Pando

With "Convoy," tech billionaires build another castle at another narrow in the stream

By Mark Ames , written on November 4, 2015

From The Disruption Desk

America’s trucking industry is a $749 billion sector in need of disruption.

And last week, A-list Big Tech billionaire investors—led by (in order of billions) Jeff Bezos, Uber co-founder Garrett Camp, and The Intercept publisher Pierre Omidyar—rolled out their latest startup, Convoy, with the goal of doing to the trucking industry what Uber has done for taxis.

The initial investment is small — a total of $2.5 million — but the stakes are potentially huge, as are the net worths of the other investors in Convoy: billionaires Marc Benioff, Drew Houston, Henry Kravis; former Starbucks CEO Howard Behar; angel investors Ali and Hadi Partovi; Expedia CEO Dara Khosrowshahi; and the secretive investment bank Allen & Co, which hosts the annual Sun Valley billionaires’ retreat, and which features ex-CIA chief George Tenet as managing director.

What’s significant is not the pocket change each Big Tech/Big Finance billionaire dropped into the Convoy kitty, but their caliber — and their expectation of being able to reconfigure the flow of all those inefficient trucking industry billions spilling around the old economy. As Hadi Partovi told Bloomberg last week,

As an angel investor, it's the largest market opportunity I've ever seen, at least since looking at Facebook in 2005.

Whether or not Convoy turns out to be the Uber of short-to-medium-haul business-to-business trucking, it’s safe to assume that sometime soon, tech will transform and restructure the $749 billion trucking sector in a similar way. And usually this means smashing the old structures, connecting users more seamlessly — and centralization on a scale never before thought possible.

For all of the Internet’s initial promise (and cant) of smashing traditional hierarchies and creating horizontal structures that democratize power and politics, the reality is that the Internet economy has centralized power and wealth and the political economy on a scale not really seen since the railroads destroyed the old economy and quickly created hugely centralized new industries, which centralized into trusts — and created a class of oligarchs with outsized wealth and power that no democracy could survive.

Uber is one of the clearest examples of how this works: Hundreds of small local taxi monopolies around the country and the world are smashed, a huge new pool of unused labor and assets are brought into the taxi market, benefiting the taxi consumer (usually) — but more importantly, centralizing all the revenues dislodged from the hundreds of disrupted local taxi monopolies around the world, to be distributed among a tiny group of already-wealthy guys who own shares in the centralized taxi mega-monopoly.

The same was true with Convoy investor Jeff Bezos’ Amazon.com — which destroyed most of the small- and medium-sized bookstore industry, and has been laying waste to the publishing industry as well, by centralizing the consumer-to-business all under one monopoly roof. Today, Jeff Bezos is the third richest American worth $53.2 billion (if you subscribe to the fiction that David Koch actually is worth the 50/50 split that his meaner brother Charles allows him—in reality, the Koch brothers’ combined $105 billion net worth is all Charles’, but he wisely wants to avoid the negative attention that 12-figure wealth brings).

Likewise, Omidyar’s eBay rolled up and centralized much of the classifieds business that used to be widely distributed in small and large newspapers across the country, centralizing America’s and parts of the globe’s classifieds and small business advertising business into one mega-classifieds, making billionaires out of him, Meg Whitman and Jeff Skoll while padding the pockets of his venture capital investors. Or in plain English—centralizing the business, the power and the wealth of that sector in the hands of a tiny few. Which gave Omidyar the power to roll up the biggest online payments business, PayPal, into his vertical structure — and with his money, he almost managed to roll up eBay’s only domestic rival, Craigslist.

That centralized wealth and political power leads to some strange spectacles, which we the peons can only watch in awe and horror, like mortals before the Olympian gods (only our gods like to imagine themselves as Second Life virtual heroes riding Segways) — the weird billionaire rivalry between online shopping billionaires Bezos and Omidyar, which a decade or so ago had pegged Omidyar as the winner for not warehousing any merchandise, but which then turned in Bezos’ favor; in which Bezos bought the Washington Post before Omidyar could make up his mind, so Omidyar pumped the same amount into a fledging new media startup, while both Bezos and Omidyar split the biggest treasure trove of leaked NSA secrets in history...

That’s the part we see, and we chatter about. But there’s a grubbier side to the fast, disintermediated, techie-clean online shopping world that’s made consumerism so convenient— and that’s the $749 billion trucking industry, a labor-intensive, old economy, pollution-spewing industry that serves as the vast grubby substructure to the ecommerce platform superstructure.   

The trucking industry today is in many ways quite different from the taxi industry that Uber co-founder Garret Camp faced. Trucking was the first major industry that deregulation was tested out on in the 1970s — first under President Ford, and then in earnest under Jimmy Carter. Ford started the process of trucking deregulation in 1975-6, taking the advice of the chairman of his Council of Economic Advisors: Alan Greenspan.

