How Uber Increases Driver Profits While Being Cheaper Than Traditional Taxis

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.


Read/Post Comments (5) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 23, 2014, at 5:23 PM, Boston99 wrote:

    Uber is 100% fully-operational peer-to-peer taxi service that violates multiple rules and regulations. There is no magic to higher pay... Any for-profit

    company that doesn't pay same taxes and fees , doesn't follow same regulations, doesn't have

    same expenses as its competitors will end up with higher profit. Any other illegal operator would be

    have its license taken away but not Uber... At least

    not yet.

  • Report this Comment On January 23, 2014, at 6:14 PM, neamakri wrote:

    boston99 has some valid comments. This also points out that whenever govt. gets into private business, things get messed up.

    I have a solution. Uber should rebrand itself with the motto "Mobile Dating Service". That way if you call a ride on Uber, you are going on a "Mobile Date". Just say a few words to the driver and voila' the legal requirement has been fulfilled.

    What say Fools?

  • Report this Comment On January 24, 2014, at 12:31 AM, sliderw wrote:

    @neamakri

    Good creativity! Too bad it won't pass legal muster.

  • Report this Comment On January 24, 2014, at 3:17 PM, laughtiger wrote:

    The problem with this analysis, as a taxidriver, the $1250 a week was what he was taking home.

    But as an Uber driver, he is paying his own vehicle maintenance and insurance costs, not to mention lease payments since he almost certainly does not own the vehicle outright. That comes out of his $1500. So the increase in pay is illusionary.

    The emphasis that we repeatedly hear about the impact of the medallion on cabdriver income is a red herring. In places like New York City the medallion rental is only a fraction of the price of operating the vehicle. In many other cities medallions cannot be bought or sold, so there is no inflated price.

    The key factors for cab income are who pays for what, and who assumes liability. Uber is just a new cab company that shifts more costs and liability onto the drivers. Plain and simple.

  • Report this Comment On March 25, 2014, at 1:50 AM, Jetson324 wrote:

    @laughtiger

    First, "a 40-hour workweek NETS him about $1,500". He is stating that he is earning $1500 over his expenses with the word "net" not "gross".

    Second, insurance costs and lease are irrelevant in this matter because as long as he owns his vehicle and is using it for personal use then he would have to pay those expenses, regardless. The cost of insuring it does not go up by using it for work, and not every Uber driver is "leasing".

    Finally, for you to state "Uber is just a new cab company that shifts more costs and liability onto the drivers" is exactly how businesses, with profits, operate. The article emphatically explains that it has opened up the market to new competition, thus, the new competition, while it does inherit the costs and liabilities, it also reaps the profits that would normally be reserved to those cab companies that earn a profit. So the profit that would have gone to the cab companies are now going to those that with scarcer resources the opportunity to become their own entrepreneurs and earn a profit on their endeavors instead of the profits going to those cab companies; which, as it was appropriately stated, are those that have the $1 million.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2807142, ~/Articles/ArticleHandler.aspx, 11/24/2014 2:08:37 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement