Why cab drivers should love Uber

By Felix Salmon
December 12, 2013

Last month the city of New York raised more than $200 million by auctioning off 200 new taxi medallions — essentially, the right to operate a yellow cab in the city. Some 2,000 such medallions are likely to be sold in all, which means $2 billion of much-needed revenue for New York, if prices remain high. But will they? It’s surprisingly easy to justify a million-dollar price tag for a medallion — but in order to do so, you need to assume that medallion owners’ income will remain constant, in real terms, over time.

Historically, the impressive political power of the medallion owners has helped to keep their income steady. They’re good at keeping the total number of medallions relatively low, and they’re also good at pushing through periodic increases in metered fees. The combination of the two allows them to rent out their medallions to drivers for about $75,000 per year.

That’s a very good deal for the medallion owners, and a much less good deal for the taxi drivers, whose income, says taxi commissioner David Yassky, is “grindingly low” — something less than $150 per day, for a 12-hour shift.

Essentially, every time you take a cab, your money gets split roughly evenly between the driver and the medallion owner. Which means that when a company like Uber comes along, it can offer lower fares to riders and substantially higher income to drivers — a win for everybody except the medallion owners.

The key datapoint came in October, when Uber said in a blog post that when it lowered fares for its UberX product, its drivers’ income actually went up rather than down: in Boston, it rose by 22% per hour, which is a lot of money. The result has been that UberX is now priced near or below prevailing taxi rates in most cities: in Washington DC, for instance, UberX costs 18% less than a taxi. And the drivers of those cars are making significantly more money than they would make if they were driving a cab.

Details on driver income are a bit sketchy, but at least one driver seems to be grossing over $1,000 per day, on good days, while Uber’s own advertising talks about an income of $70,000 per year. If you’re tactically smart as an UberX driver — driving towards hotels when empty, or waiting for a while after dropping a passenger off at the airport in the hope of picking up a fare back — then a six-figure income does not seem to be uncommon. And demand for UberX cars continue to exceed supply: the only reason they’re not even cheaper than they are, in cities like New York, is just that the cheaper they get, the more people want to use them, and Uber just doesn’t have enough cars and drivers right now to meet such demand.

We’ve already reached the point, then, at which it makes sense for almost any taxi driver who doesn’t own his own medallion to give up the rickety old yellow cab, with all of its onerous regulations, and just drive an UberX instead. I’m sure that many have already done so, and that more will follow suit over the course of 2014. And while for the time being there’s probably a big enough pool of cab drivers that new ones can be found to replace the people who have started driving for Uber instead, eventually the medallion owners are going to have to start cutting their drivers a sweeter deal, to prevent them from defecting to the competition.

Back in 1999, Jim Surowiecki proposed that we should deregulate cab fares in New York. That was a bonkers suggestion back then, because in an era of street hails, you need to know how much a cab costs before you hail it. But with the arrival of apps like Uber, we’re getting much the same effect. When you e-hail an Uber, you have just as much of an idea how much it’s going to cost as you do when you hail a cab. And so then the various services can effectively start competing with each other on price and service.

Intuitively, that sounds like a bad thing for drivers, and I understand why cabbies in San Francisco might consider Uber and its ilk to be the enemy. After all, more competition means lower prices, right? And if passenger start using taxi alternatives rather than taxis, that means less income, overall, for the taxi industry.

But in this case, the cab drivers — at least the ones who lease their cabs on a per-shift basis — should think of themselves less as small business owners, selling their services to passengers, and more as valuable employees, selling their services to either taxi-fleet owners or to companies like Uber. Looked at that way, more competition means higher wages, not lower income.

Precisely because taxi fares are highly regulated, cab drivers have historically had almost no bargaining power when it comes to their own income. The fares are set, and even if fares rise, the fleet owners will waste no time in taking advantage of that rise in fares to simply raise the cost of leasing a cab. Especially in New York, where there’s a limited number of medallions, anybody who wants to drive a taxi basically has to just accept whatever deal is offered.

But now they have a choice, which is excellent news — for them, and also for the public as a whole, which clearly loves the ability to easily order cabs from indoors, rather than having to take their chances on the street or on the phone with a dispatch service of dubious reliability and punctuality.

On the other hand, it’s not good news for the owners of the fleets. If they have to pay more to retain their drivers, that’s going to eat into their profits. And in turn, that will mean that they’re in turn willing to pay less for medallions.

That’s fine by me. So long as the price of a medallion stays above zero, the number of taxis on the street will remain constant, and the arguments against Uber — which are based on the idea that taxis will become scarcer — won’t apply. What’s more, the continued existence of all those taxis will ensure that Uber will find it difficult to raise its rates. After all, it has already discovered that demand is much greater when prices are taxi-like than when they’re significantly more expensive than taxis.

But I do think that as UberX catches on, along with its various competitors, the price of a taxi medallion is sure to fall. And that’s especially true in a world of rising interest rates, where medallions are valued on a discounted cash-flow basis. So while both drivers and passengers should embrace the arrival of UberX, if I was a medallion owner, I’d be worried. And I certainly wouldn’t be looking to buy new medallions, at a million bucks a pop.

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