Why The Medallion Tanked

For several years now the most talked-about topics of conversation with passengers have been Uber and the fate of the once coveted taxi medallion.  How an established commodity selling for as much as 1.3 million dollars in 2013 could drop in value to virtually nothing in the span of a year is quite a story and I find that not only New Yorkers but people from all over the world are often quite interested in it and many are surprisingly knowledgeable about it as well.

And yet I have not encountered a single person who actually understood the true reason for the medallion's decline.  Nor have I read an article that pinpointed exactly what happened.  The assumption is always that Uber showed up and took the passengers away or, according to a recent series of articles in the NY Times, that predatory loans agreed to by unsuspecting drivers were the cause.  (To read these articles click here.  This is outstanding investigative reporting by Times reporter Brian Rosenthal.)

It is true that these are both parts of the story, but they do not identify the primary cause of the medallion's collapse.  What I'm doing in this post is setting the record straight.  

Some History

You may already know about taxi medallions.  If not, here is some information about them:

A medallion is a license -- symbolized by a piece of metal (called the "tin" in the industry) -- attached to the hood of a cab.  It's a license not to drive, but to own one taxicab.

The owner of a medallion may or may not be the driver of the cab.  Most often the driver of a yellow cab in NYC is not the owner.  The owner is more likely to be an investor who either leases the medallion to a middleman (known as a "taxi broker", who in turn sets up a driver with the medallion, a taxicab, and insurance) or the owner of the medallion leases it to the operator of a taxi garage. Taxi garages, also known as "fleets", vary in size.  Some may have only ten or twenty cabs.  Others have hundreds.  There are many taxi garages scattered around New York City, mostly in the boroughs outside of Manhattan.

The medallion system was set up in 1937, during the Great Depression.  In those days all you had to do to get a permit to be in the taxi business in New York was to have a car and pay a $10 annual fee to the city.  The industry was so easy to enter that there were eventually way too many cabs for the amount of business on the streets.  No one could make a living with that much competition.  So the city decided to stop issuing new annual permits (medallions) altogether.  If you didn't renew it you lost it and as a result the only way to become the owner of a taxi medallion was to purchase one from someone who already owned it.  Thus a market was created for the medallion.  Business remained poor for several more years and the number of taxis dwindled from over 30,000 to exactly 11,787, where it stayed until 1996 when the city auctioned off 133 new ones.  After World War II ended in 1945, however, business picked up considerably and the demand for ownership of a medallion steadily increased along with its value, which rose to its peak in 2013 at 1.3 million dollars. 

It should be noted, however, that many thousands of car service vehicles -- far more than the number of medallion cabs -- were added to the streets of the city as time went on.  But only the medallion cabs could legally pick you up by means of the street hail.  All other for-hire vehicles had to be summoned by telephone.

2013

Okay, that should be sufficient history.  Now here's the story.  Why did the medallion drop from $1.3 million to virtually nothing in less than a year?

Let's go back to the year 2013.  Conditions in the NYC taxi industry are pretty much the same as they've been for decades.  There are approximately 13,000 yellow cabs (one cab for each medallion) on the streets, a number that is set by law and does not increase, as noted, except on the rare occasion when new medallions are auctioned off by the city.

The majority of taxi drivers are working out of taxi garages.  Working conditions, as always, are far below the labor standards of most American workplaces.

Drivers must pay leasing fees for twelve-hour shifts -- either a day shift (5 a.m. to 5 p.m.) or a night shift (5 p.m. to 5 a.m.)   They also pay for filling the tank up with gas at the end of the shift.

It takes about five hours of driving time to break even, so you don't start making money for yourself until that point is reached.   You don't have to work the full twelve hours of a shift -- that's okay -- but you still have to pay the full price of the shift.  It's not charged by the hour, or by a percentage of the money from passengers.   It's charged by the shift.

There is no union looking out for the drivers, only a taxi advocacy group called the Taxi Workers Alliance.  They try their best but they are not a real union because they have no clout -- that is, they have no ability to call for and enforce a strike. No one who has any real power to improve your working conditions -- like the mayor, the Taxi and Limousine Commissioners, or the owner of your garage -- is looking out for you.  There is nothing resembling a human resources department in the taxi industry that you'd find in any big business in the United States.

There is no overtime.

There is no health insurance.

There are no sick days.

No paid vacations.

No pension.

No profit sharing (of course).

No bonuses.

