This week, the New York Times did something I would have thought impossible: They made New Yorkers feel bad for cabdrivers. Until Uber and Lyft arrived on the scene, a surefire way to liven up a dull Manhattan dinner party was to broach the topic of taxis — never around when you need one, everyone would moan, and if you do finally luck out, you’ll discover it’s filthy and invariably driven by a maniac.
But as revealed by the Times investigation of lending practices in the business of buying and selling the medallions required for yellow cab ownership in New York — with prices reaching $1.3 million in 2013 — it turns out that the cabdrivers have their own tales of woe. Many of them took out high-six-figure loans to buy the medallions, on income that barely did more than cover the loan payments. Bad enough when taxi medallions were a scarce and valuable commodity; ruinous now that ride-hailing services have cut into their profits.
Yet, funnily enough, despite having destroyed a once-profitable business model, Uber and Lyft aren’t doing so well either. Both companies recently went public, only to see their stock trade well below the IPO price. That’s because the companies are burning great bonfires of investor cash every quarter, having so far failed to discover a working business model.
Uber and Lyft are discovering that the regulatory monopolies they smashed had existed for a reason. Before Uber’s 2009 launch, and Lyft’s a few years later, almost every sizable city tightly controlled its taxi market. Government commissions set fares and limited the supply of taxi licenses. Myriad justifications were offered for these regulations, but fundamentally they existed because without government intervention, no one would make any money. In a country with tens of millions of driver’s licenses, and automobiles to match, the supply of potential taxis far outstripped any possible consumer demand.
Virtually everything people hated about taxis stemmed from that underlying market problem and the regulatory apparatus that tried to fix it. Couldn’t get a cab when you needed one? Taxi commissions were protecting incumbent profits by sharply limiting the number of licenses or medallions. Cabs were disgusting, and piloted through congested streets at death-defying speeds? Artificial scarcity normally drives up prices, so governments set regulated fares, usually by time and distance. There was no premium for a comfortable and soothing customer experience. Naturally, drivers focused on hauling the maximum number of people every shift.
Everyone complained about the result, but for decades, nothing ever changed. Then came Uber. The company did an end run around that regulatory stalemate, pushing into markets with better service and then daring the taxi commissions to shut them down.
Some cities did just that. But often, by the time the commissioners got around to it, Uber had acquired a rabid fan base, which the company wasn’t shy about weaponizing. Amazingly, improbably, Uber broke the taxi commissions — and then broke the people who owned those previously valuable taxi medallions, from individual driver-owners to the operators of taxi fleets.
It was a triumph for libertarian ideals. For Uber’s and Lyft’s investors, however, it may have been an empty victory.
The companies’ problems essentially boil down to this: The barriers to entry into the driving-people-around business are functionally nil. Whenever the profits in the market rise above a subsistence wage, more drivers will enter, thus competing those profits away.
That was the problem taxi medallions had been designed to solve. Drivers still didn’t make much money, because all you needed to get started in the business was a driver’s license. But the people who owned the right to drive were able to make a tidy living, with almost no downside risk. That’s why New York City taxi medallions got so valuable: Two decades of low-interest rates made them an attractive alternative to bonds offering yields in the low single digits.
Then a hidden downside emerged, as ride-hailing companies disrupted that previously stable regulatory equilibrium. People who had bought into the medallion market at inflated prices saw the value of their assets crater, and many of them ended up insolvent.
But destroying a profitable business isn’t the same thing as creating one. Without the regulatory monopoly they disrupted, how are Uber and Lyft going to make money?
They could try to replicate the monopoly, only without the governmental assist, exerting such firm control over the ride market that new competitors effectively can’t enter. The other option: They can’t. Uber and Lyft may discover, like taxi-medallion owners before them, that in this business, there’s always another guy with a car waiting around the corner to overrun your seemingly impregnable market position.