Seth, How do you account for the capitalization of the entire driverless car thing?
David Salow
11

I am very much concerned about consolidation of the market as well — the large barriers to entry, both in terms of capital and in terms of securing public trust, teach us that these services will be at best oligopolies.

This is made worse by the fact that the economies of scale are profound: The service with the shortest wait times will attract the most customers; these customers will in turn allow that service to scale more, further dropping wait times. That sort of self-reinforcing network is a recipe for the birth of monopoly, without any need for the rapaciousness of Carnegie or Rockefeller.

As a result, the race to be the first to market is attracting a lot of capital, on many continents. But the best way to illustrate how strong the market will be is to look at Indonesia, which earlier this year got its first Unicorn — a ride-hailing service: https://www.cnbc.com/2017/04/24/a-ride-on-indonesias-first-and-only-unicorn.htm. Seriously, Indonesia has a billion dollar private company; capital is really interested in this market.

On a dollars-per-mile basis, think about it this way: Infrastructure might cost $40,000 per vehicle, and if you want it to throw off 25% gross margins (a good number for a large volume business, like Walmart) then it would have to generate $10,000 per year (note I am choosing numbers to make the math easy, but these numbers aren’t horribly off). If the vehicle travels just shy of 300 miles a day, that would give it 100,000 miles per year. So a profit of 10¢ per mile would be fine.

We can make the profits less by dropping the cost of the vehicle (say, by making it a two-seater) or increasing miles (since it never stops). More likely, we subsidize the transit with advertising. Or we can bundle on other services as well, selling travel subscriptions the way that Amazon markets Prime.

And of course, like Amazon and Facebook, the race will be to scale, because the first to scale is likely to win. So the early efforts will be focused on burning money to capture market share.

Honestly, I don’t think anyone has a clue what long term costs will be. But they know the market is huge; the winners will have little competition, and over the long term they’ll adjust and get it right. If I was a VC, I’d think it wiser to spend money now despite the uncertainty than to miss the opportunity to invest in one of the biggest winners of the next decade.

Show your support

Clapping shows how much you appreciated Seth Miller’s story.