Uber IPO investors should pay close attention to New York City – Quartz

As Uber races toward an initial public offering that could value it at $90 billion, the company should hope would-be investors aren’t paying much attention to New York City, one of its most important markets.

In an amended IPO filing dated April 26, Uber said regulations approved by the city last year that capped the number of for-hire vehicle licenses and created per-mile and per-minute pay minimums for drivers “had a negative impact on our financial performance in New York City in the first quarter of 2019 and may have a similar adverse impact in the future.”

In December 2018, New York’s city council approved a first-of-its-kind pay floor for local ride-hail drivers, who as independent contractors aren’t protected by state and federal minimum wage law. The pay rules were designed by the local taxi commission and implemented on Feb. 2. They aim to raise take-home pay for drivers to $17.22 an hour, the rough equivalent of a $15-an-hour minimum wage for contractors. That represents an increase of 44% or nearly $10,000 a year for some 70,000 professional drivers in the city.

The city council also voted in August 2018 to limit the number of ride-hail vehicles on its streets, ostensibly to study the effect of services like Uber and Lyft on congestion. (The study won’t necessarily accomplish that, as congestion is an immensely complicated issue. And take it from a jaded straphanger: The best cap on Uber and Lyft in New York would be to fix the subway.)

Uber highlighted the impact of New York City’s regulations in two separate risk factors in its IPO filing. The language first appears when Uber admits that it generates a “significant percentage” of gross bookings on rides—24% in 2018—from five metro areas: Los Angeles, New York City, the San Francisco Bay Area, London, and São Paulo. “[A]ny changes to local laws or regulations within these key metropolitan areas that affect our ability to operate or increase our operating expenses in these markets would have an adverse effect on our business,” the company writes, before going on to discuss the regulatory situation in New York City.

Uber reiterates the impact of the city’s regulations in a separate risk factor on how local rules can limit or halt its operations. The company gives the example of mandatory wait times on ride-hail pickups in Barcelona that led it to suspend ride-sharing in the city in January 2019. Then it mentions New York City’s minimum-pay rules for drivers.

“We are still working through adjustments to be made with respect to rider promotions, driver supply, and other aspects of our business in response to these regulations,” Uber says, “however, these regulations had a negative impact on our financial performance in New York City in the first quarter of 2019.”

Uber stopped taking new driver signups in New York City on April 1, information it displayed in a brown banner at the top of its local driver portal as recently as April 30. The company has told would-be drivers they can join a waitlist to drive in the city, or consider other opportunities with Uber, such as delivering food on Uber Eats or driving “in NYC suburbs.” Lyft also has a waiting list to drive in New York City, and is encouraging prospective drivers to sign up in another part of the state or in New Jersey. Drivers who aren’t registered with the city’s taxi commission can’t pick up passengers in the five boroughs.

The per-mile rates adopted by the city (pdf) are designed to cover costs incurred by drivers on the job, such as gas and vehicle depreciation. The per-minute rates are to compensate drivers for time spent logged into a ride-hail app, with the goal of drivers earning $17.22 an hour. Both rates are then adjusted by a “utilization rate” that accounts for the share of time the average driver spends with passengers in the car.

That the companies have stopped signing up new drivers is proof the rules are working. One reason drivers weren’t earning enough before the city passed its pay rules is that there were too many drivers on the road, and not enough work to go around. The utilization rate discourages ride-hail companies from flooding the streets with drivers by essentially forcing the companies to pay drivers for their down time if there isn’t sufficient rider demand.

The subtext of Uber and Lyft pausing new driver signups, in other words, is that New York City is oversaturated. “As drivers exit the industry and demand from riders increases, we will once again seek to add new drivers,” Uber spokesman Josh Gold said in an email. “Because of [city] regulations, we’re currently not accepting new drivers in New York City,” Lyft spokeswoman Campbell Matthews said in an email, adding that Lyft hopes to resume adding new drivers soon.

What should worry Uber and its prospective investors is that it wouldn’t be hard for other cities to copy New York City’s rules. When it comes to regulating ride-hail services, the devil has always been in the details, and the details of New York’s scheme are frankly quite good, to the point that even Uber accepted them largely without protest. (Lyft sued the city over the rules on Jan. 30, and that suit is ongoing.) If Uber’s four other biggest metro areas followed New York City’s lead, it could harm nearly a quarter of the company’s business.

Uber doesn’t explain exactly why the city’s regulations are hurting it, but it’s easy enough to guess. After Uber had to start paying drivers more, it raised prices. Then, to keep customers from dropping off, it offset those fare increases with heavy discounts. Lyft, which has done the same, said in a blog post in March that on the two days it didn’t “stabilize the market” with rider discounts, prices jumped 24% and rides fell 26%.

For now, the subsidies are working. The number of trips Uber completed each week in New York City ticked up slightly in February, with Uber completing 3.41 million trips in the last full week of the month, the latest for which trip data is available from the city’s taxi commission, compared to 3.37 million in the last full week of January. Lyft also grew its weekly trip count, from 1.13 million to 1.16 million over the same time period.

Of course, we’ve always known Uber and Lyft can gin up riders with attractive discounts. You could argue the entire ride-hail model is an elaborate arbitrage, in which companies have been able to sell a service below cost (in this case, rides) because they got a lot of money from venture capitalists and they convinced people to work for them as contractors at subpar wages and without benefits in exchange for some degree of flexibility.

The question has always been whether this scheme is sustainable. Both Uber and Lyft already lose a lot of money, largely due to these subsidies for riders and drivers, and it remains unclear how many people would use their services at its true price. By making local ride-hail companies pay a minimum wage, New York City has effectively forced them to either charge that true price or swallow the cost.