A blog about business and economics.

March 12 2015 12:54 PM

Are Uber Drivers Employees? The Trial That Could Devastate the “Sharing Economy.”

Uber, you might recall, is very rich. It’s racked up billions of dollars in funding for a valuation somewhere in the realm of $40 billion. Lyft, its main rival, isn’t doing too shabbily either. Late on Wednesday, Lyft confirmed a new $530 million funding round that brings its valuation to more than $2.5 billion. There are lots of reasons for those eye-popping estimates: good service, smart algorithms, aggressive expansion. But another one, which often gets forgotten, is the employment agreements both companies have with their drivers. On Uber’s and Lyft’s platforms, drivers are treated as independent contractors; they are responsible for paying on-the-job costs like gas and vehicle maintenance out of their own pockets and don’t receive any benefits, which translates to huge savings for their companies. Now though, Uber and Lyft are facing a serious legal challenge to the independent-contractor portion of their business model—and, by extension, the rest of the “sharing economy” is as well.

On Wednesday, U.S. district judges said in two rulings that they could not determine whether Uber and Lyft drivers should be classified as independent contractors and that the question in each case would have to be resolved by a jury. That's a major setback for Uber and Lyft, which had hoped to avoid trials by persuading their respective judges to issue summary judgments in their favor. The judges, on the other hand, both concluded that the employment question was too ambiguous for them to decide, and therefore must proceed to a jury under California law. “The test the California courts have developed over the 20th Century for classifying workers isn’t very helpful in addressing this 21st Century problem,” U.S. District Judge Vince Chhabria wrote in his ruling on Lyft. “But absent legislative intervention, California's outmoded test for classifying workers will apply in cases like this.”

Historically, the line between employee and independent contractor has been easier to draw. In California, independent contractors are generally treated as workers who serve multiple clients, have a high level of control over their work, and complete specific jobs over a limited period of time that fall outside the usual scope of their current employer’s business. Employees, by contrast, tend to be employed, supervised, and paid for a long period of time by the same one or two employers; their hours are more regular, and the way they do their work is more regimented. The legal problem for Uber and Lyft is that, by these standards, their drivers seem to fall squarely in the middle. Their hours are flexible—but only to a point. Uber, for example, has threatened to suspend the accounts of drivers who accept less than 90 percent of rides. The same is true of drivers’ control over their work. Uber and Lyft might not make drivers wear uniforms, but the companies do instruct them on other points—how to interact with passengers, what kind of music to play during rides—and threaten to deactivate drivers who don’t meet standards.

This last point—the ability to “terminate” drivers who don’t comply with expectations—is perhaps the most compelling argument that Uber and Lyft drivers ought to be considered employees and not contractors. Both judges note that California’s highest court has previously described an employer’s “right to discharge at will, without cause” as “strong evidence in support of an employment relationship.” What’s more, existing California law presumes that contractors don’t need the same protections as employees because they have significantly more bargaining power; if one job doesn’t work out, they can take their services elsewhere. But it’s an open question whether Lyft and Uber drivers who work essentially full time on the platforms—the two dominant ones in on-demand ride services—really can do this. “As should now be clear, the jury in this case will be handed a square peg and asked to choose between two round holes,” Chhabria wrote.

Of course, the cases have huge implications not just for Uber and Lyft, but for all the companies in Silicon Valley’s so-called sharing economy that have built their models on contract workers. Handy, a cleaning service company, is facing a similar suit, and complaints about contract status have also dogged Amazon’s Mechanical Turk. More than anything, the judges’ rulings on Uber and Lyft highlight just how fragile their seemingly huge businesses still are. While it’s easy to look at Uber’s billions and declare that it has already won, it’s equally fair to argue that “the gig economy won’t last because it’s being sued to death.” In short, no one really knows what might happen. But the future is undoubtedly less cut and dry than these companies would like to think. And for Uber, the unfortunate reality is that you’re probably not worth $40 billion if you have to pay benefits and gas bills.

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March 12 2015 12:21 PM

I Mocked Snapchat for Turning Down $3 Billion. Now It’s Worth Five Times That.