Although they pretty much fit the description of "employees", drivers have been deemed "independent contractors" by city law since the early 1980s.  (And there went the concept of "benefits".)

Once you're out on the road you are driving in a kind of perpetual horse race with other taxi drivers to be the first to arrive at people waving their arms in the air.  It's very competitive.  Some cabbies prefer to work the airports and spend a lot of time waiting in lots at LaGuardia or JFK.  Others choose to wait in lines in front of hotels, museums, or clubs.  Most, though, are battling traffic and other taxis on the streets of Manhattan in search of their next customer.

After you have won your prize -- a passenger -- you must provide service to a person sitting a few feet behind your head.  It's not like you're moving cargo.  You've got people -- virtually every type of person imaginable -- to contend with.

You're carrying cash.  Even though about 70% of the payments are made with credit cards, the fact that you are known to have cash could make you the target of a criminal.  You cannot legally refuse service to anyone unless they are "disorderly" or intoxicated and you can be fined heavily or even have your license revoked if you're found guilty of doing these and other offenses by one of the TLC's kangaroo courts.

So it's a dangerous and usually a thankless job.

And yet, even with all these liabilities, there are always plenty of drivers.  The great majority of them are immigrants from third world countries.  Why?  Because as substandard as these working conditions are, they're still a lot better than whatever they had in Bangladesh.  Or Nigeria.  Or Haiti.

Indeed, one problem owners of taxi garages never had was a shortage of drivers. Drivers would tend to come and go, but new ones showing up and old ones returning were always in sufficient supply.  Quite often there were more drivers than there were cabs, which gave the owners of taxi fleets a great advantage.  If they didn't like a driver for whatever reason, they could simply refuse to lease him a cab.  This put drivers in a position of needing to put up with varying degrees of unfairness if they hoped to continue working there.

Dispatchers demanding "tips".

No compensation for lost time if their cab breaks down.

Payment to the garage for accidents which is not returned after insurance compensates the owner.

And so on.

Perhaps the greatest unfairness of all was forcing drivers to accept a "weekly deal". It's better for the owner of a garage to assign one driver to one car and be assured of payment for an entire week than to let drivers work whichever days they preferred.   This meant that even if they took a day off to be with their families they were still paying for the shift for that day.

The point I'm making here is that drivers for decades have been utterly taken for granted.  I mean "utterly", as in completely, totally, absolutely, entirely, thoroughly, in all respects, and to the hilt.

Look at this:

I took this picture in 2009 at my taxi garage.  It pretty much tells the story.  Labor Day is the one day of the year in the USA that is set aside as a national holiday to honor working people.  One driver took it upon himself to write "WE ARE NOT SLAVES" on this insulting notice.

2014 - Uber Arrives

Although according to Wikipedia Uber "went live" in NYC in 2011, it didn't have any impact on the taxi business here until early in 2014.  Then, quite suddenly, everywhere you looked -- on billboards, on TV, on the internet, and especially on the backs of buses -- there were ads from Uber directed not at customers, but at drivers.  Some of these ads were actually offering guarantees of monthly income, something completely unheard of in the history of the taxi industry.

In 2014 Uber pulled off what I would call a military-precision invasion of New York City.  You've got to have several things in place simultaneously for this to be successful.

1. You've got to have a public that has heard of you and has access to you.  There was considerable word of mouth about Uber in the United States from people who traveled to places where Uber had already set up shop.  And by 2014 everyone had a smart phone, so access, of course, was automatic.

2. You've got to be able to provide your service to the public immediately.  If you promote a car service and an app to the general public and then you can't provide a car and a driver, you're finished.  That's what happened to Hailo.

3. You've got to have a business model and all sorts of administrators to put it into action.  This means people, policies, locations, and equipment.  You've got to have the app set up and ready to go without crashing, tech personnel to maintain the app, people to answer phones, people to explain the deal to drivers and get them on the road, managers, lawyers, and staff to run offices.

4. You've got to have a ton of money.  By demonstrating its success in other locations before it arrived in New York, Uber was able to obtain venture capital from major investors.  By June of 2014 they had secured over a billion dollars in funding.

5. And finally, you've got to have a green light from the city you're about to invade. City officials turned a blind eye as Uber was able to add unlimited numbers of for-hire vehicles to the already congested streets of Manhattan.  (By 2018 there were over 100,000.) I think it's safe to assume that the savvy leaders of Uber would not have attempted to enter the world's largest taxi market in the way they did (not with small steps, but with a bang) unless they felt confident that they would not be met with serious opposition from the mayor, the TLC Commissioner, or the City Council.

