Uber, a ride-sharing service operating in 45 countries and more than 170 cities worldwide, has upended the taxi industry and become a major labor flashpoint as a leader of the “1099 economy.”  Economists claim that Uber has a unanimously positive impact on consumers, but how has Uber impacted the drivers who are signing up in the tens-of-thousands each month?  Uber – valued at more than $18 billion – has kept costs low by relying exclusively on independent contractors who, hypothetically, have the freedom to become “small business entrepreneurs” within Uber’s structure.  In a series of posts we will look at Uber and the broad impact it has had on workers and unions.  This first post will offer an overview of Uber’s business model, or how Uber and its “driver partners” are earning money.  A second post will explain how those “driver partners” have responded to the many changes Uber has made as the company expands.  And finally, a third post will explore the broader impact that Uber and the “1099 economy” are having on the labor market.

How Uber Works – The App and The Drivers

First, there are a few basic aspects of Uber’s business model that are critical to understanding Uber’s impact.  Uber itself is a free smartphone app that allows individuals to request a ride from anyone within Uber’s network of available drivers.  Within this network, users have a choice between two tiers: the traditional, higher-end UberBlack and the company’s low cost alternative UberX.  The fare minimum for UberX is roughly half that of UberBlack, which also charges riders more per minute and per mile.  Uber takes a 20%-25% commission on the total fare, leaving the remainder to the driver.

Once the ride is requested, drivers can then accept the ride, pick up the customer and take them to their destination.  The entire interaction is cashless – at the end of the ride the complete fare (without gratuity – Uber has no tipping option) is automatically billed to the customer’s credit or debit card saved within the app.  After the ride is complete, riders must use the app to rate drivers on a one to five star basis – with five being the highest.  According to Uber, a driver must maintain above a 4.5 rating to remain active on the network.

Every driver in Uber’s network is an independent contractor, but all prospective drivers must fulfill certain requirements to become an official Uber “driver partner.”  In order to become an UberBlack driver, the driver must have a commercial drivers license, commercial auto insurance, and own a black sedan, town car, or SUV that comfortably seats 4-6 passengers.  For UberX, the driver must be at least 21 years old, with a personal drivers license, personal auto insurance, and own any mid to full-size, 4-door vehicle in excellent condition.  Additionally, all Uber drivers must pass a background check administered by Uber as well as an online training course that explains Uber’s standard operating procedures – essentially an online class in driving for Uber.  The process in total takes roughly two weeks.

Once drivers are on the road, Uber pays them their 80% share of their total fares via a weekly direct deposit.  Each driver can set his or her own hours by logging into the Uber app as they choose, as Uber states that there is no minimum amount of hours required.  Uber provides drivers with an Uber-enabled smartphone for a $10 per week fee.  However, the drivers provide and pay for their own car, auto insurance, general car maintenance, and gas – expenses, according to Uber, that add up to an average $14,000 or $15,000 per driver per year.  Drivers have alleged that Uber has requirements regarding routes, appearance of their cars, driver attire, and how driver interactions with passengers.  However, Uber maintains that these are merely suggestions and not company policy.

Changes to Uber’s Fare Structure

This past summer, the Uber fare structure underwent a few major changes.  Uber introduced discounted UberX fares in more than 25 cities, with an average discount of 25%.  This discount was positioned as an attempt by Uber to undercut the taxi industry by offering cheaper rides and greater convenience.

In most cities, though not all, Uber subsidized these discounts for drivers by allowing them to take their portion of the fare from the pre-discounted cost.  Under this system, a rider would pay $11.25 for what was originally a $15 ride at full price.  However, the driver would still take his 80% cut from the full price fare of $15, leaving him with a total take of $12 – more than the cost of the trip to the consumer.  In this scenario, Uber’s 20% commission is actually a 75-cent loss.

In response to the success of the summer promotion, Uber recently announced that the “temporary” discounts on UberX fares would continue indefinitely, though at a lower rate of 10% to 20%.  However, Uber could not continue to lose money on every ride in the subsidized markets, and thus informed drivers that while the discounts would continue, the driver’s earnings would be no longer be subsidized.  Finally, Uber increased their commission, announcing that drivers signing up for any Uber service – UberX or UberBlack – after September 2nd would be subject to a 25% commission, up from 20%.

So let’s revisit our average UberX driver from this summer and that $15 ride.  As discussed earlier, Uber “temporarily” discounted that ride 25% over the summer, for a total cost of $11.25.  However, with Uber’s subsidy, the driver still earned a total of $12 for that ride – 80% of the non-discounted fare.

Now it’s September 1st.  Our driver has had his subsidy taken away and Uber has made its discounted fares permanent, now at an average of 15%.  That $15 ride now costs the consumer $11.75 – a 50-cent, or 5%, increase from this summer.  However, our driver is now earning his 80% on this new, discounted fare rather than the full-priced fare, resulting in $9.40 in earnings – a roughly 22% decline – for the same ride.

Finally, we have our “new UberX driver” who signed up after September 2nd, thus subject to the increased commission.  That driver takes home 75% of that same $11.75 ride, for a total rate of $8.8060-cents, or 6%, less than our original driver’s post-summer earnings.

Next time, a look at how Uber’s drivers have reacted to these changes.