• Ride-hailing competitors to Uber and Lyft are already preparing to seize the moment if the industry leaders decide to pull their services in California while fighting a new labor law.
  • Last week, top executives at Uber and Lyft said, if forced to comply with the ruling, they would likely have to suspend service in the state while reworking their businesses around the law.
  • Such a decision could leave room for many new competitors and even taxi drivers to step in to fill the void.

Ride-hailing competitors to Uber and Lyft are already preparing to seize the moment if the industry leaders decide to pull their service in California while fighting a new labor law.

That decision could come as soon as this week, when a stay on a preliminary injunction requiring Uber and Lyft to reclassify their drivers as employees is set to expire. The companies are appealing to a higher court to overturn the ruling or at least extend the stay.

Last week, top executives at Uber and Lyft said that, if forced to comply with the ruling, they’d likely have to suspend service in the state while reworking their businesses around the law. Both companies said they’d need time to make the necessary changesand rehire drivers as employees. They have since been warning users in California of the potentially imminent shutdown.

That move could help Uber and Lyft at the ballot box if consumers lament their absence enough to approve a proposition that would carve out their businesses from the new state labor law, Assembly Bill 5, or AB5. The law aimed to classify gig workers as employees, requiring their employers to pay benefits and unemployment insurance they otherwise wouldn’t. But, once passed, Uber and Lyft claimed it shouldn’t apply to them, prompting California’s attorney general and three city attorneys to sue the firms for misclassifying workers.

If they leave California, Uber and Lyft risk losing market share in the country’s most populous state, which is also the home of many sources of venture capital. Several competitors have already taken notice and are accelerating plans to enter the market. Even the taxi industry, long derided by Uber and Lyft in the early days of their services, could be positioned for something of a comeback.

Start-ups prepare to swoop in

At least two start-ups that spoke with CNBC are accelerating their plans to enter California in light of Uber and Lyft’s potential retreat.

Alto, a Texas-based rideshare service, had planned to expand to California by early 2021. CEO Will Coleman said Alto now hopes to be there no later than early November.

Alto has had an employee-based driver model since its inception, lowering the regulatory hurdles it will have to jump to get set up in California. Coleman said the model allows Alto to better control the rider experience, which is especially important for cleaning procedures related to Covid-19.

“The reality is that having W-2 workers is actually significantly more innovative than [having] contractors in the transportation space,” Coleman said, noting that most taxi drivers have traditionally been independent. “Fundamentally what we can control is actually the most important part of our business, which is supply. The challenge that Uber and Lyft have with independent contractors is that they have zero control over their supply.”

Coleman said Uber and Lyft’s extra supply benefits consumers through low prices, but it drives down pay for workers and leads to an excess of cars on the roads. At Alto, rather than incentivize drivers to go to less-populated places with surge pricing, the company forecasts demand to optimize its fleet. Coleman acknowledged that means drivers are slower to arrive than Uber and Lyft, but said Alto has prioritized other parts of the experience.

“We’re never going to be as quick as Uber or Lyft,” Coleman said. “In many central business districts you might be able to get an Uber or Lyft in literally seconds if not a minute or two. We don’t optimize for that. We tell our customers, look, expect us to be there in 10 minutes no matter what. And we deliver on that promise like 99% of the time.”

Another start-up, Arcade City, is no stranger to swooping into cities in a standoff with the ride-hailing leaders. It grew its cooperative rideshare model in Austin, Texas, when Uber and Lyft briefly left due to stricter background check requirements they argued would add bureaucracy to their sign-up process. Arcade City was born out of a Facebook group where riders and drivers could connect with the freedom to negotiate prices. They’ve since tried to expand to the Philippines and Brazil during other regulatory pushes.

Arcade City founder Christopher David said he’s preparing to sign up drivers in California with a new app. The service doesn’t yet collect fees from riders or drivers, but David said he anticipates making money down the road by offering services like credit card payment processing to those who use the service.

David said he wouldn’t shy away from using some of Uber and Lyft’s early tactics to enter a new market if regulation doesn’t keep up with new models of transportation.