Meanwhile, At The Taxi Garage

Let's take a look into the world of the taxi garage.  Imagine that you operate a taxi garage and you own or lease a hundred medallions.  That's one hundred cabs, double-shifted.  Two hundred drivers.

If every shift is sold out that means you've got two hundred drivers paying you approximately $125 every day for the use of a cab for twelve hours.  That's a lot of money coming in, but you also have an enormous overhead.  Your expenses include:

--- the cabs themselves which by TLC rules must be replaced every three years.

-- the parts for the cabs which are in constant need of repair.

-- the cost of the garage.  This includes whatever you pay for renting the space if you don't own it, for property tax and insurance if you do own it, the parking lot for the cabs, the equipment you need to maintain the cabs, office machinery and office supplies.

-- insurance for the cabs, over $500 per month per cab.

-- a body shop and its equipment.

-- perhaps a tow truck.

-- personnel, including mechanics and dispatchers.

-- lawyers.

-- accountants.

-- fees paid to the city.

-- and let's not forget the cost of leasing medallions if you don't own them or paying for loans that may be outstanding on the medallions that you do own.

Clearly, it's an expensive proposition to run a taxi garage in New York City.

The Key Question

About a year after the medallion crashed it occurred to me that I didn't know the answer to a very pertinent question about the economics of the taxi business.  I keep up with these things and I was sure I'd never heard the answer to this question in conversation nor had I learned about it from trade magazines or in the media.  So I posed the question to the owner of my taxi garage, a person who has operated a fleet of as many as 240 cabs for thirty years:  

"What percentage of your cabs have to be out on the road for you to break even?"

He answered immediately without needing a moment to think about it.  

"Eighty per cent."

Eighty per cent to break even.  That, ladies and germs, is a great piece of data.

Here's another one: the customers of the owner of a taxi garage are not the passengers who get into his taxis and pay for a ride.  His customers are the drivers who lease his cabs.  His income comes almost entirely from his drivers.  It is of little concern to the garage owner if passengers are happy with their rides or even if his drivers are out on the streets for the full shift and racking up lots of money on the meter.  In fact, it would be fine with him if the drivers don't work the full shift.  It would mean less wear and tear on his cabs.  

The customers of the owner of a taxi garage are his own drivers.  That's where his money comes from.

Why The Medallion Tanked

The medallion did not tank because Uber took the passengers.  Uber certainly took many passengers but not enough so that you couldn't still make a living driving a yellow cab.  I can say this for a fact because I've been driving a yellow cab since 1977 until the present.   It's true that I'm making less than what I was before Uber showed up in 2014, but it's not that much less.  There's still plenty of business for yellow cabs.

And that's because the business model of the medallion cab -- people who live and work in an extremely condensed piece of real estate (Manhattan) step out onto the street, wave a hand in the air, and a yellow car suddenly appears and whisks them away -- is actually competitive with and often better than the app.  I see people all the time standing there waiting for their Uber to show up while available yellow cabs are driving right by them.  The app may have replaced the telephone but it has not replaced the street hail.   

The medallion also didn't tank because several hundred drivers were swindled by predatory lenders.  There are over 40,000 people in New York City who have valid hack licenses.  There were thousands of people who never drove a cab but purchased medallions strictly as investments.  The misfortunes of a relative few could, and should, lead to reforms in the way loans are made and even to compensations to these drivers, but it would not by itself destroy the confidence that so many others still had in the commodity.

The medallion tanked because the drivers defected to Uber.  

They suddenly left the garages, in big numbers, and did not come back.  New drivers considering entering the industry chose Uber instead of yellow.  Old drivers considering returning to the profession decided to give Uber a try instead of taking the old twelve-hour shift deal.  

Drivers, who for so many years were taken for granted, whose working conditions were deplorable, saw the possibility of a better life if they left the garages and went with Uber.  

No more twelve-hour shifts.

No more working for five hours before you break even. 

No more waking at 3 a.m. to get to the taxi garage by 5:00 to start your twelve-hour work day.

No more working all night and not getting to sleep until 7 a.m.

No more dispatchers shaking you down.

No more being turned away because all the cabs are already leased out.

Now you can own and drive your own vehicle.

You can make money even if you drive for just a few hours.