A year and half ago, Facebook reportedly offered to buy Snapchat, an upstart messaging app, for $3 billion. Snapchat's then-23-year-old CEO, Evan Spiegel, turned it down. Sources told the Wall Street Journal at the time that Spiegel was holding out for much more.

I thought that was pretty funny, and I wrote a snarky blog post saying so. Here's an excerpt of the snark with which I greeted Spiegel's decision:

Snapchat, it behooves me to point out, makes no money. I don’t mean that it is spending more money than it takes in, like Twitter. It literally does not have any revenue.

I was not the only one snorting condescendingly at Spiegel's apparent hubris in spurning Facebook's cash. My former colleague Farhad Manjoo asked his Twitter followers: "Someone tell me even a halfway plausible way Snapchat can make any money." Suggestions ranged from "in-app funny hat purchases" to "sponsored sexts" to "save all the pictures/chats, threaten to post them unless people pay up." Ah, we cracked ourselves up.

Near the end of my post, I dutifully included the following caveat:

OK, so let’s admit that “advertising” is plausible. And let’s stipulate that while we’re all laughing at Spiegel today, there’s at least some possibility that he’ll be the one smirking last, Zuckerberg-style, when Snapchat becomes the world’s next social-media giant.

And then I wrapped things up by predicting that he'd look back someday in bitter regret at passing up the $3 billion. It was a pretty zingy blog post, if I may say so.

It was also, as is probably quite clear by now, utterly wrong. Bloomberg reported on Wednesday that Snapchat is raising $200 million from Chinese e-commerce giant Alibaba, an investment that values Snapchat at $15 billion. This is not far off from recent rumors that Snapchat was raising money at a valuation of $16 billion to $19 billion, putting it in a class with Uber, Palantir, and SpaceX among the most valuable private startups in the world.

Here comes this post’s obligatory caveat: Even today, we don't know whether Snapchat will justify its valuation. There's still a chance it will flame out spectacularly, perhaps when its monetization efforts make it uncool.

That said, it's pretty clear today that Spiegel was right and the skeptical pundits were wrong. Skepticism is not a bad quality for a tech journalist to have. It is, however, probably the reason we are tech journalists instead of tech billionaires.

What wildly successful entrepreneurs like Spiegel have in common is an unshakable, almost irrational belief in their own vision and ability. You don’t start a company because the pundits say it’s a good career path. You start it because you believe you’re different—that you can buck the odds. Objectively, the odds were against Snapchat exceeding a $3 billion valuation at a time when it had zero revenue. Yet Spiegel liked his chances, and he either got lucky or was good. Probably both.

Here it pains me to note that not all of the pundits were as down on Spiegel as I was. My own colleague at the time, Matt Yglesias, disagreed with me. At almost the exact time I published my post mocking Snapchat, Yglesias published one praising the company for having the audacity to go all-in. “Three cheers for Snapchat!”, he wrote. Slate’s online commenters predictably tore him up. “The platonic ideal of a #slatepitch,” one sniped at his post. “Does Yglesias understand even basic economics?” another asked. (He does.)

To be fair, Yglesias’ argument wasn’t grounded in economics so much as a rooting interest in startups pursuing their own vision rather than selling out. But at least one other pro-Snapchat contrarian did lay out the economic case for Spiegel’s decision, at a time when it seemed like everyone else was down on it.

Snapchat, wrote Business Insider’s Henry Blodget, would make money the same way other social platforms before it made money: by advertising to its fast-growing, teen-heavy user base. That is, in fact, exactly what it is now beginning to do, albeit in a more creative way than initially envisioned. Its new “Discover” service has video channels run by major media businesses, like CNN and the Food Network, which sell ads and share the revenue with Snapchat. (Blodget also said Snapchat would make money selling virtual goods, a strategy that has long been rumored but has yet to materialize.)

So here it is, my apology to Snapchat and to my readers: I got this one wrong. Not that Spiegel or Snapchat need my apologies, any more than they cared about my skepticism in the first place. Snark is cheap; when you turn down $3 billion because you’re convinced you’re worth more than that, being right is its own reward.  

