What do Uber’s Challenges Mean for the On-Demand Model?

Seemingly unfazed by Uber’s legal challenges, entrepreneurs have continued to create on-demand marketplaces at an incredible rate. An online search quickly uncovers the Uber for private jets, medical marijuana, massages, and snow plows. As critics voice their concerns about Uber and unfair cost advantages, these new vertical marketplaces can do little to change the conversation. But, is Uber really the right flag bearer for these on-demand businesses?

With lobbyists in all 50 states, Uber seems well positioned for any fight. The Company, according to the Washington Post, spent nearly half a million dollars to influence California lawmakers in Sacramento — in just a few months. Despite Uber’s incredible growth and top-tier backing, the taxi industry has donated $3,500 to state legislators for every dollar that Uber, Lyft, and Sidecar have given. The dollars suggest that this will be a 12-round heavyweight fight.

Despite catalyzing a startup movement, Uber, as the all-inclusive representative of all things “on-demand”, seems to operate much more in the gray with employment issues than many of its so-called peers. Generally, the IRS considers you an employee if the employer controls how the services are performed. Uber’s website includes a video page that details information on safety, payments, how to return lost items, rider music, when to call, and how to cancel — basically, everything except the actual act of driving. But, what service are these drivers peforming? Are buyers only paying for the actual transit? Or, do they choose Uber over a standard taxi because of the total, enhanced ride experience. It’s an interesting question, but Uber will continue to push self-employment taxes onto drivers as it works with rather nebulous IRS language.

Describing Uber’s business as a one-size fits all model for the sharing economy seems lazy to me. Other marketplaces are both vertical and horizontal, and they come in many forms — buyer picks (Airbnb), double-commit (Odesk), and Uber’s model, supplier picks. Let’s also not forget that Ebay and Craigslist were leveraging the crowd years before Uber.

Freelancer relationships with marketplaces also vary wildly in scope and intensity. Uber, which once claimed that the median annual income for a NYC driver was $90,766, has drivers who work solely for Uber, around the clock, year round. While that number seems hardly plausible (a rebuttal to their claim suggests that a NYC driver would need to work 70 hours a week for 50 weeks to cross the 90K plateau), it does seem to suggest that some of these drivers are putting in a lot of time with Uber as their only means of income.

Other on-demand businesses are built on worker flexibility–a celebrated trait of the sharing economy. These businesses have supplier sides filled by freelancers who might work on one or two short-term projects with a marketplace over the course of an entire year. These marketplaces might value diversity, but in most cases, they simply don’t have enough buy-side demand to create pseudo full-time roles. As a result, most freelancers tend to work across different marketplaces, and in many cases, have full-time jobs. Uber’s incredible buy-side demand makes it an outlier.

Many (not all) Uber drivers were also former full-time taxi drivers. For these drivers, the logo hanging from their mirror has changed, but the nature of work has not. As such, the notion of creating entirely new work opportunities for drivers is not universally accurate. Higher pay? Perhaps. Entirely new jobs? Not always the case.

In contrast, for many on-demand startups, freelancers find themselves working with clients or in roles that would otherwise be unattainable. Without the marketplace infrastructure, could a freelance designer in Thailand land a Fortune 500 gig? Probably not. But with marketplaces, business development is put on the shoulders of the marketplace owner, who in-turn helps freelancers monetize an undervalued skill. The reality is that human talent has always been widely distributed, but the same can’t be said for opportunities. An online marketplace can uncover talent in little seen places. As more of these people are uncovered, the competitive pressure will only increase on slow-moving, high-priced industries. Sudden and widespread access to skill, will create even more innovation.

These marketplaces don’t democratically distribute terms and work to all freelancers. These businesses operate on meritocratic principles — the best-fit (pricing / quality / availability) freelancer will usually win the job. In Uber’s case, this is often the closest driver. Driver ratings cut out the bottom tier, but a large chunk of the bell curve will provide services without a highly differentiated experience.

However, in some on-demand models, a diverse set of supplier skills creates multiple methods for achieving the same task. As such, the suppliers seem much more aligned with the IRS definition of independent contractors. Such is not the case with Uber, where the process is mostly determined by pre-calculated routes. While freedom of action is not a determinant of independent contractor status, the manner in which work is performed is.

As long as these on-demand startups stick to only determining the preferred outcome of a transaction, they can circumvent the labor tax laws that apply under normal employee relationships. While Uber’s model helped pave the way for many businesses, the oversimplified “Uber for X” description does not paint the right picture for many great startups who are using the sharing economy as a way to deliver value and opportunities to both sides of their market. Despite a great level of variation and good-doing, these on-demand businesses will likely continue to be compared to Uber, fair or not.

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