Uber's IPO and the future of gig economy workers

Uber's IPO and the future of gig economy workers
© Greg Nash

The recent strike of Uber and Lyft drivers on the eve of Uber's historic initial public offering (IPO) had no effect on the IPO itself, but its implications for the future of the gig economy in general, and Uber in particular, are significant. 

First, what does it even mean to strike in the gig economy? To understand this, we must first acknowledge the fact that most gig workers continuously make three decisions at any point of time: Do they want to work?; on what platform (Uber, Lyft or maybe even TaskRabbit or Postmates)?; and for how long? 

ADVERTISEMENT

Given that drivers have the freedom to make these choices, and Uber has a hard time predicting exactly how drivers would react to different incentives, having a driver not show up (or not respond to a specific stimulus or nudge) cannot be distinguished from the choice to work for a competing platform or deciding to stay at home for other reasons.

The notion of striking is almost anachronistic when discussed within the realm of the gig economy. In fact, most gig-economy platform incentives and promotions are generated using machine-learning models that are "trained" to identify inactive drivers (over the last day, week or month) and try to incentivize them. 

In other words, the striking drivers are more likely to be rewarded for their inaction than to be penalized for it.

The chief complaint made by Uber and Lyft drivers seems to be the fact that in preparation for the IPO and in an attempt to look more profitable (or lose less money), the firms reduced their commissions paid to drivers.

The drivers also complain (primarily Uber drivers) that they feel they receive very little support when, for example, there is a dispute with a passenger.  

Uber and Lyft operate a two-sided market. They mediate interactions between both drivers and passengers, which means that they compete both on the demand side and on the supply side.  

In fact, in its S-1 filing, Uber describes the term partner as “any one of a Driver, restaurant or shipper, all of whom are our customers." While some people mock this definition, I actually find it absolutely honest and on point, as well as very telling about the future of the firm. 

Over the last three years, Uber has generated more than $10 billion in operating losses, almost all subsidizing drivers and riders, with the goal of achieving "winner-takes-all" status. And while one may imagine a situation in which we have a winner-takes-all that locks in both drivers and passengers, this is not the reality.

While the strikers were calling for stricter regulation, guaranteed minimum wages and treatment of gig workers as employees rather than contractors, in my opinion, the necessary regulation is one that ensures that platforms cannot prevent these workers from working for multiple platforms, also known as “multi-homing.”

It’s also critical for platforms to provide them with the information and transparency they need to make optimal decisions for themselves. 

Studies show that as a society, we are better off when there is significant multi-homing. This is especially apparent when compared to the highly regulated, but extremely inefficient yellow taxi or any other medallion-based model. 

The issue with the demand for higher guaranteed wages is that even with the current business model, in which the firms compete for drivers and passengers, both Uber and Lyft suffer significant losses.

The only way to increase wages will be to either increase prices or increase commissions to drivers, which will accelerate losses even further.   

In that sense, the strike and its failure are not unrelated to the initial skepticism with the Uber IPO. Uber's ability to withstand the strike demonstrates that Uber does not depend on any subset of drivers.

ADVERTISEMENT

But it also indicates that Uber needs to continuously convince and incentivize these drivers to work for Uber, which at least in the short run means burning even more cash, which is going to be funded through the money raised in its IPO. 

However, in the same way that Netflix is no longer a DVD rental company, Uber is not a taxi-hailing firm. While there is no profitability in sight for Uber, Uber Eats is overall a successful platform with a clear road for profitability.

And with autonomous cars in the (maybe not so near) future, Uber is well positioned to play the role of the platform on which this technology will be tested and deployed (as Lyft is going to do soon for Waymo). In that case, the very notion of gig workers and their role in mobility will have to be redefined.

Gad Allon is a professor of operations, information and decisions at the Wharton School of the University of Pennsylvania and director of the Jerome Fisher Program in Management & Technology.