1099 as antitrust
I have no idea what legal, regulatory, or policy process might achieve this outcome. But maybe it would be a good thing if it happened.
Suppose the criteria for 1099 status really emphasized having multiple customers. For example, if you make money by offering people rides, the fact that you get to set your own schedule doesn’t cut it, if substantially all of your business comes from Uber. To qualify as an independent contractor, if you do substantial business with a regular, repeat customer, you must have multiple customers in that line of business for whom you do substantial work. Otherwise, there is a strong presumption that you should be considered an employee of your customer.
Right now, the greatest danger to to the rest of us from “sharing economy” platforms like Uber is that these platforms benefit from network effects that render them “winner-take-all”. Today’s apparent innovators are really contesting a tournament to become tomorrow’s monopolists. The outcome we should be hoping to achieve is neither to strangle these products in their cribs (they are often great products that create real efficiencies), nor to permit wannabe monopolists to win their prize. We should want competitive marketplaces in the products these platforms provide.
Much of the network effect that might render Uber-like platforms anticompetitive derives from density of suppliers. Customers flock to the platform that has the densest, richest set of offerings. When suppliers pick just one, they prefer to work for the platform that has the most customers. So once one platform pulls ahead, a cycle may kick in, virtual or vicious depending on your perspective, leading to a single dominant platform. But if suppliers “multihome”, if pretty much all of them sell through pretty much all of the networks, this “market cramp” can be interrupted and multiple platforms might survive. I’ve recommended before, in a vague way, that policy should be geared to encouraging multihoming. But that was going to be hard work, because platforms’ incentives are to make it hard as possible for suppliers to be promiscuous.
But if 1099 status required that suppliers multihome — and in a substantive, not mere token way — platforms’ incentives would reverse. They would face a choice of bearing much higher per-supplier costs (as “suppliers” become employees), or of insisting that suppliers also do business elsewhere. All of a sudden Uber would need Lyft and Lyft would need Uber (and maybe my former favorite, Sidecar, would de-pivot back into this market). Reclassification of suppliers as employees would serve as an antitrust doomsday device for sharing economy platforms. That might be a pretty good outcome.
There is of course a huge, serious problem with this idea. The people who hope to benefit from employee rather than contractor status are not customers, but workers. This suggestion basically sells out benefits and protections for workers in order to secure competition on behalf of customers. Silicon Valley titans may not realize it, but everything they hope to do depends upon finding less intrusive ways than traditional employment regulation and collective bargaining to give workers the negotiating power they need to secure a decent living. An economy that defines “efficiency” as throwing the majority of workers into a competitive race to the bottom so that a relative few at the top can enjoy cheap services is neither desirable nor stable. We can prevent that the old fashioned way, by having labor form cartels (via unionization or regulation), or we can try something new. Silicon Valley types hate the old way. Any sort of cartel is a thing they want to disrupt, except when they are operating it. Great. But then it’s time to go beyond libertarian bromides and the rhetoric of plutocratic self-regard and actively support better ways to ensure that humans in the technoutopia to come have the leverage they need to negotiate good lives for themselves. I have suggestions.
Encouraging competition via the threat of reclassifying contractors as employees is, at best, a kludge. It would be better if we had laws explicitly designed to push back against winner-take-all dynamics and ensure a competitive marketplace. But even traditional antitrust doctrines are now rarely and weakly enforced. Addressing more directly the threats to competition posed by technological network effects would require creative, controversial, new legal doctrines. Until we work those out, and work up the courage to pass laws to give them force, maybe a kludge wouldn’t be a bad thing.
What you’re saying sounds a whole lot like the monopoly arguments made against Microsoft. I agreed with these at the time but they look ridiculous now. I guess people said the same about IBM. I think the lesson is network effect empires are a lot less secure than they look.
September 27th, 2015 at 10:09 am PDT
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How applicable are old monopoly arguments to modern examples like Amazon and Google? A Standard Oil extracted rent from their monopoly power in manners that could be clearly argued via multiple metrics. But Google, Amazon, and Uber type monopolies seem to exist by providing consumer surplus, at least relative to arrangements preceding their arrival. Is it so obvious increased fragmentation of these network monopolies improves societal outcomes? That seems to be frequently implied, but rarely argued.
How much of modern monopoly chatter represents a misuse of classical theory, wherein pundits start with the notion of monopoly, and ignore how revenue concentration has been achieved?
September 27th, 2015 at 4:06 pm PDT
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Lawrence, you’re right that generalized anti-monopoly laws _and_ enforcement would be better than overly-targeted kludges, which will probably not apply to some future wave of monopolists. Much as the economists of the 90s couldn’t foresee 1099-vs-employee as the antitrust battlefield of the 2010s, we can’t foresee some _other_ battlefield in 2030.