Ford was a true believer in free-market ideology, although he hadn’t ditched anti-monopoly politics the way Reagan would. The trucking industry was largely subjected to New Deal era regulations, overseen by the Interstate Commerce Commission (ICC) since 1935. Different types of licenses, weight hauls and types of cargo were all regulated by the ICC in order to prevent the sort of disastrous over-competition that fed the Great Depression and its chronic deflation and production declines. But the problem in the 1970s was high inflation and low growth, and it was thought that deregulation would lower prices for consumers and spur growth in the trucking industry.

As Ford said at the time,

Few sectors of the American economy were more stifled by government regulation than the transportation industry, and I thought deregulation was urgently required.

One of Ford’s biggest allies in the Senate—at least in deregulating the airline industry—was Senator Ted Kennedy; and to help him push through airline deregulation, Kennedy brought a Harvard professor to Washington named Stephen Breyer. (FedEx became the biggest beneficiary of deregulating the air cargo industry, and later FedEx become a trucking industry leader too—and its business is increasingly tied directly into the ecommerce structure.)

The underlying neoliberal idea driving Kennedy and a lot of other “New Democrats” in the 70s was decentralization and anti-monopoly— in which the federal government was the bad centralizing monopoly power stifling competition. The problem of course would come when, freed from regulation and then antitrust oversight, many of these industries would become privately centralized far worse and far more coercively than when they were regulated under the ICC.

A quick word on the Interstate Commerce Commission: This was the first American federal regulatory agency, set up in the late 1880s in response to the sudden rise of all-powerful railroads and the massive political backlash from populists, labor, and middle-class progressives. The ICC was originally intended to make sure that the railroad companies did not discriminate in pricing — railroads had the power to make or destroy towns, farms, entire business sectors, and people’s lives, by offering different rates and by deciding where to run their lines and branches. But the ICC was quickly captured by the powerful oligarchs who owned or financed the railroads. In the early-mid 20th century the ICC had more success representing the interests of the public, and it also reportedly served as a model for other more successful regulatory agencies that reigned in corporate power like the FTC, FCC, SEC.

While Ford tried liberalizing the trucking industry, he wound up being stymied by one of his own appointees to the ICC, who came out against deregulation after his appointment to the commission. There wasn’t much Ford could do about that.

So it fell to Jimmy Carter, who made sure he appointed radical deregulation ideologues to his ICC.

Carter also pushed through a bill in 1980 that essentially gutted trucking industry regulations for good, the Motor Carrier Act. As he signed the bill in 1980, Carter released a statement that sounds remarkably like the Milton Friedman libertarian dogma we’ve grown weary of today.  

The heart of the Motor Carrier Act of 1980 is its call for prompt and sweeping change of the regulations that have insulated the trucking industry from competition since 1935. No longer will trucks travel empty because of rules absurdly limiting the kinds of goods a truck may carry. No longer will trucks be forced to travel hundreds of miles out of their way for no reason or prohibited senselessly from stopping to pick up and deliver goods at points along their routes.

The Motor Carrier Act of 1980 will bring the trucking industry into the free enterprise system, where it belongs.

And it was another Democrat, Bill Clinton, who drive the final nail in the coffin by abolishing the Interstate Commerce Commission altogether in 1994.

By the time Clinton killed the ICC, life was already getting considerably worse for most truckers, while consumers were arguably benefiting from lower costs, and a handful of booming freight businesses were creating a handful of wealthy and powerful individuals like FedEx’s billionaire founder, Fred Smith.

Deregulating trucking meant freeing up truckers to become independent small businessmen; but they quickly started losing control over their fates as they relied on the consolidated big freight businesses like FedEx and UPS to negotiate rate pay with the thousands of small trucking brokers and firms that they used. The big freight companies, like their New Economy counterparts, want “independent contractors” rather than full-time employees who cost a lot more and who are covered better by federal and local labor regulations.

Last year, the Washington Post’s Lydia DePillis did a series of great and at times wrenching articles on the harsh, declining lives of port truckers, just as the Teamsters were trying to organize them into unions. (Before deregulation, the Teamsters had a lock on much of the regulated trucking workforce, but that lock—sullied by mob ties—got broken up by deregulation.)

In her article, “Trucking Used to be a Ticket to the Middle Class, Now It’s Just a Low-Paid Job” DePillis writes,

Since Congress deregulated the industry in the 1980s — when a unionized truck driver made today’s equivalent of $44.83 an hour — about two-thirds of the nation’s 75,000-odd port truck drivers have become independent operators. And now, “independence” has become shorthand for earning less: Owner-operators make an average of $28,000 a year. That’s $7,000 less than employee drivers, who are paid by the hour and typically receive more comprehensive benefits.

In other words: The industry workforce and assets have already been Uber-ized, only without the tech platform and tech billionaire political power to restructure and re-centralize all those revenues. Independent contractors mean cheaper labor costs and no legacy costs; it also means shifting the costs of capital investments (trucks, gasoline, insurance, maintenance) onto the “independent contractor” just as Uber has done. And that has resulted in a lot of unreported misery and pain for the tens of thousands of truckers whose work services the ecommerce platforms that made billionaire/media titans of Bezos and Omidyar.