“There’s always going to be some amount of friction … having the existing systems becoming accustomed to the new innovation,” David said. “To that extent, we absolutely are doing things similar to Uber. We are explicitly borrowing at least some pages from Uber’s playbook.”

But, he said, Arcade City aims to value drivers more than he believes those businesses have demonstrated.

Another ride-hailing service, Wingz, already operates in San Francisco and is working on converting its drivers there to employees. CEO Christof Baumbach sees it as an opportunity to discover if employment-based driving gives the company more control over its standards, especially with the new demands of Covid-19, which require additional cleaning and protocols for drivers.

“All these things really point toward having more of a relationship which is more an employee-employer relationship,” Baumbach said. “Because if you work in an independent contractor model, there’s just a number of things that you’re not supposed to do. Really clearly directing the driver of what to do or even providing PPE [personal protective equipment] to be able to protect them is typically something you wouldn’t be doing in an independent contractor relationship.”

Baumbach plans to use his San Francisco market as the first to test the employee model before possibly expanding it to cities in other states in which Wingz operates, even if they don’t mandate employee classification.

The return of the taxi?

Just a few years ago, the taxi industry complained of the potentially existential threat Uber and Lyft posed to their businesses. Now, with both companies positioned to suspend service in California, they may have a chance to reclaim some territory.

Taxi drivers have already found ways to carve out niches Uber and Lyft drivers are less incentivized to serve, according to Izzy Aala, CEO of the taxi-hailing app Flywheel. Before the coronavirus pandemic, Aala said many riders would opt for licensed taxis during rush hours because they are not subject to surge pricing that can make Uber and Lyft rides more expensive during periods of high demand. And during the public health crisis, taxi drivers in San Francisco have focused on efforts to transport essential workers and meals during Covid-19, Aala said.

Uber and Lyft forced the taxi industry to innovate by introducing new competition, which Aala said was ultimately a good thing. Taxi drivers used to prefer driving the streets to pick up riders who would flag them down, rather than focus on services for the medical community, for example, he said. But now that the source of income has shifted, taxi fleets have learned to adapt, Aala said.

Ironically, to comply with AB5, Uber and Lyft have considered new models that could look strikingly similar to the way traditional taxis operate. Both companies have discussed a franchise-like model where people could use their platforms to work as fleet operators, dispatching drivers to where they are most needed, The New York Times first reported Tuesday.

That’s not unlike a dispatch operator for government-licensed taxi drivers. Taxi drivers are in fact independent workers who operate through a variety of models. Some own and operate their own licensed cars and medallions, while others lease them for set periods of time. In many cities, taxi drivers who lease vehicles pay a set fee per day and keep their earnings, while drivers for Uber and Lyft may use their own vehicles but give up a cut of their earnings.

Before AB5 went into effect earlier this year, some taxi fleet operators made changes to their businesses to avoid any potential compliance issues. The state lawmaker who authored the bill, San Diego Democrat Lorena Gonzalez, told the San Francisco Chronicle last year it would be possible for taxi drivers to be reclassified under AB5, though the success of such a challenge is still untested.

In a statement, an Uber spokesperson said a fleet model would look similar to its early Uber Black service, “with higher prices and less reliability. In some models, drivers bring their own cars; in others, the cars are owned by the fleet. In either case, drivers would likely earn a predetermined hourly wage for their time on-app—but, in exchange, fleets would need to monitor and enforce drivers’ activity and efficiency, for instance by putting drivers into shifts, dictating where and when they must drive, and enforcing trip acceptance criteria. We are not sure whether a fleet model would ultimately be viable in California.”

“We’ve looked at alternative models, and the one that would work best for drivers is what we’re supporting in the ballot measure — they remain independent and can work whenever they want while also receiving additional health care benefits and an earnings guarantee,” a Lyft spokesperson said in a statement.

Aala sees a potential pause on Uber and Lyft in California as an opportunity for the taxi industry to reclaim some market share. But that may require the industry to first reclaim its branding.

“Is taxi even like a bad word now? Like, do we even want to say ‘taxi’?” Aala said he’s debated with co-workers.

