medical Leave Act) laws to respond to the needs of the time.
- Today, the workforce and economy have adjusted, and rising non-traditional work arrangements need to provide workers with similar benefits.
- Legislators, in response to COVID-19, have adjusted policies to provide relief benefits for gig employees, allowing these citizens to apply for unemployment benefits.
- This change provides visibility to the gig economy and its workers, allowing the public to understand how not all workers are treated equally.
- Growing sense of urgency from both the government, and pressure against companies like Uber, to provide benefits to freelance employees.
- While targeting certain gig sectors and companies, like ride-sharing and Uber, is beneficial to the worker, in order for long-term change to occur then the gig economy as a whole should be considered.
- Larry Mishel, a member of the Economic Policy Institute, argues that passing rules against one business model is not enough, when there are millions of gig workers employed in separate industries still fighting for equality.
- Growing belief that new legislation defining employees and going against the gig economy business will help account for all gig employees and allow for greater worker rights and benefits.
Overall Summary of Articles:
During the 20th century, the United States worker was expected to remain at one place of employment for a majority of their careers. To leave a decent position, or even work freelance, was frowned upon and considered irresponsible. However, at the turn of the 21st century and as a result of the 2008 financial crisis, many citizens found themselves out of work and instead turned to freelance and contract work to make ends meet. Over time, cultural opinions would shift and this limited type of work was becoming more commonplace, as the gig economy began to rise, with nearly a third of the entire US workforce being recorded as gig employees.
Uber, founded in 2009 as a “mobility as a service provider”, took advantage of the growing gig workforce through their technology and seemingly lax corporate policies. The company’s business model allowed them to attract freelance and limited workers by appealing to their ideals: flexible hours, quick payments, and guaranteed work. Uber created a sense of worker independence, and their rapid growth and innovation allowed them to quickly expand globally and dominate the driver service market. Over time, though, as the gig workforce began to grow more popular, pressure began mounting on Uber and similar gig employers to provide for their staff as if they were regular full-time employees.
New York and Los Angeles were both proposing bills to limit the amount of activity that Uber and Lyft drivers could do. In LA they left it up to the citizens to decide on in a vote called Proposition 22 which was voted against, in NY the government voted on it and passed the bill. This limited drivers to the number of for-hire drivers the city could have. By doing this in NY specifically, it is supposed to help the taxi industry as their worth has fallen from $1 million to about $200,000. In LA, the bill was not voted on by the general public which meant that Uber and Lyft drivers would not become independent contractors that would be offered benefits and a set wage. Some drivers are happy with this as they are able to make their own schedules, and some can even earn upwards of $100,000. The drivers who are not happy with it are still continuing to fight to try and get the bill passed into law.
The COVID-19 pandemic forced the world to rely on the services of gig employees to support those quarantined due to the virus. The public opinion on freelance and contract workers have quickly shifted, deeming their efforts as vital to society, and pressure was put on legislations across the globe for employment equality. Courts in both Europe and the United States have begun to pass sweeping legislation for the employment benefit rights of freelance workers, allowing them to secure items such as unemployment benefits and paid-time off. Governments have even begun to come down on gig employers, such as Uber, forcing them to obey regional regulations and provide certain rights to their contracted staff.
With these changes, there is a growing sense of belief that greater benefits and laws will soon pass in favor of the gig employee. But in order for true change to come the legislation must account for all gig employees and companies, while at the same time not restricting the foundational ideas of the gig economy.
- What is the Uber business model?
- Uber is often used as an example of Disruptive Innovation. It has indeed been disruptive off the traditional taxi industry. But is there a significant innovation? If so, what is the innovation? And finally, will it be disruptive for long enough for it to qualify as a disruptive innovation?
- The United Kingdom’s Supreme Court ultimately ruled that Uber must consider their drivers as workers rather than self-employed independent contractors, which entitles Uber drivers to employment benefits. California’s AB5 legislation did the same but was overturned by proposition 22 which in turn has been declared null and void by a low court in California. As the case rises back up to the California supreme Court on appeal it’s indeed possible that Uber drivers in California could be declared as employees. What would be the impact of such a decision?