Yesterday California passed a bill that will turn gig workers in the state into employees of the companies they work for. The big problem with this from the perspective of Uber, Lyft, DoorDash et al is not the explicit cost of it, but the fact that it turns what was a mostly marginal cost (drivers get paid when they pick up a paying passenger) to a largely fixed cost (drivers will get paid whenever they’re on the road, regardless of whether they have a paying passenger or not, and will probably get some benefits which will be paid even when they aren't on the road).
The big problem is that this breaks Uber’s flywheel. In 2014 David Sacks posted this on Twitter:
It’s a good representation of what Uber does: more drivers -> greater coverage -> faster pickup + lower prices -> more demand. This is built on a classic supply and demand economic model, where more supply leads to lower prices and new demand.
The California law throws a wrench into this flywheel. A higher fixed cost per driver means that Uber needs to either constrain the number of drivers on the road, or to stimulate demand to leverage the fixed cost of paying a driver a wage and benefits. Fewer drivers throws the whole flywheel into reverse, a classic death spiral. And we know that this is a largely commoditised service where demand generation has been coming mostly from price incentives, which are not sustainable.
While this is bad for Uber it is actually much worse for Lyft, who are almost exclusively in the US and are now vulnerable to this decision being replicated in state after state. Ignoring the politics of the decision, it might turn out to be a great reminder that flywheels don’t operate in only one direction.