Previously in Slate:

March 11 2015 5:33 PM

Wall Street’s Appetite for Shake Shack Fades After Lukewarm Earnings

When Shake Shack stock hit the market in late January, Wall Street gobbled it up. During the company’s inaugural hour of trading, its share price climbed as high as $50 from the $21 point set by the initial public offering. Since that first voracious day, though, investors’ appetite for the stock has cooled. And after Shake Shack delivered its first ever quarterly earnings report on Wednesday, it appears to have vanished.

Shake Shack shares sank 7 percent in extended trading after the company reported a net loss of $1.4 million, or 5 cents a share, in the fourth quarter of 2014 and total revenue of $34.8 million. Sales at restaurants open at least 24 months (“same-Shack sales”) increased 7.2 percent during that same period and rose 4.1 percent for the entire fiscal year. Shake Shack also said it plans to add at least 10 new domestic and five international locations in 2015. “We are pleased with the strength of our fourth quarter results,” Shake Shack CEO Randy Garutti said in a statement. “All of our stakeholders are rooting for our success.”

So if that’s the case, why are shares falling? Well for starters, consider how high Shake Shack’s valuation was leading up to its earnings report. Even after initial investor enthusiasm waned, its stock had still been trading at about 200 percent of its IPO price. To sustain pricing like that, you don’t just need good numbers—you need great ones. Or, as Jefferies analyst Andy Barish wrote in February, Shake Shack had “little room for error.”

On top of that, Shake Shack’s forecasts for 2015 were tepid. The company’s outlook for revenue hit the midpoint of Wall Street’s range. Shake Shack also said it anticipates same-Shack sales growth in the low single digits for the coming year. “We’re going to continue to be conservative, and guide you to a low single digit comp,” a company representative said during today's earnings call. “We’re confident in where the comp is. We feel good about it.”

Peace of mind is all well and good, but much of the Shake Shack hype has been built on the hope that the chain could be the next major fast-casual success story, à la Chipotle. In its latest fiscal year, Chipotle reported explosive same-store sales growth of 16.8 percent. When that’s your comparison, expectations in the low single digits just don’t cut it.

March 11 2015 2:46 PM

Google’s First Physical Store Is Very Google-y

Google is famous for offices that are elaborate if slightly chaotic, built around the idea that a productive work environment is also a playful one. Now the company appears to be testing whether that philosophy works in the retail world, too.

On Wednesday, Google unveiled its first real stab at a physical store—a “shop in a shop” located inside the Currys PC World store on Tottenham Court Road in London. Since 2011, Google had run small concession stands out of about 300 Dixons and Currys PC Worlds, but the new outpost is more ambitious. In addition to showcasing Google merchandise—Chromebooks, Chromecasts, Android phones, and so on—the space includes a “Doodle Wall” for customers to scribble on with digital spray paint, a “Chromecast Pod” for movie viewing, and a “Portal” for touring the planet via Google Earth. Google wants you to shop, but it also wants you to be entertained.

Google’s venture into physical retail comes as the broader online-shopping-verse has appeared to take interest in old-fashioned brick-and-mortar sales (“clicks for bricks,” if you will). Etsy, eBay, and Warby Parker are among the primarily online companies that have experimented with temporary pop-up stores in recent years. Back in October, rumors also abounded that Amazon would open its first physical store in a 470,000-square-foot property it had leased in Manhattan’s Midtown. (Later reports suggested that Amazon intended to use the space mainly for corporate offices.) Google reportedly plans to open two additional shops in England later this year.

Why this move from bricks to clicks and back to bricks? Industry research suggests that “omnichannel” customers—those who shop both online and in stores—spend 3.5 times more than other shoppers. Target has put out a similar figure in explaining its focus on online and mobile shopping, noting that customers who shop in-store and online generate three times the sales of other consumers.

Google, of course, isn’t a retailer in the same way that Target is, but it must think there are benefits to physical merchandising that can’t be had online. One of those is building relationships with customers. Google says it hopes to use its shop to “host regular classes and events for the public” on things like cybersecurity and the “connected lifestyle.” Down the line, the company says it might also offer “virtual space camps” to teach kids the basics of coding.

“We’re incredibly excited to launch this space,” Google spokesman James Elias said in a statement. “We think it’s a genuinely unique try-before-you-buy experience.” Presumably the company also thinks there will be enough conversion from “try” to “buy” to make the shop worth its while.