But we have antitrust laws now, and yet we have plenty of monopolies. Facebook. Google. Uber (aspirationally). Lyft probably wishes they were, too.
Source: I’ve worked at several Silicon Valley startups, currently work at Greylock partners. (Opinions personal, just saying I’m not a stranger to this world)
September 27th, 2015 at 4:15 pm PDT
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I am CPA. It’s not that simple. Each case is determined on its own facts. The IRS, state agencies, etc. are biased against the idea of independent contractors.
September 27th, 2015 at 7:27 pm PDT
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I’m not as pessimistic on the “network effect monopoly” thing as you are. It also makes it easy for a good competitor to swell up fast if they offer something better or different. Just look at Google and Facebook – the first one grew into a search engine market that was already swarming with giants, and the second displaced the dominant MySpace. And there is no lack of capital investment out there to fund challengers to the dominant firm, as has happened with both Uber and its competitors getting investment rounds.
It’s also worth remembering that Uber is losing a ton of money annually right now. Investors seem to think they’ll eventually be profitable, but if they’ve got a whole ton of competitors now at money-losing rates, how are they ever going to pay back the investment poured into them over years? I’ll bet they’ll eventually find a way to oust Kalanick and then go throw a brutal restructuring, assuming they don’t just go out of business when they get slapped with the “your drivers are all employees now” ruling.
@SRW
As long as a single union can’t form a single monopoly over labor in a particular sector, I think it’s fine (in fact, I think it would be best if you constrained bargaining units for unions to the firm-level). Unions can be flexible as well, at least in theory – see the unions for film and television production. And as long as you reserve the right of firm-owners to choose to shut-down the firm in the face of unionization (a “right to go out of business”) without retaliation as long as they pay any outstanding wage or debt claims (or go into bankruptcy), then I don’t see the problem.
September 27th, 2015 at 9:51 pm PDT
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[…] 1099 as antitrust – interfluidity […]
September 28th, 2015 at 12:06 am PDT
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Unlike respondent #4, I’m not a CPA, but I did work at Microsoft for a while, and the “contingent staff” who worked for Microsoft were required to take 3 months off each year to strengthen the argument that MS wasn’t their only source of income.
So I think this is already one of the factors in what qualifies one for 1099 status.
September 28th, 2015 at 9:32 am PDT
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[…] Steve Randy Waldman on Uber and 1099’s as antitrust (Interfluidity) […]
September 28th, 2015 at 12:09 pm PDT
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[…] an interesting post up on interfluidity arguing that independent contractor status should be awarded selectively, in a manner designed to […]
September 29th, 2015 at 5:06 am PDT
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I don’t understand why a product that creates efficiencies is a good product, per se. These seems to be one of the core confusions rampant throughout economic thinking. It’s so deeply wired that questioning it invariably leads people to conclude you are stupid.
Baked into this is the assumption that more is always better. But anyone who studies human beings (i.e., NOT economists) knows that human well being is far more dependent on equal distribution than the size of the pie in developed countries where necessities are not in doubt.
But on a more basic (and less logically air-tight) level… What if an app created efficiency by reducing the number of pall-bearers required to move a coffin? Now five men are free to… Feel useless in the face of death? Thanks.
September 29th, 2015 at 12:30 pm PDT
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Uber benefits from the app model where you download a smartphone app that queries the smartphone servers and it’s three times as much work to check Uber, Lyft, and Sidecar.
What you want is a model where each driver has a reputation, a rate, an area he’s willing to operate in, and your computer sifts through the data itself, or, asks a trusted third party computer to sift through the data.
In order to transition from Uber app Uber server Uber-collected Uber data to user computer one or more user-trusted servers data collected wherever, you want to do some accounting thing in the US government.
People already go to one of many websites to book airplane flights because airlines publish their rates and are big enough for you to know their reputations. Figure out how to get people to pay for cab rides in bitcoins and store their rating of the driver in the blockchain?
September 29th, 2015 at 5:33 pm PDT
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peppermint makes a good point. The use of apps enforces a monopoly since it is hard to do the relevant comparisons. Having an actual mechanism for linking drivers and potential passengers would be quite different if it were not filtered through a mechanism like Uber or Lyft.
Google is similar. Google stands between browsers and the web sites that they are seeking. It would be great to have a search engine as comprehensive as Google, but with more control of the sorting mechanism. (Every year it seems Google gets worse and worse as its search focuses more and more on the statistically probable, rather than on what I am looking for. I used to find what I wanted in the first 10-20 results, now I have to scour the first 100-200.)
