Google Driverless… Taxi?

Google wants to be part of your everyday vehicle environment. Here's how it can implement driverless cars to do just that.

Driverless cars are no longer fiction – they have become a reality. Google’s driverless cars have successfully driven 1,120,000 km without a single machine caused collision. The large automakers such as Mercedes-Benz, General Motors, Toyota, Nissan and Audi have also developed their own autonomous cars. At the same time, four states (California, Nevada, Michigan and Florida) have passed legislation allowing self-driving cars on the roads.

As driverless cars hit the streets, many players within the automotive industry value chain will benefit. Consumers will benefit from fewer accidents, lower insurance premiums, and fuel savings. The government will save money on traffic police, road signage, and buses. People will become more productive in general as they will be able to work while commuting. But while certain players benefit from autonomous driving, others lose out. Taxi cab drivers, auto repair stores, and car accident lawyers will become close to obsolete.  Insurance companies will see revenues fall dramatically with reduced premiums. Oil companies will also see revenues drop as less gasoline is wasted due to traffic congestion. Below is a breakdown of each player and the theoretical changes that might occur if driverless cars are adopted by the public [1][2][3].

Google1

In total, society could see approximately $450 billion in added value every year if driverless cars are adopted.

 Why Google Must Compete

Google wants to be a part of your everyday car environment as it would significantly improve their core advertising business. The car environment is one of the last relatively untapped areas where people spend a significant portion of their days. Google can increase revenue and data collection by having drivers use their services for extended periods of time.

Although there is considerable value Google could provide to society and capture with the mass adoption of autonomous cars, Google must overcome two major problems in the process; social acceptance and legislation. To address the former, it is likely that the average U.S citizen in 2014 is not likely to jump into a robotic car that will take them over 100 km/h on a highway. Complicating the matter, all states must have the legal frameworks in place to allow autonomous cars on the road. Once Google overcomes these roadblocks, they will be able to succeed in the driverless car industry.

How Google Should Compete

Google2

Technology Perfection: Google should continue to fine tune the technology of their driverless cars.

Google Taxi: Once the technology is ready, Google should introduce its own low-cost taxi company in California to gain social acceptance.

Automotive Partnerships: Once social acceptance has been achieved, Google should partner with automotive makers to provide the software of driverless cars to the general public.

Justification

Technology Perfection

While this short term strategy may seem obvious, some experts argue that driverless cars don’t need to be perfect – they simply need to be better than humans. Considering that human drivers kill approximately 40,000 people per year, these technological capabilities have likely already been achieved. But this assumption is too big of a risk for Google to take if it plans to own the roadways. Using Tesla and their Model S as an example, the company’s stock price has been known to fluctuate widely whenever an accident is reported, despite that car being awarded a 5 star safety rating by the National Highway Traffic Safety Administration. One software malfunction resulting in a deadly crash could cause complete hysteria and compromise the social acceptance of Google’s Driverless car program. Continuous iterations and testing must not be overlooked.

Google Taxi

A cheap taxi service is an excellent steppingstone Google can use to gain social acceptance for its driverless cars. By offering a taxi service, it gives consumers the chance to incrementally overcome the fear of driverless cars without committing to one full time. In addition to overcoming the fear, the taxi service will allow consumers to overcome the financial commitment of buying a driverless car to test it out. Cars are the 2nd largest investment a person makes during their lifetime and consumers would not likely buy a driverless car without gaining trust by trying one multiple times.

California poses the perfect location for Google to implement this plan. Google has significant influence and momentum regarding legislation around driverless cars in California. In 2012, California became the third state to allow autonomous cars on the roads when Governor Jerry Brown signed the bill at Google headquarters. Additionally, by choosing California as the pilot state, Google’s headquarters can maintain close proximity and rapidly respond to problems that surface.

Google3The taxi service will be the first opportunity for Google to make money off their driverless car initiative. A traditional taxi driver can only be on the road 12 hours a day and the fares must be high enough compensate the driver’s work. On the other hand, a driverless taxi can be on the road at all times and can be cheaper than traditional taxis by eliminating the need to pay a driver. With a rough calculation, we can see that each cab pays itself off in about 3 years.

While this is a per car analysis, Google can expect taking a considerable share of the taxi market with cheaper fares and safer rides. In fact, a recent study from Pew Research Center showed that 48% of Americans are willing to try self-driving cars. If Google had 48% share of the California market, they could expect approximately $86 million in annual revenues and $25 million in profit. Overall, Google Taxi will generate cash but it more importantly offers a great steppingstone for Google to gain social acceptance to sell its driverless car software to the mass market in the long term.

Why  Start ‘Google Taxi’ and Not Acquire/Partner with Companies like Uber, Lyft and Hailo?

Google has a history of acquiring companies to enter markets. However, acquiring a cab company – using Uber as an example – makes little sense. Google has no use for Uber’s drivers, and considering the drivers own the cars, Google would have to roll out its own retrofitted fleet regardless. The only value to Google is access to the Uber’s network. Assuming Google could provide the necessary vehicles and despite nearly half of American’s claiming they would try self-driving cars, there is no guarantee that that percentage of Uber’s user base would shift over. Add in that Google now has to partake in the legal battles of the current company, in addition to any that arise from being directly responsible for cutting the jobs of hundreds of drivers, Google would essentially overpay for Uber or any other potential takeover target.