To illustrate this, DePillis tells the story of Miguel Tigre, an Ecuadorean immigrant who saved up enough money to buy his own truck in 1993 — but then became trapped in a kind of 21st century sharecropping Hell:

It’s a few minutes into a run carrying a load of scrap copper from the Port of New Jersey to a waste transfer station outside Philadelphia, and Miguel Tigre reaches over the dash of his maroon-and-yellow cab to grab a folder stuffed with the receipts squeezing him dry. He reels off calculations: He gets paid $400. It’s about 150 miles round-trip, and his truck gets 5.2 miles per gallon, so that's $180 in fuel. Tolls are $20. Taxes take about a quarter off the top — but then there's insurance for the truck, and any repairs, which came to $22,000 last year.

All told, that amounts to $32,000 in take-home pay per year, which is barely enough to cover rent and food for him and his wife, who doesn’t work. Then there’s child support and car insurance. Tigre, a stocky 56-year-old with the paunch that comes from sitting for 12 hours a day, says he can’t afford health insurance — he’s diabetic, and pays $100 a pop out of pocket for regular doctor’s visits, plus $300 a month for insulin. And retirement? Tigre laughs, harshly.

“The way things are going, I’m going to die before that,” he says.

And that’s the happy part of the story, the frighteningly familiar stuff that most of us can relate to. It’s a precarious existence, and a preview I think of what’s to come as the post-deregulation trucking industry sharecropping model merges with the Internet/Uber sharecropping model:

For Tigre, the history of the trucking industry is written in red ink. The long hours tanked his marriage. He stopped being able to make mortgage payments on top of truck payments, and he lost his house. He declared bankruptcy. Now, he owes $30,000 to the IRS, and another $10,000 to credit card companies. As he speeds along the New Jersey Turnpike, those circumstances well up like a confession.

"I wish I could say I don't owe it, but I'd be a liar,” says Tigre, eyes full of guilt. “I can go to my bank and say how much money I have, and I'm broke. But I don't cry, I got to keep doing what I'm doing."

Tigre may soon have to sell his truck to raise money. With a million miles on it, it would barely fetch enough to cover the credit card bills. Then, with no assets and ruined credit, he’d have to find a trucking company to work for. But the signs all around the port are for owner-operators, not simple employees; trucking companies don’t want to pour money into equipment, either.

Which brings me back to this new A-list funded “Uber for b2b trucking” platform, Convoy. As the many puff pieces on Convoy point out, the trucking industry is highly atomized at the trucking company level. It’s worked well this way for shipping giants like FedEx, and it’s worked fairly well for the small trucking brokers—and increasingly badly for the truckers themselves, who have been getting squeezed downward for the past two decades.

In Fortune magazine’s description of Convoy, if you sift through all the cant about inefficiencies, what you really get is a blueprint for massively centralizing a highly decentralized industry:

Local freight shipping is an extremely fragmented market, with lots of small proprietors. Washington state alone has more than 24,000 such companies, Dan Lewis, founder and chief executive of Convoy, told Fortune.

Right now the process of finding a carrier to handle a given load typically involves a round-robin of calls between the customer, a broker, and the carriers. The broker acts as a go-between to find an open carrier, work out price, and book the business. “It’s a very manual and phone-taggy process,” Lewis said.

For their trouble, the brokers charge anywhere from 20% to 45% of the job’s worth, Lewis said.

Convoy’s aim is to automate that process, putting the customer together with the carrier using a back-end system running on Amazon Web Services and an Android app on the front end. A version that uses Apple’s iOS mobile software is coming soon.

Indeed.

The question of who benefits from this “efficiency” and what it means can be quantified. When the revenues are concentrated through an app or two, and distributed to a small handful of incredibly wealthy investors, there you have the real architecture of this New Economy trucking industry.

Or another way of looking at how Internet companies like Uber, Amazon, eBay and, if it all goes well, Convoy operate — the metaphor of “the narrows” in the stream, as described by JA Hobson a century ago:

Each kind of commodity, as it passes through the many processes from the earth to the consumer, may be looked upon as a stream whose channel is broader at some points and narrow at others.  Different streams of commodities narrow at different places.  Some are narrowest and in fewest hands at the transport stage, others in one of the processes of manufacture, others in the hands of export merchants. . . .

In the case of Internet Economy, the “narrows” are the app or the platform which control the stream; now replace “German barons” with “Bezos” or “Omidyar”:

Just as a number of German barons planted their castles along the banks of the Rhine, in order to tax the commerce between East and West which was obliged to make use of this highway, so it is with these economic ‘narrows.’ Wherever they are found, monopolies plant themselves in the shape of ‘rings,’ ‘corners,’ ‘pools,’ ‘syndicates,’ or trusts.’

With Convoy, another castle is being built at another narrow in the stream.

Special thanks to Joe Costello, for perceiving forms in the murk of politics