You can arrange your schedule to give you time with your family.

Work when it's busy.

Work whenever you feel like it.

Surge pricing!

Unfortunately, and predictably, this didn't last.  As time went forward Uber (and Lyft), like the owners of taxi garages, showed themselves to be not particularly concerned with the welfares of their drivers. In fact Travis Kalanick, Uber's founder, shamelessly announced that the long-term goal of Uber was to completely do away with their drivers and replace them with self-driving cars!  These companies allowed their market to become saturated with unlimited numbers of drivers and the good times were over.  It was, and still is, actually very similar to the situation which led to the creation of the medallion in 1937.

But in 2014 Uber sure looked great if you were working out of a taxi garage.

At first the drivers began to drop away like weary soldiers disappearing from their ranks on the long march home.  You might wonder whatever happened to so and so who you used to see at the garage every day.  Someone would say out of earshot of the dispatcher that so and so went to Uber.  The word started to get around from these early defectors that they were doing so much better now, making as much money in two or three busy hours as they were making in twelve at the garage.  

I will never forget what I started seeing in September of 2014.  Traditionally summer was always the slowest season for yellow cabs due to so many New Yorkers being out of town on vacation.  Many cabbies took time off in the summer, too -- the only time of the year when they may not have had to worry about losing their weekly deal.  I might see a dozen empty cabs parked on the street in front of my garage in the summer months, whereas at other times of the year there would be perhaps just two or three out there, waiting for repairs.   

But every year right after Labor Day, it would be as if a switch had been turned on. Immediately the business was back, the traffic was worse, the shifts at the garage were selling out, and things were back to normal.  This did not happen in 2014. Instead there were dozens of empty cabs sitting on the street because they did not have drivers.  In fact, the owner of my garage had a new problem -- he had no place to put his cabs.  He had to start paying to keep them in commercial parking lots. 

Driving around the city I saw the same thing.  Every taxi garage with dozens of empty cabs on the streets.  As months went by, nothing changed.  Rows and rows of empty cabs at every taxi garage.  

The days of endless supplies of drivers were over.

This meant that the garages were below their 80% threshold.  They were losing money.

Worse than that, the confidence in the medallion evaporated.  There was no reason to believe that things were ever going to get better.  

This carried over into the taxi broker segment of the industry as well.  As mentioned above, some drivers preferred to lease medallions rather than continue working out of garages.  They'd go to a middleman (the broker) who'd set them up with a medallion (owned by an investor), a taxicab, and insurance.  He'd then guide them through the red tape of the Taxi and Limousine Commission and they'd be in business for themselves.  Part of this arrangement would be for the driver to sign a contract agreeing to continue to lease the medallion for an agreed upon period of time.   

Let's say the driver signed a two-year contract to lease the medallion in November of 2012.  The two years go by; it's now November of 2014.  He sees that all the drivers he knows who went to Uber are doing great, much better than he is.  Is he going to renew his contract to lease that medallion?

No.  He's going to return it to the broker.  See ya later.

Also, getting back to the owners of taxi garages -- they usually own some medallions themselves but they, too, were leasing medallions from investors.  Seeing that they no longer had enough drivers and were losing money, did they renew their leases with the medallion owners?

No.  In order to cut their expenses they reduced the number of cabs in their fleets by returning the medallions they did not own.  My garage shrunk from 240 cabs to 144.

What if you were the person who bought a medallion (or ten) strictly as an investment?  That commodity which had been giving you a great return in the form of a monthly check from a broker or a fleet owner has now been returned to you. There are no drivers to be found and you are getting nothing.  If you owned only one medallion (and one cab) at least you could still make money by driving the thing yourself.  But you can only drive one cab at a time.  And you own ten medallions.

You are screwed.

Supposing you owned a bank or ran a credit union.  Would you still accept the medallion as collateral for a loan?

No.  So the existing medallion owners could not borrow on their own medallions in the hope of riding out the crisis.

Supposing you were someone who had been considering buying a medallion and you understood what was happening. Would you buy a medallion for a million dollars? Would you buy one at any price at all?  No, you would not.  Nor would anyone else.

If no one will buy a medallion, what is it worth?  

Nothing.  

So that is the story.  That is why the medallion tanked.  The engine that was producing the wealth -- the drivers -- galloped out of the stable in the hope of finding a better life.   

It's a story that has a certain karmic appeal to it.

If you kick a horse long enough it will no longer be around to pull your wagon.