Business·Analysis

Uber economics could be the new cottage industry: Don Pittis

While the taxi alternative Uber takes flak over its business practices, Don Pittis says that consumers and regulators must consider whether the advantages of the sharing economy are worth its potential long-term risks.

Powerful internet middlemen create the possibility of Uber exploitation

While the taxi alternative Uber takes flak over its business practices, Don Pittis says that consumers and regulators must consider whether the advantages of the sharing economy are worth its potential long-term risks. (Junko Kimura-Matsumoto/Bloomberg)

I hope this doesn't mean Uber is going to start digging up dirt on me.

That's what Emil Michael, an executive with the San Francisco-based ride-sharing company, reportedly threatened to do to journalists who wrote critical stories about his firm.

It is tempting to write something negative about Uber for that reason alone. But there are other good reasons to have serious reservations about the long-term impact of not just ride-sharing, but the growing list of internet-based services in "the sharing economy."  

Of course, in the battle between conventional taxi services that are used to being protected by government regulation and companies like Uber that favour deregulation, the argument is not one-sided.

Advocates of a new way of doing things, such as high-profile Canadian businessman and Toronto mayor-elect John Tory, think it is time to change the way we oversee a highly regulated industry.

"Deregulating carries with it this notion that somehow it is the Wild West, but it's not," Tory said on CBC Radio's Metro Morning this week.

"It's 2014, and Uber and Hailo and all these applications are here. They're not going away. And I think the sooner we accept that fact and move on to modernize regulation, the better."

Raising the stakes

Tory was wrong on one point. Uber's British competitor, Hailo, is indeed going away, announcing in October that it was pulling out of North America.

But Uber has upped the stakes, flouting local laws by expanding its UberX service across Canadian cities.

"Anyone driving as an UberX driver is doing so in violation of city bylaws," said Tracey Cook, executive director of licensing and standards for the City of Toronto.

The city argues the popular ride-sharing service poses a risk to residents, and users take a ride in UberX cars at their own peril.

UberX is a true sharing economy innovation where ordinary people use their personal cars to drive other people around. Uber is the middleman. The UberX rides are also about 30 per cent cheaper than regular taxis. 

One of the reasons UberX is able to undercut normal taxi services is that drivers don't have to buy a plate or "taxi medallion" that specifically allows a car to call itself a taxi. Medallions, which allow regulators to limit the number of cabs on the road, can trade for tens of thousands of dollars and are often held by large companies. 

Ride sharing services like UberX, by letting many more drivers into the business, will drive the price of those medallions down. And for consumers who want the lowest possible price for a taxi ride, that's a good thing.

More than rides

Sharing economy services extend far beyond the taxi business. The original Napster and its many imitators allowed people to share their music and videos.

Airbnb allows ordinary people to undercut the hotel business by renting rooms in their own houses. Companies like Krrb allow people to sell homemade food and handmade products to their neighbours without passing through a normal retailer.

Such companies and services are often described as disrupters, considered in economic theory to be a good thing for society, though bad for the businesses that get disrupted.

Working from home sometimes means there's no oversight or authority ensuring all your interests are protected. (krrb.com)
By reimagining their business strategies, such upstarts send old and inflexible industries to the scrap heap (think record companies) and create new, efficient ways of doing things. 

But in the sharing economy, disruption isn't the only thing happening.

Effectively we are seeing the revival of what was historically called the cottage industry.

In the modern context, the name sounds quite appealing, and at the beginning it was.

Working from the convenience of their rural homes, craftspeople would manufacture textiles or other goods on a piecework basis for middlemen who would drop off the raw materials and collect the finished products.

But isolated in their own homes, the workers were in no position to bargain. The middlemen had all the market power. 

There was no shortage of workers, and workers were responsible for their own overhead, like rent and food. 

Not always the best thing

Soon middlemen began setting the amount paid so low that entire families worked every hour of daylight just to survive. It was only the factories of the Industrial Revolution that ended the practice. 

We all like low prices. But sometimes the lowest price is not the best thing for an entire economy.

In the case of UberX. one of the reasons it can undercut the conventional taxi industry is that it has a virtually infinite supply of potential drivers.

Like other internet-based disrupters from Apple's iTunes to Amazon, it is the middleman who increasingly has the clout, effectively squeezing out a larger share of the revenue.

As Tory says, Uber may be here to stay. It may be time to modernize regulation in the taxi industry.

But as we welcome new participants to the disruptive impact of the internet-based sharing economy, we must keep one eye on the future to make sure that we don't build an economy based on exploitation.

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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