Why Self-Driving will Kill Uber
Self-driving was once the solution to Uber’s financial issues. The drivers on the platform take in about 46% revenue. This means that a fleet of autonomous vehicles would largely eliminate that overhead and provide a clear path to profitability. However, near the end of 2020, Uber sold its self-driving division to Aurora for $4 billion. While this is not the death of autonomous ride sharing, it does derail its momentum. However, lets for a moment imagine that Uber didn’t sell their self-driving division, and that instead they succeeded in creating self driving cars.
What could this look like?
Uber would move to quickly scale up their autonomous fleet and move away from human drivers. This means Uber would need to buy or lease vehicles, which would be a shift from their current strategy where the supply side of the marketplace (i.e. the drivers) are bringing their own car. Because Uber does not make cars they would need to partner with manufacturers, like they did with Volvo during their attempt to create self-driving cars, to supply their autonomous fleet.
Human drivers would be swapped out for self driving cars. The initial capital outlay would be high but the margin per ride would increase for Uber. We can expect that Uber will continue to optimize margin per ride, but because its largest cost (the driver) is removed they will now need to decrease the cost of the vehicle. However, Uber isnt well positioned to do this because they dont make the vehicles in their fleet.
Uber now faces a similar predicament as Netflix did. For Neflix, once media content became digitized the distribution of content became much less expensive. Self-driving replaces the driver and reduces the cost per ride for Uber. For both companies to increase profitability they need to become a producer of the core function of the platform. For Netflix, this meant becoming a content creator. For Uber, this means becoming a car manufacturer.
Doesn’t this sound crazy?
Uber had the first mover advantage with its platform. However, like most tech, the advantage erodes over time as competitors are able to replicate the same functionality. Lyft, Sidecar, and others created similar ride share platforms, though most did not achieve the same success as Uber. So, Uber’s value above other competitors is not necessarily its platform IP, but instead its value is its network effect. The users it has on the platform, both drivers and riders, are what gives Uber most of its value.
So, how does Uber keep users on its platform when others can build something similar? Uber has to beat competitors on cost, convenience, and quality. Having more drivers on the platform means that Uber can offer a more convenient service, better price, and higher quality. Over the last year, drivers dropped off the platform due to Covid and wait times jumped to 30 minutes in some cities, ride cost increased almost 80% in certain areas, and users experienced a dip in the overall quality of the service. Uber spent $250m on incentives to get drivers back on the platform.
The issue of driver incentives disappears with self-driving. Uber no longer has to worry about keeping drivers happy because that function has been replaced by software. However, this means that problem no longer exists for would be competitors. As self-driving becomes ubiquitous, competitors can more easily enter the space. In order to maintain the cost, quality, and convenience of its service, Uber must now focus on the car as there is no longer a need to convince people to become drivers. Now, Uber must acquire as many self-driving vehicles as possible.
Who is best positioned?
With the focus now on the acquisition of a large fleet of autonomous vehicles, Uber must work with car manufacturers. Uber can try and strike deals with manufacturers to minimize the cost of the vehicles in its fleet. However, they are poorly positioned to do much more than that. The car manufacturers are the ones who have the cost advantage, and as they develop their own self-driving software they will be well positioned to compete with Uber.
Imagine companies like Ford, Toyota, and Honda stop selling vehicles to Uber for its fleet of autonomous vehicles. Uber will be forced to negotiate with fewer manufacturers who will be better positioned to offer a better deal for themself than for Uber. Eventually, Uber could be positioned much like Netflix who saw content providers like NBC and Disney pull their content off the service as they created their own streaming platforms.
Ford, Toyota, and other manufacturers could stand up their own ride hailing platform and use their own vehicles as the drivers. If car manufacturers do this they would be able to outcompete Uber on price as they can acquire vehicles at a lower cost. Collectively, they can also squeeze Uber on the supply of vehicles it has within its own rider marketplace. If Uber loses on the supply side its platform will become less convenient and more costly (just as we saw during Covid), and ultimately it will become a lower quality platform.
Double Edged Sword
The benefits that Uber would receive from a self driving fleet of vehicles opens the door for new competitors. It forces Uber to switch from optimizing the acquisition and maintenance of human drivers to doing so with vehicles. This transition is what could allow car manufacturers to become Uber’s biggest competitor, and ultimately it could spell the end of the ride hailing giant. We’ve seen incumbents in other fields, like Netflix, handle such a transition. However, countless others like Garmin, Blockbuster, and Kodak have been forced to pivot away from their existing business or close shop. What do you think will happen with Uber?
