How Uber Increases Driver Profits While Being Cheaper Than Traditional Taxis

New competitors don't typically raise the wages in an existing industry, but it appears that's exactly what Uber is doing.

Jan 23, 2014 at 4:55PM

If both the workers and the customers are getting a better deal from Uber, then who is it that's losing out? As Uber rolls out across the nation, consumers are getting a better deal and so are the drivers. Turns out it's those investors who hold the artificially scarce taxi medallions that seem to be getting hit.

You probably wouldn't expect falling costs to consumers and rising wages to employees when a new competitor comes into the market. That's not the way we normally think of markets working. But the rise of the various ride-share companies like Uber and Lyft does seem to be managing this. The reason is the basic structure of the taxi market in the big cities. Here's a little story from San Francisco, from Fortune:

Jason Bow worked as a cab driver for two years before he turned to Uber X. Compelled by promises of lower cost overhead, he began picking up passengers last July in his black 2010 Toyota Prius. For a 50-hour workweek driving a taxi, he once pocketed up to $1,250 after expenses. But as an Uber X driver, he makes more for less: a 40-hour workweek nets him about $1,500.

The passengers are also getting a better deal: even if Uber X isn't cheaper (which it mostly actually is), customers obviously think the convenience is worth it. Otherwise, they wouldn't use the service. But if the driver's making more money and the consumers are paying less then where's that money coming from?

One answer is that using an app to hail a cab is inherently more efficient than standing in the gutter and hoping an empty one will sail by. So there's more paid usage of the vehicle and the driver's time, meaning that these overheads can be distributed across more paying passengers. But there are apps to hail regular cabs these days, too, so there must be more.

Limiting the fleet

The other part of it is that most cities artificially limit the number of cabs that can be on the roads in any one year. This is done by issuing a badge or medallion.  Because of the artificial limitation, those medallions obviously have value --in New York City, as much as $1 million for the right to have a single cab on the road 24/7. If you want to drive a cab, then you've got to either own or rent one of those medallions, and the rent doesn't come cheap. A good guess at the NYC price is $40,000 a year for the use of it for a 12-hour shift each day.

So after he's paid that rent, his gas, his insurance, and his other expenses, that cab driver is making perhaps $9 or $10 an hour. No matter how many fares he picks up, he's not getting rich. The economic explanation is that profits always flow to whoever has the rare and necessary part of the process. It can be skill, as in sports, which is why the players make such hefty salaries. Or in this case, it's the medallion, which is why the owner ends up with more than the cab driver. But Uber, Lyft, and the other companies change the equation because they don't need a medallion.

Changing the game

We can now find a new equilibrium in the split of money between the infrastructure (i.e., Uber, or the medallion-owning company) and the labor, or the driver. Uber can say that it will take less of the total revenue stream (a flat 20% at present) and still leave more for the driver.

Thus everyone -- except those medallion holders -- is benefiting from this disruptive technology. And with medallions costing a million bucks a pop, they're likely owned by the 1%, so it's a reasonable redistribution of wealth to the other 99%. And it's all happening not because anything is being taken from anyone, but because we're opening up a previously restricted market to competition.

That's what industry disruption looks like.

The next step

Want to figure out how to profit on business analysis like this? The key is to learn how to turn business insights into portfolio gold by taking your first steps as an investor. Those who wait on the sidelines are missing out on huge gains and putting their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you what you need to get started, and even gives you access to some stocks to buy first. Click here to get your copy today -- it's absolutely free.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers