Uber, Lyft win delay from court, will stay in CA for now

Professor at NYU Stern School of Business and Author of ‘The Sharing Economy' Arun Sundararajan joins joins Yahoo Finance’s Akiko Fujita to discuss the future of Uber and Lyft in California.

Video Transcript

AKIKO FUJITA: Let's bring in Arun Sundararajan. He is the NEC faculty fellow professor of technology operations and statistics and doctoral coordinator at NYU Stern School of Business. Arun, you heard Alexis just kind of breaking down the action for us going into November. What's the likely outcome here? What should investors be looking for?

ARUN SUNDARARAJAN: Well, I'm cautiously optimistic that the platforms will be successful with the proposition that they've put on the ballot. And in many ways, putting that on the table and actually sort of having that become law could be a really important template not just for California and not just for platform work, but for the economy more broadly.

Because I think that part of what's going to happen through, like, you know, the recession that we're going through right now and the way that a lot of jobs have been wiped out is that as companies reconstitute their workforces, they're going to have a greater fraction of non-employment work as part of the mix. And so at some point in the near future, we're going to have to come up with a social safety net model for people who are not full-time employees. We can't just keep passing legislation that says, let's make them employees, even if they don't fit.

And so maybe this ballot measure and the plan that Uber and Lyft have put on the table as part of it will be a good step forward-- a good way to sort of get that process started. But you know, when I saw the news yesterday, I was thinking that the California Attorney General must have really been breathing a huge sigh of relief, because, you know, maybe there had been some blowback on the platforms if they had shut down. But you know, having this essential part of public transportation shut down during the pandemic when people are worried about, you know, taking mass transit, taking buses could have been politically disastrous for him.

AKIKO FUJITA: Yeah, and, Arun, to the point you made-- there are a lot of people in California who rely on these for their livelihoods, especially in this time of need. Let's talk about what Proposition 22 could likely mean, because this seems to be sort of the compromise, if you will, between what we've heard from California lawmakers and what they're asking for in terms of the classification of these drivers as full-time employees, and then Uber and Lyft saying, wait a second, there is a whole other category here. What does this mean for the business model that exists for both of these companies right now?

ARUN SUNDARARAJAN: Well, I think it will be consistent with them continuing to operate using their existing business model. You know, in many ways, I applaud the government for sort of bringing the platforms this far. Because five years ago, it was very sort of hands-off, we have no responsibility. Now, there is, in fact, a concrete here is the funding model, here is, like, ways in which people can get benefits. They won't be as much as, like, you know, what you'd get if you're an employee, but different platforms can cost share depending on how much time you're spending on them.

Now, what also might happen is that other people who are currently in full-time arrangements may start to see their arrangement shifted to this third way, because now we've got one gray area, right, between independent contractors and full-time employees. Once we have a middle ground, then you've got two gray areas. And so it won't just pull a lot of independent contractors into having benefits, but it may cause companies to think about ways in which they can reclassify their existing employees as these, you know, dependent contractors or whatever we call them.

But you know, that having been said, you know, I particularly like the fact that, you know, Proposition 22 calls for flexibility in what people can use their benefits funds for. Because, you know, I've surveyed New York City freelancers, and a lot of them care about health insurance, of course, but a lot of them care about retirement. Some of them want a product that will simply reduce the volatility or increase the predictability of their income. Some people want money that they can put towards child care, towards taking vacations.

So different workers have different social safety net needs. It's not a one size fits all need. And therefore, having funds that can be spent on different things with the choice being, you know, sort of left to the freelancer is a good model-- is a better template than what we have today.

AKIKO FUJITA: Arun, to that point, we-- really, both of these companies-- their executives consistently say that our drivers don't want to be full-time employees. They want the flexibility. They want the flexibility, but they also want benefits, which seems to suggest this third category that you're talking about. If, in fact, things do go down that route in California, what are the implications for not just app-based workers, but freelance workers? And are other states likely to follow?

ARUN SUNDARARAJAN: I think they are. I've heard a lot of discussion-- legislative discussion late last year in New York state. And so there's certainly sort of legislation in the works. So New York will certainly follow. I do actually buy the argument that a majority of drivers don't want to be employees, because the majority of drivers aren't driving 40 hours a week. A vast majority of them are probably driving less than 20 hours a week, and so don't want the formal structure of employment. They want to be able to sort of plug in and out of the app as needed.

And what we see when we have protests or what we hear is a vocal minority of drivers who do, in fact, drive 40 or more hours and who would benefit from being classified as employees. But this, I believe, is a very tiny fraction of the total set of Uber and Lyft drivers. And I think at this time in particular, sort of adding rigidity to, like, you know, this work arrangement is going to be particularly bad for all these people who have lost their jobs and who might be sort of using delivery or using driving to try and make some money on the side.

AKIKO FUJITA: And, Arun, really quickly, there's a lot of investors who are watching this who are going to say, does this mean that that timeline to profitability gets pushed down even further down the road? If it's just about benefits, not necessarily the classification of full-time employees, what kind of hit is that likely to have on revenue for both of these companies?

ARUN SUNDARARAJAN: Well, if they have to categorize workers-- drivers as employees, I think it will be a substantial hit, both from increased costs, but also reduce demand, because prices will go up. I think the hit will be modest if Proposition 22 goes forward. But I've said this all along-- I don't think either of these platforms should be pushed into focusing on earnings at this point.

I mean, they still have a very tiny fraction of the wallet share of, like, you know, total spend on transportation-- we're talking about, like, over a trillion dollars a year that Americans spend buying cars, maintaining them. And what Uber really should be going after is market share growth. They should be following this Amazon model of saying, well, we can turn a profit if we want to, but we're going to sort of take that money and plow it back into getting people in the suburbs to convert-- sort of expanding our footprint.

And so I've told the CEOs of both companies consistently that, like, you know, don't sort of succumb to the Wall Street pressure of proving that you can, like, you know, show earnings too soon. You're in it for the long game-- like, you think about the next decade as market share, not earnings.

AKIKO FUJITA: Arun Sundararajan, always good to talk to you about this. He is--

ARUN SUNDARARAJAN: Thank you. Great to talk with you, as always.

AKIKO FUJITA: --of business.