When Uber and Lyft first entered markets, they often appealed to consumers by drawing contrasts with the taxi industry: they offered lower prices and far-reaching, accessible service to riders and lured in drivers with the promise of flexible hours after a quick on-boarding process. Their success has opened up the eyes of the taxi industry to areas of the market they didn’t previously serve.

Now, the taxi industry will have to show consumers it’s not as different from the services they’ve gotten used to as they might have imagined. In addition to hailing a cab on the street, riders in many cities can use apps like Flywheel to call a car just like they would Uber or Lyft, though they may not see a preset rate. Aala said he hopes it can soon provide riders more predictability and ease “meter anxiety.”

Uber and Lyft have shown that the ride business is larger than city-centric taxi companies previously envisioned. Now, Aala hopes that cities can cut back on some of the bureaucracy that extends driver sign-up times to bring some app-based drivers into the fold before Uber and Lyft return.

“I think what Uber has shown is that you could make a business by servicing those underserved areas. I think that if that void becomes kind of permanent, you’re going to see companies adapt and launch fleets [in those areas],” Aala said. “What they’ve shown is the pie of people wanting passenger transportation was so much bigger than what they thought, like a hundred times bigger than what the taxis thought it was. They just had to be able to create a model.”

Deja vu

Andy Tryba had a feeling of deja vu when he learned of Uber and Lyft’s threats to suspend service in California over a new law.

That’s because Tryba was in Austin when both companies paused service there over a new regulation that required drivers to submit fingerprints for their background checks. Uber and Lyft complained that the process would delay and discourage driver sign-ups and that their background checks were already sufficient. Voters sided with the city of Austin in a proposition that year, and the companies left, taking their complaints to the state of Texas.

It took a matter of months for the state to overturn the law before Uber and Lyft returned to Austin. But in that time, a flood of start-ups tried to fill the gap in service.

“It was a bunch of everything … you had all kinds of different apps, which in one sense is good, there’s obviously a lot of innovation that occurs,” said Tryba, who founded one of the most successful and long-lasting apps at the time, the nonprofit RideAustin. “In another sense, it’s also very confusing for some of the riders and drivers, too, because you have to have multiple phones if you’re a driver, perhaps, or multiple apps open. And obviously, on the consumer side, because the demand was so broken up into different players, no one really got the economies of scale needed until we gained more than 50% market share… before Uber and Lyft lobbied to come back.”

As a nonprofit, RideAustin’s model prioritized giving back to the community by allowing riders to round up their costs to donate the change to charity and charging a flat 99 cent cut per ride for drivers, rather than Uber and Lyft’s percentage cut. Tryba said that model allowed RideAustin to focus on riders’ and drivers’ best interests instead of shareholders’.

Still, Uber and Lyft gained back much of their market share when they returned to Austin, though Tryba said RideAustin maintained a loyal following. The service only recently shut down during the pandemic, which Tryba said made it difficult to forecast when drivers would be able to return safely.

What Uber and Lyft will look like once they return

If Uber and Lyft lose their court battle and fail to gain voter support for their ballot measure, the services will look very different once they return to California.

Both companies have said they’d likely have to limit drivers to a set number of hours and may prioritize hiring full-time workers, leaving many part-time drivers without work.

Riders will most likely see more expensive rides that reflect the costs Uber and Lyft must absorb to pay additional benefits to their drivers. Cars may take longer to get to their pick-up locations without as many drivers on the road, and potentially without the incentive of surge pricing to bring them to under-served locations.

Competitors say Uber and Lyft have for years set unrealistic expectations of how quickly and cheaply rides could show up at passengers’ doorsteps. Newly strengthened competition could help keep prices at bay and consumers will likely once again adjust.

“Rideshare is in its early stages yet of an industry,” Tryba said. “I think that there’s still more experimentation to go around. Even if you look at the Uber and Lyft apps, it seems like every other week they’re experimenting with different types of services and offerings and car types and things like that. So I believe that this is along that same type of evolution where there will be experimentation going on and frankly the employee side of it may be something that we learn could work. Or maybe something that we learn that it doesn’t work. But in all scenarios I think embracing change in the industry is something that is good. And now it’s just a matter of, can it actually work?”

*by Lauren Feiner via CNBC*