Creative destruction is a process through which something new brings about the demise of whatever existed before it. The process of creative destruction stems from competition and innovation, which drive changes in the market. The success of Netflix is an excellent example of “creative destruction. Netflix has driven the video tape/disc rental business, along with companies like Blockbuster, into extinction. Federal Express created the overnight delivery industry and all but decimated the U.S. Postal Service. Kodak was an iconic American company synonymous with photography. But long entrenched in film manufacture, it did not see the shift to digital photography, one that required no film. But the iconic exemplar of creative destruction was Apple. Its story needs no re telling as it is the stuff of culture and legend. Apple unified the worlds of computers, internet, phone, photography and music by bringing them all together in a single device. Last, but not last, there probably has not been a better example of creative destruction than the ascendance of Uber.
In New York City, the taxi industry continues to collapse under the forces of Uber’s disruption. Traditional taxi drivers and medallion owners, after being protected from competition by government regulations for many generations, are the obvious losers from the “Uber effect”. Some people believe that consumers are the winners from Uber’s creative destruction in the transportation industry, as we now have more choice, better and faster service, friendlier drivers, cleaner cars, and most importantly — lower prices. Competition is said to breed competition as it forces business to rethink their methods of doing business and to devise methods of doing business in a better and more efficient fashion. At the very least, competition often causes businesses to maximize their responsiveness to consumers. But for competition to be beneficial to the consumer, competition must be fair. In New York City, Uber can hardly be said to have been competing fairly. They burst into the market claiming they were not a transportation company subject to regulation by the New York City Taxi and Limousine Commission (“TLC”), but were a technology company. Their business model was the same as the traditional car services, yet they refused to abide by the rules of the TLC, which all other car services that provide identical services must play by. Compliance with government regulation is very costly, but by the time the TLC got around to regulating Uber, it was too late. The damage had already been done. Uber’s methodology was to break the law, and obtain absolution from the TLC by eventually agreeing to submit to the rules that all other car services in NYC had to play by. Misclassifying its drivers as independent contractors is just another example of how Uber not only continues to take advantage of their drivers, who in my opinion are employees and not independent contractors, but also avoids having to pay the massive costs associated with paying employees (e.g. health insurance, payroll tax, time and a half for overtime, compliance with labor laws). Of course, there are the stories of Uber engaging in a concerted effort of calling other car services for transportation and then eventually cancelling the trip at the last minute, thus upsetting the driver who lost a fare. All this causing the driver to reconsider working with Uber rather than staying with the traditional law abiding traditional car service. And we should not forget about Uber’s massive subsidies of each trip for its drivers and Uber’s obscene subsidization of “sign on bonuses” given to for-hire vehicle drivers to lure them away from the local community car service. With a $65 Billion dollar valuation, Uber can afford to provide subsidies to drivers to lure them away and even to prospective customers to get them to become customers. The list of unfair business practices can go on and on. All of this may seem like legitimate business operations, but in my opinion, it is not only not legitimate but it is destructive to the for-hire vehicle industry in an extremely negative fashion.
Uber did do one good thing in its creative destruction. It caused the for-hire transportation industry to modernize. The yellow taxis had a government backed monopoly for years with no end in sight. As such, there was no incentive for them to modernize or pay more attention to customer service. Car services were forced to modernize by obtaining smartphone applications to allow its customers to book a trip or summons a car, just like one may do with Uber. If a company is forced out of business because it refuses to modernize and adapt to the times, just like Blockbuster and Kodak, then that is the forces of the market that caused their demise. But by engaging in unfair business practices, Uber is forcing the competition out of business for reasons other than market forces. This is patently unfair and should not be condoned.
The City of New York turned its backs on the yellow taxis and is also turning its backs on community car services. Many of these small car services are mom and pop shops, mostly minority owned and operate a legitimate business that have served the transportation needs of the local communities in the outer boroughs of NYC for decades. They provided a service to the City in the 80’s and 90’s in areas of the city that most people did not want to travel to. These small businesses are being forced out of business not just because of Uber’s unfair competition, but also due to the onslaught of new, burdensome and irrational government regulations. The cost to comply with most of the irrational government regulations are so high that small car services cannot afford it. When government regulations serve a genuine purpose, and are rationally related to a legitimate goal, then compliance is required, regardless of the cost. But for the past 6 years, the TLC has been engaging in a pattern of creating new regulations that serve no legitimate goal. Most importantly, government regulation, while sometimes mandatory, is not a market force, but is a governmental requirement.
Most of the governmental leaders of the City of New York have allowed Uber to grow and grow at an unchecked rate. This has caused many unfortunate circumstances. First, it has caused the demise of the yellow taxi industry. Medallions that were worth 1 million dollars a few years ago are worth about half of that now. Even with the plummeting values, medallion owners are still unable to meet their loan obligations because the unchecked rise of Uber has shifted the actions of consumer base from hailing a cab to summonsing a car on demand from Uber. Taxi and car service drivers were once able to make a legitimate and decent living. Now, most can hardly afford to make their car payments. Full time professional drivers are a thing of the past. Uber and the actions and inactions of the TLC have created a market filled with part time unskilled drivers. So what happens to the full time drivers….they become unemployed, unable to pay their bills, unable to feed their families and eventually bankrupt.
I believe in the free market. So if all of this destruction was caused by market forces, then I would have no problem. But when the government turns its back on long standing, law abiding businesses and allows a super-rich and super powerful entity like Uber to operate outside of the law, then the end result will be another government backed monopoly…..all in the form of Uber. So back to the consumer, because that is really what matters here. Right now, the consumer is happy. No more stinky yellow cabs. No need to wait for a car service to pick you up. No need to be concerned about costs because the cost of an Uber trip is the same as a trip with a yellow cab or a traditional car service. But the public usually does not realize the inherent problem until it is too late….and that problem is that non-market forces in the form of unfair completion from Uber along with irrational and needless regulations from the TLC are all combining to cause all other car services to go out of business and make the yellow taxi extinct. So the typical question from the consumer is this….what is wrong with that ultimate scenario since Uber will be left standing the consumer can always use Uber’s app to get transportation? The problem is that the end game of Uber’s creative revolution is a destructive revolution where only one company is left standing….and when Uber is left to be the only company in town, they will be free to jack up their prices because there will be no competition to keep their prices in check. It also reduces their willingness to serve the public interest or provide top customer service. All of this surely make us all worse off. This is why the government is supposed to prevent monopolies from being created or from continuing to operate. Since the late 1800’s monopolies have been largely outlawed. But in the meantime, Uber continues to make massive “donations” to politicians’ campaigns, all to get them the lawmaker to see it the “Uber way”.
If the history of transportation in NYC has taught us anything it has taught that we need to move away from the ubiquitous crony capitalism that protects well-organized, well-funded, concentrated companies like Uber. In the long run, it will only lead us down the same vicious cycle of high prices and poor service. Think about what I am saying here. Look at the dynamics of the industry. Take a thoughtful view of the future and decide if creating another government created and government backed monopoly is in the best interest of the public. I think you know that my opinion is a resounding “NO”.