September 29th, 2015 at 7:19 pm PDT
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[…] Debate on the Gig Economy: The interfluidity blog posts a piece exploring antitrust elements of the classification of “independent contractors” in the […]
September 30th, 2015 at 5:33 am PDT
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Having a large percent of the total customer base is not sufficient to call it a monopoly. Facebook has an absolutely commanding presence with well over a billion active profiles- and their revenue per profile is around $10. Now there are two possibilities- people value their profiles at extremely low levels, or that Facebook is failing to capture monopoly profits from its position. Frankly the latter is almost certainly true and the former almost certainly false.
October 1st, 2015 at 11:15 am PDT
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Great idea. If you combine that with a basic income and a single payer health system, we might be really getting somewhere in REALLY liberating people.
October 2nd, 2015 at 1:48 am PDT
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Lawrence D’anna
You do realise that your working life is around 40 years long. An effective monopoly for 25 years is still a big deal.
October 2nd, 2015 at 1:54 am PDT
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In the case of Uber I need to challenge the central point that challenging their pursuit of artificial market power (and the “1099” worker exploitation linked to that power) poses an economic/social tradeoff because what Uber produces “are often great products that create real efficiencies”. Uber has absolutely no efficiency/service/technology advantage over existing companies. Apparent “product advantages” are entirely driven by massive subsidies (losses of $470 million on $415 million in revenue, among other reports) designed to drive more efficient companies out of business. But even a more mature Uber would have higher vehicle ownership, operating and insurance costs than any existing urban car service company, and would not have any other efficiency or competitive advantage that could allow it to produce urban car service at lower cost (or higher quality) than today’s industry. The Uber “app” is trivial from a productivity/network efficiency standpoint, and none of the hundreds of other major companies offering similar apps have found any industry transformative powers, much less justifications for $50 billion valuations. “Surge” (peak/off-peak) pricing has been used in urban settings for a hundred years (i.e. the Long Island Rail Road) with only marginal efficiency impacts. But none of the conditions that allowed airlines and similar industries to achieve major gains through highly sophisticated pricing software apply to Uber. Airlines can massively reduce capital and operating costs by shifting discretionary traffic (via lower prices) to otherwise empty seats on off-peak flights. Uber’s software cannot provide customers with more attractive schedule options, those customers aren’t going to shift their Saturday dinner plans to Tuesday morning at any price, and since Uber doesn’t directly control assets or drivers, it can’t optimize the network the way airlines can. In every transport-related industry, economic efficiency is driven by the ability to carefully manage resources against volatile demand patterns. Uber will actually be worse at this than the typical Yellow Cab company, who have strong local knowledge of demand patterns and driver availability, and can more efficiently organize peak capacity. Urban car service have never had significant scale or large-scale network economies (which is why Yellow Cab of Cleveland never tried to enter Columbus or Buffalo). No one can explain how Uber found massive efficiencies that no other urban car service company could ever find, because they haven’t actually found any. Out of the thousands of articles on Uber, you won’t find any written by objective outsiders documenting actual sources of competitive advantage, and you won’t find any written by people who actually understand the economics of urban transport.
It is arguable that some tech unicorns 10-15 years ago posed this “better service/increased efficiency versus monopoly power/exploitation” tradeoff (i.e Amazon, Ebay) but it is critical to understand that Uber’s “disruption” of the taxi industry is a perversion of classic capitalism—(relatively) more efficient companies and assets are being destroyed to make way for the domination of a company that uses assets less-efficiently and could not survive without the power to exploit labor and subvert basic consumer protections regarding training, insurance and liability. Uber has to spend heavily to demonize safety regulators, harass critical journalists and to spread pure propaganda because (unlike Amazon or Ebay) they have no evidence of sustainable service/efficiency gains and absolutely no evidence that society will be better off if they can achieve the quasi-monopoly power they are pursuing. Yes, Uber’s initial VC investors will get fabulously rich, but absolutely everyone else gets screwed
October 4th, 2015 at 8:45 am PDT
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[…] i bolje plate. Na uglednom ekonomskom sajtu Interfluidity, Stiv Rendi Valdman (Steve Randy Waldman) promišlja da ćemo morati ove uposlenike prevesti u status zaposlenih kao neki vid antimonopolske mere, kako […]
October 9th, 2015 at 2:31 am PDT
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Hi there, everything is going well here and ofcourse every one is sharing data,
that’s actually excellent, keep up writing.
October 10th, 2015 at 8:35 am PDT
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