Google's $258M investment in Uber shows it is serious about commercializing its self-driving car.
As I've argued before and expand upon in my upcoming book, The New Killer Apps: How Big Companies Can Out-Innovate Start-Ups, massive car sharing is the long-term disruptive scenario enabled by driverless cars.
In the US, for example, more than $2T flows from car-related spending, encompassing suppliers, carmakers, dealers, financing, service, repairs, insurance, energy, rentals, taxes, etc.
With massive car sharing, a significant portion of these expenditures are potentially eliminated and much of the rest could be thrown up for grabs due to new business models and changes in the competitive landscape.
The prediction about when driverless cars will be commercially viable range enormously, with Sergy Brin predicting five years and others putting the number closer to decades.
Given where Brin sits on this spectrum, and the head start that Google has on autonomous vehicle technology, it is hard to imagine that Google’s pricy $250 million investment in Uber is not driven by its driverless car efforts. And, in that context, it is a great investment.
Uber enhances Google's strategic options for launching driverless cars. By doing so, it also keeps Google firmly in the pole position to capture the massive economic value that will result.
The investment is also a clear statement that Google is raising its bet on driverless cars, and intends to play for real in a space that many argue is nothing more than a distraction. The detractors are wrong.
Even without car sharing, driverless cars will deliver tremendous social and economic benefits. Every year, more than 1.3 million people die in car accidents worldwide, and more than 50 million are seriously injured. In the US alone, more than 34 thousand die and 2.2 million are injured in over 5 million accidents. 90% of these accidents are caused by human error. Google has declared its intention to reduce accidents by 90% using driverless vehicle technology. Volvo is on a mission to eliminate all deaths and injuries in its cars by 2020.
The economic benefits and business disruptions of this accident reduction is enormous. In the US alone, the direct and opportunity cost associated with vehicle accidents amounts to about $450B. These expenses would fall along with any drop in accidents.
But, as the old saying goes, one man’s savings is another man’s lost revenue. Emergency rooms could lose millions of patient visits a year. The car service, parts, and repair industries, which add up to more than $100B a year in the US, could be dramatically reduced.
Here’s another far-reaching business disruption. Each year, in the US, we pay about $200B in car insurance premiums. These premiums are directly correlated to the expected losses calculated by insurers. It is an actuarial inevitability that, as accidents goes down, total insurance premiums will also go down.
Yes, we’ll still need car insurance, but the total revenue pool from which insurers draw will dramatically fall. Not only that, with the transition to driverless cars, much of that insurance will probably take the form of product liability insurance bought by manufacturers, as opposed to personal liability insurance bought by drivers. Some auto insurers will survive and perhaps even thrive this collision with driverless cars. But, most won’t.
Massive car sharing, however, could bring the potential benefits and business disruptions to another level. Cars, on average, sit unused 95% of the time. Not only are cars underutilized, an enormous amount space is required to park them.
One estimate is that the parking spots in the US add up to the equivalent of the size of Connecticut—with much of this real estate in dense, high priced urban centers. Massive sharing of driverless cars, through driverless taxi services, could dramatically increase utilization and reduce cost.
Larry Burns and his colleagues calculated in a study at Columbia University’s Earth Institute that total cost-per-mile could drop 80 to 90% compared to total cost of private ownership. And, because they are on the move and could park far away when not needed, driverless taxis would not take up as much valuable real estate.
Massive car sharing drives disruptive effects into the heart of the auto industry. Without car sharing, it could be argued that driverless cars just represent an incremental change for auto companies. Today’s companies would just make driverless rather than human-driven cars. I’m skeptical of the incremental change argument even without car sharing, but if massive car sharing is enabled, the argument goes out the window.
Here’s why.
Today many buyers buy cars based upon occasional usage scenarios: Buying minivans to accommodate the occasional family outing or car-pooled soccer game. Buying SUVs for the weekend excursions or large load. Buying the second car for the one or two days a week when having it is critical. In fact, most of the time, cars carry just one or two passengers on a known commuting route. Car sharing would allow riders to call for the car that they need for each particular.
This means that, with massive car sharing, the cars needed most of the time could be small electric cars—a huge contrast to the large expensive cars from which auto companies make most of their profits today.
What’s more, these small cars could be simpler and cheaper to design and make, reducing the competitive advantages of today auto giants.
They’d also be sold as fleets, rather than to individual owners, cutting the need for large dealer-based sales and distribution networks—another big auto competitive advantage.
The big question, however, is who will guide consumers along the technology adoption process and profit from the transition to car sharing.
That is where Uber comes in. While there are multiple car sharing models, including ventures Relay Rides and Zipcars (in which Big Auto companies are participating), Uber is the farthest along in developing a simple interface and business model that fits perfectly with the deployment of driverless cars.
With Uber, passengers specify pickup and drop-off points and the car comes to them. Pricing, payment and verification is already handled. When the technology is ready, driverless cars can begin as simply another car-type option from which Uber users can choose.
Given that Sergy Brin and Larry Page believe the time to commercialization of driverless is closer to 5 years, isn’t this the time to invest in Uber?
With its investment in Uber, Google is giving Uber a big boost in its rollout, thereby helping Google develop the natural target market for driverless taxis.
Just as importantly, Google is buying a seat alongside Uber as it learns how to market to and serve car-sharing customers.
This learning is critical—and will be immensely valuable—as Google continues to position itself to grab a share of the trillions that driverless cars put up for grabs.
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Chunka Mui’s new book, The New Killer Apps: How Big Companies Can Out-Innovate Start-Ups, will be released in September. Follow him here at Forbes (click on the +follow button next to his picture), on Twitter @chunkamui or at Google+.
