This Bill Could Destroy Uber’s Unsustainable Business Model

An unholy alliance of on-demand companies is desperately trying to stop a California bill from reclassifying their independent contractors as employees.

Last week, the California Senate’s Labor, Public Employment and Retirement Committee held a hearing and passed Assembly Bill 5 (AB5), which promises to make it harder for companies to claim workers are independent contractors and increase the operating expenses of Uber, Lyft, and other on-demand companies that already find themselves unable to turn a profit.

Written by Assemblywoman Lorena Gonzelez (D-San Diego), AB5 codifies the California Supreme Court’s unanimous May 2018 ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeleswhere an “ABC test” was introduced to determine whether a worker was an employee or an independent contractor. Individuals with sufficient control over how and when they did their work are independent contractors, while workers without much control are employees.

…The real threat is that AB5 could become a model everywhere. Let’s take Uber, for example. Before Uber went public, it filed and released an S-1 form, a document laying out all the information necessary for investors to clearly understand a company’s operations. Uber’s section dedicated to potential risks was particularly interesting. In it, Uber said its business would “be adversely affected if drivers were classified as employees instead of independent contractors” because it “generate[s] a significant percentage” of its gross revenue from five metro areas: Los Angeles, New York City, the San Francisco Bay Area, London, and São Paulo.

Uber has never made a profit and has actually lost over $14 billion in the last four years alone. In the prospectus, Uber insists that these five major metropolitan markets are essential to its path to profitability. In reality, what Uber actually relies on is the $20 billion in funding raised over the past decade and the $8 billion in new investments after going public in May. This investor welfare covers the cost of low prices that render each rideshare trip unprofitable, of driver incentives to combat the high turnover rate of drivers, and of promotions used to drive up demand.

The investors have continued piling that money onto Uber because they believe Khosrowshahi when he talks about becoming the “Amazon of transportation” or the platform on which all transportation happens. In other words, a monopoly. After achieving a monopoly, some commentators warn that Uber will then charge whatever price it wants and use its dominant position to both pay back investors and kill potential competitors. As an added bonus, Uber promises it will turn its labor costs to zero by deploying a fleet to autonomous vehicles (which may prove to be difficult to widely adopt). That is Uber’s path to profitability.

Equity research analysts at Barclays project Uber is on track to lose $3.9 billion in 2019 and if AB5 were passed, it would cost the company upwards of an additional $500 million. A drop in the bucket. But if AB5 were to become law and other states follow California’s example and pass similar laws, it could constrict these companies’ already narrow paths to profitability. Investors saw no clear path to profitability in Lyft’s S-1. Postmates hopes to use the money generated from going public to expand geographically and achieve profitability. DoorDash says it’s profitable (if you don’t include overhead expenses like salaries and rent). If nationally adopted, the investors behind each of these companies could cash out and bankrupt them. AB5 isn’t an existential threat, but it will cause one.

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