Prop 22, The Gig Economy, and Headwinds for Tech
November 20th, 2020 | Posted in Investing
How a California Proposition Could Shape the “Gig Economy”
With all attention focused on the U.S. presidential election, many investors may have missed some down-ballot measures that could have meaningful investment implications. One such ballot measure was Proposition 22 in California.
Prop 22 affected workers in the “gig economy,” and of course the companies that hire these workers. The gig economy refers to the market where workers are classified as independent contractors, which in the modern economy often means Uber and Lyft drivers, grocery delivery drivers, photographers, graphic designers, and myriad other part-time professions.1
According to the Bureau of Labor Statistics, there could be 25+ million independent contractors, or gig workers, across America – many of them working in the technology sector. For years, companies have been able to keep costs low for these workers, since they are often paid by the hour and receive no health, retirement, Social Security, minimum wage, or paid vacation benefits. Gig workers also have to manage paying their own taxes.2 Then came Prop 22 in California.
Lawmakers in California passed a law earlier in 2020 that would have forced companies like Uber, Lyft, Instacart, and DoorDash to classify their gig workers as employees, which would have arguably led to soaring labor costs and perhaps higher fares and fees for customers. For the gig employees at those companies, it would have also meant losing the flexibility of setting one’s own hours, though they would gain all the benefits of being full-time employees.
In the end, none of the companies complied with the California law.
Instead, they joined forces to submit the ballot measure in California, Proposition 22. Uber, Lyft, Postmates, and Instacart spent a combined $200 million to get the measure passed, which would allow them to bypass state law and continue treating their workers as independent contractors. Uber and Lyft ultimately made the stronger case, as they told voters they would provide health insurance for workers who clock at least 15 hours a week, plus occupational-accident insurance and other protections.
The measure passed, allowing ride-sharing and other companies the ability to preserve the gig model. A win in California could have big, national implications for tech and other businesses that rely on independent contractors to run their business. Big rulings like the one in California tend to drive the policy framework for other states developing their own rules, particularly as a ballot measure offers insight into how voters think about the issue.
Prop 22 is a Win for Tech, But Other Headwinds are Building
Technology has been the best performing sector for years running, and companies in the space have delivered strong earnings even in the midst of the pandemic – in some cases, because of the pandemic.
But headwinds are building, as there is growing bi-partisan support for more regulatory action on some of the country’s biggest technology companies. The elephant in the room: Google’s antitrust lawsuit.
The Justice Department’s investigation into Google’s anticompetitive practices has long been known, though it’s been less clear when the government would actually file a lawsuit. The suit has arrived.
The Justice Department accused Google of monopolizing search and thwarting competition, while also engaging in lucrative contracts meant to secure their position as the dominant platform for search. The Justice Department alleges that Google’s practices leave no opening for competition, which therefore results in less choice and innovation that would otherwise benefit consumers. Advertisers also suffer, the Justice Department says, because they are forced to pay Google’s prices (nearly all of Google’s 2019 profits came from online advertising).
Interestingly, at the center of the Justice Department’s lawsuit is another behemoth in the Technology sector – Apple, Inc. Allegedly, Google pays Apple upwards of $10 billion a year in order for Google’s search feature to be the default option for search on iPhones, via the Safari browser. This payment is a major benefit to both companies: a 10% to 15% of revenues for Apple, and up to 50% of all search volume for Google. Google also has contracts with non-Apple smartphone makers that use Google’s Android operating system, requiring them to use Google as the default search engine.
In all, Google owns or controls about 80% of search queries in the U.S., with the balance of market share spread across Yahoo, Bing, and others. If Google and the Justice Department do not come to a settlement in the coming months, and the case proceeds to the courts, we would expect it to drag on for years – and have implications for the technology sector along the way.
The Bottom Line for Investors
Technology companies are no longer operating with a free pass, and scrutiny is only likely to grow in the coming years. While this scrutiny does not necessarily translate to lower earnings or squeezed margins, it does warrant a closer look from investors to determine who the winners and losers might be going forward. For ETF investors, an overweight to Technology may hold for the time being, but we would not expect the outperformance to last indefinitely.
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1 Wall Street Journal. November 4, 2020.
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