March 11 2015 2:34 PM

The Crashing Euro Is Great for American Tourists. But What About the American Economy?

Planning a trip to France or Spain this summer? If so, congratulations: The world's financial markets have smiled upon you. The euro is in the midst of a spectacular freefall—down 12.4 percent against the dollar since January, and down about 24 percent over the year—that could soon leave it worth less than the greenback for the first time since 2002 (at the moment, it's trading around $1.05). Where will the slide end? Deutsche Bank, for one, thinks that the shared currency could eventually bottom out at $0.85. For American tourists, buying a glass of wine in Paris is becoming cheaper by the day.

This is wonderful news for Europe. But cut-rate vacation options aside, is it good for the United States? That's a slightly trickier question.

There are a few reasons why the euro has been falling so rapidly against the dollar. First, the European Central Bank has finally begun its quantitative easing program, buying government bonds in order to push down their yields. With interest rates in Europe falling to record lows, investors are looking to park their cash in places like the United States, where they think they can get a better return. With money flowing out of Europe, the euro is depreciating—which is exactly what the central bank wants. A cheaper euro, after all, should help Germany, Italy, Greece, and the rest of the currency area sell more exports and boost the region's anemic growth.  

While policymakers in Frankfurt are doing everything they can to push the euro lower, the world' s markets are doing their part to drive the dollar higher. Compared with the rest of the globe, the U.S. economy is growing at a fairly healthy pace, and interest rates on bonds here are somewhat higher. That's attracting more investment stateside. At the same time, low oil prices have improved our trade balance. Those factors are all contributing to a stronger dollar, which is rising not only against the euro, but also the British pound, the Japanese yen, and "almost every other currency in the world," as Matt O'Brien notes. To some degree, we're witnessing a snowball effect: As the dollar's value goes up, it attracts more investment, and spirals ever higher.

A strong dollar can be both a blessing and a curse for the U.S. economy. On the one hand, it means cheaper imports, which consumers love. Families will save money on clothes, cars, electronics, coffee, some really delicious cheese, and all sorts of other staples. On the other hand, a supercharged currency will make it harder for us to sell our own goods abroad. While exports aren't quite as crucial to our economy as they are to Europe's, for instance, they're still important. As they fall, it could cut into job growth.

Whether the dollar's boom turns out to be a net plus or a drag could depend on how the Federal Reserve reacts. With unemployment dropping, Janet Yellen & co. are widely expected to raise interest rates some time this summer in order to head off inflation. The problem is that a hike would strengthen the dollar further (again, higher interest rates attract investors, and as investors pile into a currency, it appreciates). At the same time, just like low oil prices have kept a lid on inflation these past several months, cheap imports should keep prices from rising in the near future. So theoretically, the strong greenback gives the Fed two very, very good reasons to remain at bay, by keeping inflation in check and threatening to curtail exports. If that's enough to keep our central bankers from pushing the button on higher rates, it could also allow for additional time for the unemployment rate to drop and for wages to rise—which is probably something most Americans would appreciate far more than a cheap Euro trip.

March 10 2015 6:05 PM

Target Kicks Off Turnaround Plan by Laying Off 1,700 Employees

Target on Tuesday laid off 1,700 employees at its headquarters in Minneapolis as part of an effort to save $2 billion over the next two years. That cuts were coming was first announced last week in the company’s “roadmap to transform business.” Target is also shedding 1,400 open jobs at its headquarters in an effort to make operations there “more agile, efficient and guest-focused.”

In the short term, those layoffs are expected to cost the retailer. Each Target employee who was laid off will get at least 15 weeks of pay as well as severance checks determined by the length of their employment. Target says total severance costs will set it back about $100 million in the first quarter.

Only a few months into 2015, it’s clear that Target is looking for something of a fresh start. In January, the company elected to shutter its disastrous Canadian business after less than two years of operation. The 133 rapidly constructed stores had lost money since they opened and were known for their empty shelves and bureaucratic chaos. Target has also continued to grapple with the fallout from a late 2013 data breach that affected an estimated 70 million people, drove customers from its stores, and put the company’s stock in free fall.