Why not Partner?

Google has an advantage over all potential competitors in the taxi industry in terms of driverless car software. To start, Google already has functioning driverless cars on the road. Additionally, Google has access to the most accurate map software in the world – Google Maps. Accordingly, Google is well positioned to remain at the forefront of driverless car technology and doesn’t need to share a piece of their pie.

What about Legislative Speed Bumps?

Driverless Cars: Having proper legislation in place is one of the biggest hurdles for Google’s driverless car program. Fortunately, Google has significant lobbying powers. Google’s lobbying team includes former employees of the Treasury, Justice Department and Congress. In the other direction, many of Google’s past employees are presently working under the Obama administration. In fact, Google has already successfully lobbied Nevada and California to allow autonomous cars on the road. While Google does have strong lobbying powers, the government is one of the stakeholders with the most to gain if it allows driverless cars on the roads. The government could realize $442 billion in added value every year from less traffic police, road signage, and buses.

Taxis: Modern taxi companies like Uber and Lyft are facing many legal battles for the way they avoid traditional taxicab regulations around pricing, licensing and hailing. As such, ‘Google Taxi’ may have problems lowering their rates below traditional taxicab rates. Fortunately, the modern taxi companies like Uber and Lyft have exposed loopholes and are pumping massive amounts of time and money into rewriting taxi legislation across the United States. By the time Google perfects its driverless software and is ready to begin ‘Google Taxi’, companies like Uber may have solved many of the problems Google would have otherwise faced.

Automotive Partnerships

In the long term, Google wants everyone in their driverless cars. That way, Google could collect massive amounts of data and use it to target advertisements. To justify partnering with automakers, parallels should be drawn to Google’s Android operating system and cell phone manufacturers such as Motorola, Lenovo, and Samsung. To start, Google is comfortable integrating their software with hardware manufacturers. After all, Google is in the business of making software, not hardware. If Google were to manufacture driverless cars, it would require large amounts of capital and they would likely not reach the same level of expertise as Toyota, Ford, or Nissan. The same applies the other way around. If automakers decide to commit resources to develop driverless software, they will have to spend significant amounts of time and capital to match that of Google. It is in the best interests of both parties to form a partnership to develop driverless cars.

Wrap Up

Driverless cars are an important part of Google’s strategy. Not only would Google’s driverless car allow society to realize $450 billion in value creation every year, Google could also add to their core advertising business. While this is exciting for Google, they must remember to take baby steps in order to achieve their long term goals. Google must gain social acceptance and warm up the American population before they can hope to be successful with a full rollout. An autonomous taxi service is a profitable way for citizens to incrementally overcome the fear of driving hands-free. Once acceptance has been achieved, Google must look to move to a mass-market strategy – only then will the internet giant be able to be a part of your everyday car environment.

Revenue Assumptions

To calculate revenue, Uber Driver’s were used as a proxy. Uber claims its San Fransico drivers can earn $70,000 a year based on a 40 hour work week. Since autonomous cars have no limitations on how many hours a week they can work, and there are 168 hours in a week, a conservative number of 80 hours on the road was used for Google Taxi to bring revenues to $140,000 a year. Next, a 10% price reduction in Google Taxi’s fares was also included to give customers monetary incentive to use Google Taxi.

http://www.businessinsider.com/how-much-you-earn-as-an-uber-driver-2014-6

Uber drivers in San Fransico, assuming 40 hour work week, make:                                                    $70,000 

*Assume Google cars can drive 80 hours each Google Driverless Cars can make:                            $140,000

*Assume Google charges 10% less than competition:                                                                              $126,000

Cost Assumptions

Fuel:

$36,000

Lease of Permit/Medallion:

$24,000

Insurance (assumes same):

$5,000

Car Maintenance:

$4,000

Total:

$69,000

Medallion Assumptions

Using an input for a medallion is rather conservative because there are many ways Google could get around it. Similar to Uber and Lyft, Google could claim their driverless taxi doesn’t fit the regular definition of a taxi and thus avoid the need to pay for it. However, in order to be conservative, a medallion payment was included. A taxicab medallion/permit can either be bought or leased. For this article, it was assumed Google would lease the medallions/permits because in some cities there are waiting lists years long to purchase them. Additionally, by leasing medallions/permits it gives Google an easy way to exit the industry if Google Taxi were to fail. A common rate of $2000/month was used for the calculation.

Initial Taxi Investment Assumption

It will be assumed that the Google Taxi’s desscribed in the article will be modified Toyota Prius’. Right now, the Google’s modified Prius’ are packed with $80,000 worth of equipment. Althought the cost of the driverless equipment may come down in the future, a conservative $80,000 was used in the calculations.

Initial Investment: Cost of Toyota Prius

$31,090

Current Cost of Google’s Driverless Equipment

$80,000

Total:

$111,090

http://www.economist.com/news/business/21603029-google-miles-ahead-its-rivals-race-autonomous-motoring-self-driving-seat


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