Not a week goes by, it seems, without some sort of development in the world regarding self-driving cars. Whether it’s Google going on a hiring spree as it attempts to accelerate its efforts or General Motors acquiring Cruise, a driverless-car startup, the subject consistently finds a place in any given news cycle.
And now Uber recently got in the mix, putting autonomous cars on the streets of Pittsburgh.
But if you‘re waiting for a self-driving car revolution, you better keep waiting. Sure, the technology is there, but there are plenty of legal and regulatory battles that will have to take place before consumers are being zipped around in autonomous cars.
What’s more interesting, and less talked about, is what a world of automated drivers will look like for some of the world’s most disruptive transportation companies — Uber and Lyft — and how these ridesharing companies will become part of a one-sided, commodity marketplace model with complex logistics and low profit margins.
Lyft and Uber won the war over driver supply. And I should know; one of the companies that did not win on supply against them is Taxi Magic, a company I founded.
The phenomenal success of Lyft and Uber stems from the fact that they are two-sided marketplaces. Both have incredible network effects — more drivers attract more riders, which in turn attracts even more drivers. And this virtuous circle makes the economics of these two companies very different from others in the on-demand ground travel space.
But once fully self-driving cars are available for widespread use, one side of that marketplace will collapse. Drivers will be replaced with capital, and anyone with sufficient capital will be able to put a fleet of cars on the road. Car manufacturers, city governments, perhaps Google and Tesla and others will enter the game, massively increasing the supply of cars and flooding the market.
Self-driving cars are exciting. But they also are a long way off.
With the advent of fully self-driving cars, it’s easy to imagine rideshare companies looking more and more like the airline industry. And while some of us have brand loyalty (mostly because of mileage programs), the industry as a whole is fully commoditized and there is little difference between United and American. Airlines all do the same thing (move consumers from Point A to Point B), and primarily compete on pricing in a race to the bottom.
If this analysis is right, the industry of on-demand self-driving fleets will need apps that connect them to consumers, similar to KAYAK for airlines. This app could be Uber or Lyft, or both, but neither — as one-sided software layer connecting passengers to self-driving fleets — would be worth what they are worth now.
KAYAK is a very successful company used by millions to find air travel services, yet when Priceline bought KAYAK for $1.8 billion in 2012, KAYAK was performing 1.2 billion searches. That purchase price seems low given the quantity of searches, but it was an accurate reflection of the business’ value. KAYAK is a one-sided marketplace generating revenue through lead gen to service providers (airlines and hotels). That type of one-sided marketplace is far less valuable than a two-sided marketplace that has a locked-up supply and also manages demand.
For technology geeks like me, self-driving cars are exciting — they will make commuting safer and our daily lives easier. But they also are a long way off, and before we get to use them, there is a lot more technology to create and, beyond that, policy and legal challenges to overcome. When they come into mass use, they are likely to be awesome, creating a new platform for future startups or alternative business models for existing businesses.
One thing self-driving cars won’t do, however, is help Lyft and Uber (and other two-sided on-demand ground travel companies) maintain their existing business models or the valuations they command. While self-driving cars can help these companies create new platforms, it is hard to see how they can help them increase their value or justify valuations that these companies and their current business models now command.
As the age of the horse and buggy ended, jockeys faced a rough patch, but the age of the auto mechanic was on the horizon. This time around, we’re going to see the end of driving as an occupation. And no one stands to lose more than ridesharing companies.
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