That said, Target has rebounded significantly since last November. The stock spiked on the viral #AlexFromTarget sensation as well as strong expectations for Black Friday weekend. Shares fell 1.15 percent on Tuesday, but over the past four months have added more than 20 percent.

As part of its turnaround plan, Target intends to adopt a “channel-agnostic approach” to growth, meaning it will focus equally on in-store, online, and mobile experiences. The company also aims to reclaim the cheap-chic formula that first earned it the Tar-zhay pronunciation. Hey, whatever helps.

March 10 2015 2:16 PM

Burger King Is Hiding Soda From Its Kids’ Menus

Fast food and America are going through a rocky patch. After years of devotion to cheap, convenient dining, the country has decided those readily available calories are a primary cause of its obesity crisis. Cities are weighing soda taxes. Sales are flailing. And fast-food chains are being forced to adapt.

The latest evidence of this came on Tuesday, when USA Today reported that Burger King had in February quietly dropped soft drinks from its kids’ menus. For practical purposes, that means that soda will no longer appear as a default beverage option for kids’ meals—instead, customers will be able to choose from fat-free milk, low-fat chocolate milk, and apple juice. McDonald’s and Wendy’s have made similar changes to their menu offerings in recent months. Alex Macedo, president of Burger King North America, told USA Today in a statement that the shift was “part of our ongoing effort to offer our guests options that match lifestyle needs.”

What might be most interesting about Burger King’s menu change is that the chain chose to do it so quietly. When McDonald’s decided last week to phase out antibiotics from its chicken—a similar appeal to increasingly health-conscious consumers—it played up the decision in a press release and won significant praise from healthy food and sustainability activists. For McDonald’s, which is grappling with an image problem, that positive response was presumably invaluable. Burger King, as a fast-food stalwart, has similar image issues. When it acts to improve it, you’d think it would also want to claim some credit.

March 10 2015 1:05 PM

Look at All These Countries That Are Better at Fighting Inequality Than the United States

You'll often hear that income inequality is far more severe in the United States than most of the developed world. But is that because our economy is naturally tilted in favor of the rich? Or is it because our government does less to redistribute resources?

This graph, from University of Oxford economist Max Roser’s Our World in Data project, offers one elegantly illustrated answer to that question. When it comes to market earnings, shown in blue, U.S. inequality—measured by the Gini coefficient—isn’t much worse than it is in the Netherlands or Sweden. It’s slightly less severe than in Germany or the United Kingdom. But in Europe, governments are more aggressive about addressing the income gap, as you can see in red. As a result, inequality is less pronounced in those countries after taxes and benefit programs are taken into account.

It might seem strange to think that market incomes in famously egalitarian Sweden or Finland are just as unequal as in the U.S. (if not moreso). And by some measures, they're not. The Gini coefficient is supposed to be a holistic measure that captures how concentrated income is through the whole economy. But it misses a lot of very important details. The top 1 percent consumes a greater share of income in the U.S., for instance, than in any other developed country, according to the World Top Incomes Database.

Still, comparisons like Roser's are useful. You'll sometimes see writers attempt to explain away, or minimize the importance, of inequality by pointing out that it is growing more slowly and is less yawning once taxes and transfers are taken into account. That may be true. But the graph up above is a reminder that we could be doing much, much more.

March 9 2015 6:15 PM

Apple’s Trick for Using “As Little Gold As Possible” in Its New, $17,000 Gold Watch

The tech world has spent today salivating over/ridiculing/otherwise kibitzing about Apple's new watch, after CEO Tim Cook finally revealed how much the little bauble would cost at an event today. The answer: anywhere from $349 for the basic design up to between $10,000 and $17,000 for the 18-karat gold version, known as the Apple Watch Edition.

There's not much point in debating whether the Edition is "worth" that luxe price tag. Ultimately, it is a nicely designed piece of Internet-enabled jewelry targeted at customers with enough money that they don't have to fret over a five-figure style choice. If it becomes a status symbol, it'll be because it's expensive and rare, not because of any intrinsic value. However, there is something conceptually funny about the product that Apple has engineered. We are talking about an 18-karat gold watch that, to quote one of the company's patents, uses "as little gold as possible."

