Innovation and the free market have been dealt a crushing blow in the battle for supremacy on the streets of New York City.
The taxi medallion industry has effectively neutralized Uber’s effects. Although the defeat has to do partially with Uber’s economic model, the taxi medallion financial industry has received a lot of help from regulators and remains as durable as ever.
It’s worth examining the situation in New York so that we can gain a better understanding about which fights make the most sense for the free-market, and where our resources are better spent. We learn more in defeat than we do in victory.
Uber Effect Negligible
A New York City FOIL request revealed that, for the period January through April 2015, average daily farebox declined a mere 4 percent over the same period in 2014. This is a minor decrease considering the four-fold increase in UberX drivers to 16,000, and claims of 10,000 new drivers being added this year.
UberX is the price-competitor to taxis, but the associated wait time simply cannot compete with the street hail, which is the government-protected exclusive right of yellow taxis between Wall St. and 96th St. This is the critical element to why Uber will never win in NYC, and the street hail is never going to vanish.
Worse, a lawsuit seeks to define a “hail” as including an E-hail via the Uber app. If successful, and certain interpretations of the TLC regulations suggest it just might be, then Uber would literally be put out of business in NYC altogether.
Other Restrictions On the Way
Uber is also facing a new growth-restrictive law being considered by the city council. Citing an increase in congestion and a decline in average speed, the council has proposed a bill that would permit the city to study congestion and deliver a report late next year. The kicker is that a static picture is necessary for the study, so for-hire vehicles (FHV) like Uber would be limited to 1 percent growth. Sources tell me this bill has a lot of traction and is likely to pass.
Another concept being considered is to either eliminate surge pricing, or to cap it at 1.25x regular fares and permit taxis to charge it as well.
Another idea that has been floated is to put a cap on the number of medallion and FHV ownership and affiliations. Thus, no one company could own more than a certain percentage of the medallions or FHV licenses. The city actually had a structure like this in place many years ago. Chicago still has a 25 percent cap.
Uber’s Internal Problems
To be fair, there are other reasons why Uber’s impact on the taxi medallion financial industry has been negligible.
Uber’s own internal study showed a 50 percent driver attrition rate over one year, ending June 2014. It’s likely higher by now. This attrition’s explanation may come from my just-released white paper, “Towards A Cost Estimate for A NYC UberX Driver.”
I was curious about driver costs, wondering if UberX wasn’t the great deal as advertised, and if this might provide additional explanation for Uber’s defeat. Sure enough, the research concluded that NYC UberX drivers lose 68 percent of pre-tax gross revenue on the first dollar-per-mile of revenue, 55 percent of the first $1.50-per-mile, and 48 percent of the first $2-per-mile — pre-tax.
It appears that just having a free market isn’t sufficient. The business model actually needs to work.
At first, it seemed like the price of taxi medallions were falling in response to the threat of Uber cratering their underlying value. It turns out that isn’t true.
The price of a taxi medallion has nearly quadruped since 2000 to $1 million, so a decline to $800,000 really isn’t that surprising, particularly in light of the city’s decision to increase the number of yellow medallions by 15 percent, and since green Boro Taxis are now in operation and have captured about 8 percent of the market.
As for those transfers that did take place, it turns out the media blew it again.
Out of 13,605 medallions, less than 0.5 percent have traded hands. Furthermore, former TLC Chairman Matthew Daus is on record saying, “A significant number of transfers were between family members and friends, and which converted independent unrestricted medallions into corporate medallions. There are too few true arm’s-length transactions to conclude that rideshare, or any other factor, has materially impacted medallion values.”
Daus notes the media seized on the non-market value transfers, “leading to market fears and a freeze in liquidity, creating the self-fulfilling prophecy of a decline in value.”
Uber’s Uphill Battle
I think us free-marketers were fooled into thinking Uber could easily topple the taxi medallion financial industry.
The truth is that taxi medallions generate enormous revenue. The TLC reports the average taxi medallion grosses $190,000 annually. Most owner-operators also lease their medallion, collecting 2x debt service from that source alone. Passive investors who lease medallions to cabbies generate $3,000 per month, which is also 2x debt service.
Clearly, a 4 percent taxi revenue decline won’t cause a cascade of foreclosures and my research shows that decline would have to hit 50 percent before any real pain is felt. That isn’t going to happen.
By the way, there isn’t even any definitive evidence that the revenue decline is due to Uber. The MTA reports subway ridership surged 2.6 percent in 2014, adding 132,000 riders daily, so that’s likely to be at least a partial factor.
The NYC taxi medallion financial industry is on solid ground. The data is unequivocal. While Uber faces increasing headwinds from driver liability exposure, lawsuits over driver employment status, driver attrition, and eventual caps on surge pricing, the yellow cab remains New Yorkers’ ride of choice.
We Conservatives aren’t going to win every battle. There are serious forces lined up against us. While NYC is a lost cause, and Chicago is not likely to see much change either, there are many other cities around the world that are ready for this shake-up. Let’s get on with the fights we can win.