Waymo’s threat to Uber’s raison d’etre.

Google’s Waymo is a threat to Uber, but not just because it has the obvious head start in the autonomous car business. While that would indeed reduce Uber’s eventual market share in this segment, Waymo’s arrival also threatens Uber in a more fundamental way. In my opinion, it also threatens Uber’s ability to continue to operate the normal taxi business which is the far bigger business still. Here is why.

Self driving cabs — Taxi business or Car rental business?

The popular perception is that if the legislation permits fully autonomous vehicles eventually, self driving cars will have a major advantage over human driven cabs since they would have removed the labor cost entirely from the equation.

But more and more one thinks about it, using self driving cars for mass transportation looks lot more like a car rental business than like a taxi business. Instead of renting a car to drive myself, I am hopping on a car which drives itself. The unit economics will still be similar to the car rental business. Since there is no driver who will act on behalf of the company, the business will have to consider the aspect of rogue passengers who might damage or attempt to steal the vehicle by overriding it, assuming that the self-driving cars will still have manual overrides — both because of regulations, as well as because of the fact that passengers are highly unlikely to board a vehicle where they have absolutely no control if things go wrong.

And once we realize that we are talking about a modified version of car rentals, rather than a modified taxi business, we can also question the hypothesis that self driving cars will eventually replace taxis entirely in the near future. There are simply way too many obvious cultural and legal hurdles. Taxis can be hailed by everyone — even those who cannot drive. But it is highly doubtful if people who can’t drive will comfortably step inside a fully autonomous vehicle ( Even regulations might prohibit that. ). Can it happen 30 years later? Maybe. But it makes no sense to talk about what can happen 30 years later. That is simply far past the average lifetime of companies. Uber might have been long gone by then.

The autonomous cab business or autonomous car software — which is the real play here?

The problem discussed above is true even for first world countries — where traffic is highly regulated and predictable and law and order system can be expected to handle cases of damages to cabs properly. Then, it becomes a hopeless fantasy to ever imagine this business having any impact in emerging economies where traffic is much much higher and law and order enforcement is only now beginning to be taken seriously. The sensible conclusion is that this business will remain confined within a niche market for the next 10–15 years — limited to select cities in the US and Europe. In fact it is certain that Alphabet and Waymo also know this already. They are not entering this business to compete with Uber. They will be doing this in order to collect valuable data and perfect their algorithms. This will be a huge opportunity to understand people’s behaviour and help them progressively refine the user experience of their self-driving technology. In fact, it makes more sense for them to consider Tesla as a competitor. Tesla gets valuable data by bundling its self-driving technology with its cars and treating its customers as test subjects. Waymo will get to do this by launching this self-driving car taxi business and treating its customers as test subjects.

The technology will eventually be worth billions to automobile companies around the world. Waymo can become the monopoly software company which provides the software modules which will power the self-driving cars of all the automobile brands. It won’t be a surprise if even Tesla migrates to it at some point.

The real threat to Uber

Uber’s core business of human driven cabs will barely be affected by self driving cars for the next decade at least. And Uber is insisting that it wants to continue expanding in emerging economies like India — where self driving cars won’t be a factor for maybe even two more decades until the infrastructure can catch up to support it. Despite these, Waymo will still be a huge threat to Uber even in the short to medium term. Why?

Because of the way Uber funds it business.

Uber has so far not yet figured out how to make profits in this cut-throat cab business. Its dreams of being the one monopolistic platform where all rides are booked is in shatters now with strong competitors in every market — Lyft, Didi, Ola, Grab etc. It means there is no realistic timeline at which Uber will eventually be able to start charging users at rates where it can start covering its expenses. It will keep having to keep the prices down artificially waiting for all its competitors to die out. But then again, they are also heavily funded and are doing the same waiting game.

So the only way for Uber to survive has been to keep raising bigger and bigger rounds. They have done this so far by promising bigger and bigger market opportunities to the investors — Flying cars, Food delivery etc etc. The logic was that just like Amazon built a hugely successful AWS business by leveraging the infrastructure it had already built, Uber will also be able to leverage its huge network of riders and drivers to build allied businesses. But these side projects have not really shown any big traction so far. If we start analysing why, that will take another big post, so let’s leave that for another day.

Since these moonshot ideas have not materialized so far, Uber is increasingly under pressure to show that its core business can be profitable in itself without needing some allied businesses to rescue it.

But we already saw that there is no way Uber can increase the ride prices significantly — since they have strong competitors everywhere. This means they have to cut costs. One way to do this is to squeeze the drivers. Transfer as much costs on to them as possible and give them as little pay as possible. Uber is certainly trying this. But it is also encountering stiff opposition from drivers everywhere. In fact trade unionism which had been dead for several decades is experiencing a revival in many cities thanks to Uber.

So that bring Uber to its final trick — Tell investors that it will bring in self-driving technology for its cars eventually and remove the pesky drivers from the equation — thereby reducing the costs and making profits finally.

As long as self-driving car technology remains an unproven or limitedly proven technology, investors can keep taking comfort in the religious belief that Uber will eventually master it and keep dumping money into Uber hoping that they will invest it in research and implement the technology soon.

Waymo debuting it much ahead of Uber causes 2 problems to this logic

1. Like others have mentioned, it proves that Waymo is a few years ahead of Uber in this respect. And artifiical intelligence is one field which benefits a lot from data. First movers do indeed have a big advantage here. And unlike other softwares, second movers cannot simply copy the features and catch up. Without the data, the system will simply be inferior. This means that it doesn’t make sense for investors to fund self-driving research in Uber if Waymo is anyway years ahead. Better to ask Uber to wait and eventually buy the software from Waymo when it starts selling that software as a commodity. So one less bullet point in Uber’s pitch deck when it tells investors the reason it needs more money for
2. But an even bigger problem will arise if and when Waymo’s taxi service shows the limitations of using self-driving cars as taxis. As discussed at the start of this post, it is quite likely that it will show itself to be a very niche business not really capable of showing a global scale. All the problems which the investors might not have either ignored or wrongly assumed as solvable, will now be glaringly obvious as unsolvable. It will be clear that even if those problems are solved by Waymo, it was at a great cost and solved only because Waymo’s (and Google’s) primary goal was in perfecting the software to be sold, and not in making self-driving taxis a great business in itself. In short, Waymo might end up proving that while the software for self-driving cars is a tremendously profitable business, using the software for running them as taxis might not be as attractive as it is dreamt to be. That will greatly dampen the story that Uber is selling.

So the threat that Waymo poses to Uber is that it spoils the story that Uber has been selling its investors. And for a business which is yet to make profit, that is a pretty huge threat.

Originally published at https://techonometrics.com on May 1, 2019.