Uber and the Car Industry’s Wild Future
Predicting how new technology will affect our lives in 5, 10, or 15 years is nearly impossible — technology progression is too fast and dynamic. To help us understand and prepare for the future with some confidence, however, we can extrapolate current technological trends to uncover plausible end-state scenarios.
Some persistent and enduring trends in technology, for example, are the rapid decrease in the price of computer memory and processing power (Moore’s Law), the exponential growth of data collection and data-driven decision making (Big Data), and the rapid globalization of the world’s economy and workforce (Globalization). These trends have persisted for decades with no signs of abating. It is business managers’ responsibility to ensure that not only their business survives as these trends persist, but thrives as a result of them.
A more recent and less publicized trend is the rapid decrease in the cost of commuting — a result of the proliferation of ride sharing businesses such as Uber. I believe this trend will have enormous effects on the future of transportation, commerce, logistics, and overall business operations.
Specifically, I predict:
- Uber transportation costs will continue to decrease dramatically.
- Uber will continue to enjoy a ‘winner-take-most’ economic outcome.
- In 10 years, 100s of millions of people worldwide will forgo owning a car because of Uber.
- Uber will dominate the autonomous car market
1. Uber transportation costs will continue to decrease dramatically.
Initially seen as a convenience or luxury to avoid having to look for a parking spot or pick a designated driver, ride-sharing apps are quickly proving to be able to deliver much more. Uber, for example, started 5 years ago as a black car service (UberBlack) for the well-to-do of Silicon Valley and has rapidly increased its addressable market by introducing ride-sharing (UberX), taxi (UberTaxi), and carpooling (UberPool) services.
With each new service, the cost of transport decreased and the addressable market ballooned. With over 1 million Uber rides per day across all services, it has taken the world by storm.
UberPool — a feature that allows transporters to coordinate the carpooling of an Uber ride — was introduced only a year ago, but by some reports already accounts for nearly half of all rides in San Francisco.. UberPool is wildly successful because it decreases the cost of transport by almost 50%. Commuters simply book a ride and Uber’s logistic engine pairs the commuter with a second commuter with similar pickup and drop-off locations. The commuters split the fare. At no additional cost to the driver, this brings the cost of a 15 minute ride from about $12 to close to $6 with not much more than a concept and some lines of code.
Naturally, autonomous cars will bring the costs down substantially more as driver costs are a majority of the costs in the network. This affect is addressed below in prediction 4.
2. Uber will continue to enjoy a ‘winner-take-most’ economic outcome.
Services likes UberPool highlight the strength of the network effect that Uber enjoys. Without a robust network of drivers and commuters in a given city, UberPool would have no chance of success or sustainability.
Similarly, all aspects of the business from speed to costs perform better in scale. Chris Sacca, an early Uber investor and prominent VC, recently went as far as to say that Uber’s business model has a winner-take-all economic outcome,
“it’s not going to be a two-horse race… This is a winner take all game… Uber is a better company [than Lyft] with better math, better predictive supply, better brand, lower pickup times, and higher quality service.”
— Chris Sacca
Surely he could be biased as he is one of the largest shareholders of Uber, but the idea is simple and convincing: the bigger the network of drivers for a given city the greater the value (low cost & speed) to a commuter, and in turn, the more value to the commuter, the more people will join the network as customers.
3. In 10 years, 100s of millions of people worldwide will forgo owning a car because of Uber.
Let’s take a look at the cost of owning a car versus using Uber for a typical urban resident. Consumer Reports estimates “a quick, refined, and roomy small SUV such as the V6-powered Toyota RAV4 costs… $7,800 a year to own.” This includes, depreciation, fuel, interest, insurance, maintenance & repair, and tax. For city folks, if you add monthly parking at a conservative $100 a month, your total comes to $9,000, or roughly $24.65 a day.
With a 15 minute UberX ride costing about $12, owning a car to commute to work is starting to look like a luxury, especially if you add in parking at work. Now take into account UberPool and public transportation options for commuting, errands, etc. and owning a car starts to look almost frivolous.
With 80.7% of the US population living in urban areas, there are roughly 240 million people for whom owning a car will increasingly become an expensive hassle or at best a luxury.
4. Uber will dominate the autonomous car market.
The next huge innovative leap for how the world commutes is going to be self-driving cars. The technology has been developed, tested, and refined over the past 10 years. Just last month, Google has reported over a million miles of 100% autonomous driving — equivalent to 75 years of typical US adult driving. It will likely not take hold in the consumer market for some time, but as I will explain, it highlights the rapid and persistent trend of transportation cost reduction.
Once self-driving cars are introduced, the cost to commute on a ride-sharing network, like Uber, will plummet. Even if the autonomous cars retail at $200,000 and last 10 years ($20,000 per year) with no salvage value, it is still much cheaper than having a manned fleet. When you take into account that autonomous cars don’t need sleep or rest, even at a price point of $500,000 and a usable life of 10 years ($50,000 a year) the cars brings down the costs of transport in some geographies and for longer routes. After all, a $500,000 car is only $5.70 an hour over 10 years and well below any US city’s minimum wage.
The combination of Uber’s very strong network effects, the enormous substitution benefits of Uber as compared to car ownership, and the inevitable introduction of autonomous cars lead to a profound question: Who is going to buy autonomous cars?
Before Uber became widely popular, I would have guessed that individuals would buy autonomous cars to give them more free time and peace of mind during their commute. Now, however, I am convinced that Uber will be the natural buyer of the great majority of autonomous cars. At close to $500,000 per car it becomes economically beneficial for Uber to add an autonomous car to its network, so by the time the cars come down in price to be marketed to everyday commuters (say $35,000), Uber should already be controlling the vast majority of the market.
One final question to leave you with: When two autonomous cars crash will we call it an ‘accident’ or a ‘bug’?
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