In other words, gold bugs, this is not the accessory for you.

Last week, Apple cultists took note after the Financial Times published a profile of the company's design guru, Jony Ive, in which he explained that “the molecules in Apple gold are closer together, making it twice as hard as standard gold.”* This was tantalizing. What sort of high-performance precious metal had the geniuses of Cupertino cooked up? Soon, Twitter and the tech blogs unearthed an answer. As Dr. Drang of wrote, Apple had filed a patent for a method of producing 18-karat gold that was both stronger than usual and used less actual gold by volume. While the company has not confirmed that it is formulating the gold in the Edition using these techniques, it seems reasonable to suspect that's the case (I've emailed their communications team for comment).*

The key thing to remember is that 18-karat gold is not 100 percent gold. It's an alloy, or mixture. Three-quarters of its mass must be made up of gold. The last quarter is typically made up of another metallic element. But, as Dr. Drang wrote, "Apple’s gold is a metal matrix composite, not a standard alloy. Instead of mixing the gold with silver, copper, or other metals to make it harder, Apple is mixing it with low-density ceramic particles."

To put it another way, Apple is combining gold with durable materials that don't have much mass, but take up lots of space. That gives it wonderful qualities like lightness and scratch-resistance (normal gold is somewhat soft and prone to damage). And by mass, the final product is still 75 percent gold. But when it's poured into a mold to make an Apple Watch Edition's shell, the other, not-so-precious ingredients take up most of the room. Apple gets to use less gold per cubic centimeter and still call it 18-karat. It gets to stretch its gold out further than, say, Rolex would, to make a watch this size and shape.  

This table from the patent should give you a sense of the difference we're talking. Again, in normal 18-karat gold, actual gold particles make up about three-quarters of the mass and three-quarters of the volume. With some matrix composites, gold could make up three-quarters of the mass, yet just 28 percent of the volume.


In sum, Apple has found a technically useful loophole in the way we typically grade the shiny yellow rock. "In addition to using as little gold as possible while maintaining a specific karatage," the patent states, "a gold metal matrix composite can be formed that has selected aesthetic properties well-suited for providing a favorable user experience." Again, I don't think that particularly affects the value of the watch, insofar as such a thing can even be determined. (It's not like jewelery is typically priced solely based on the amount of gold used to create it.) And Apple's high-tech metal composite might even acquire a cachet of its own. It's just not what we typically think of when we see the words "18-karat gold."

*Update, March 9, 2015, 9:26 p.m.: This paragraph has been updated to clarify that Apple itself has not confirmed whether the patent describes how the 18-karat gold used in the Edition is formulated.

*Correction, March 10, 2015: This post originally misspelled Jony Ive’s last name.

March 9 2015 4:51 PM

After Reports of Account Breaches, Venmo Says It’s Adding More Security Features

Venmo has announced a major update to its account notifications. To improve account security, the popular mobile payments app plans to begin alerting users via email whenever there are changes to the primary email address, password, or phone number on their accounts. The company also said Monday that it is “working to be more responsive” to support inquiries from its users and will introduce multifactor authentication in the coming weeks.

The changes come a few weeks after Slate reported on several apparent flaws in Venmo’s security and support systems—among them, that changes to passwords and emails made from within an account did not trigger any kind of alert. The absence of those notifications played a key part in letting hackers gain access to and steal thousands of dollars from unsuspecting Venmo users in at least two instances. Those users and others also complained that Venmo, which currently routes all its support inquiries through either an online form or a generic email account, was slow to respond to urgent queries. Katie Uhlman, a spokeswoman for Venmo, said the company didn’t have any comment to add beyond what was said in a blog post on the changes.

Assuring users that their accounts and finances are secure is crucial for Venmo, which handled $700 million in payments in the third quarter of 2014 and aspires to be the dominant mobile payments app in the U.S. The company has a unique challenge in building an app that is at once social and “frictionless” to use, but also adequately secure. After all, the more security layers you add to just about anything, the less easy and fun it becomes to use. At a time when people seem frighteningly apathetic about huge data breaches, it shouldn’t be surprising that Venmo had previously prioritized simplicity and intuitive design over complex security features. It looks like that's finally starting to change.