Amazon's Zoox Acquisition: Should Uber Be Worried?
Uber's existential threat from Amazon and others!
Uber recently confirmed the acquisition of food delivery unicorn, Postmates. Interestingly, Postmates was feature early this year in Kähler Insights post entitled 'The Kolmogorov IPO Score for a16z's Marketplaces'. The companies that scored poorly were; Postmates (12%), Rover (9%) and SeatGeek (6%). Hence we noted that these unicorns should perhaps consider an M&A as the first exit option rather than IPO!
Another relevant M&A before Postmates was the acquisition of Zoox by Amazon. Our friends at Wire.com wrote an article about it entitled 'Amazon Shakes Up the Race for Self-Driving—and Ride-Hailing':
UBER CEO DARA Khosrowshahi says his company wants to be the “Amazon for transportation.” Friday, Amazon made clear that it intends to be the Amazon for transportation.
The ecommerce giant said it had agreed to acquire Bay Area–based autonomous vehicle company Zoox, a deal reportedly worth more than $1 billion. (Amazon did not respond to WIRED's queries.) Since its founding in 2014, Zoox has been known for its technical chops, its secretiveness, and its sky-high ambition. While Alphabet's Waymo is focusing on self-driving tech and leaving the car building to places like Detroit, Zoox has stuck to its plan to design a robotaxi from the ground up—and operate a ride-hail service. In 2018, it showed off its first prototype vehicles, which look like sensor-laden golf carts on steroids. The company has also been testing its software on more conventional-looking Toyota Highlanders in San Francisco, where it is learning to handle chaotic city streets.
In a press release, Amazon signaled that it will not stray from Zoox’s formidable self-driving goals. “We’re acquiring Zoox to help bring their vision of autonomous ride hailing to reality,” it wrote in the headline. Jeff Wilke, Amazon CEO of global consumer, said in a statement that “Zoox is working to imagine, invent, and design a world-class autonomous ride-hailing experience.”
Which means the autonomous-taxi race just got more interesting. Amazon’s entrance to the space “is an existential threat to Uber and Lyft,” says Asad Hussain, a mobility tech analyst at the market analytics company Pitchbook.
In theory, autonomous vehicles and ride-hail services go hand in hand. As Uber and Lyft struggle to iron out the economics of trips, both continue to spend millions each year recruiting and retaining drivers. Moves by states including New York and California to require those drivers to be considered employees further threaten their business models. A self-driving car wouldn't need a driver.
Today, only Waymo is running an commercial, autonomous ride-hail service, only in the Phoenix metro area, and only occasionally without someone in the driver's seat monitoring the nascent tech. In 2015, Chris Urmson, a former Google self-driving head who later cofounded self-driving startup Aurora, suggested his 11-year-old son might never need a driver’s license; the son has started learning to drive. Just this week, Aurora signaled it would shift its focus away from self-driving taxis and toward self-driving trucks. “If you want to get to market with a safe system quickly, you can do no better than to start in trucking,” Aurora cofounder Sterling Anderson said at an event hosted by The Information.
If Amazon pushes ahead with its own ride-hail network using Zoox vehicles, the company may have some built-in advantages. In a note published a month ago, after The Wall Street Journal first reported that the Zoox deal was in the works, Morgan Stanley analyst Brian Nowak wrote that the company could offer discounts to its 100-million-plus Prime members, as it does at Whole Foods. He also theorized that Amazon could jump ahead of automakers, whose ability to pay for moon-shot tech like autonomous vehicles has waned during the Covid-19\–induced recession. “In a post-Covid world, we believe fewer and more powerful players will be in position to deploy capital and talent to solving autonomy with a ‘play to win’ mindset,”
Both Uber and Lyft have invested in self-driving tech. But despite a $1 billion infusion last year from Toyota, automotive supplier Denso, and the Softbank Vision Fund, Uber is still seen as being behind on the technology; it recently said it will close an artificial intelligence lab. Uber is now testing self-driving cars in fewer places than it was before a fatal 2018 collision between one of its autonomous vehicles and an Arizona woman. An executive told CNBC this year that self-driving tech has to move through development, piloting, and commercialization stages—and that Uber is still at development. Wire.com
Should Uber Be Worried?
It is fruitful to consider how the business model of Uber will be affected by the environmental & technological changes in the future. One such a change of note that is immediately apparent to all that follow the advances in driverless technology is that Uber will have to move away from employing people as drivers. The implications of this is that there will be a backlash against the company for being perceived as profiteering from people whilst employing so few. Nevertheless, the sociological change will become widely accepted by the general public due to the convenience factor that we will all be experiencing. However, a large part of Uber’s business model is that they are able to charge higher prices when there is peak demand. In this vein, it is likely that they will have to change their pricing model to a flat rate, with small variations depending on geographic location, given that people will no longer accept paying higher prices as there is no human being inconvenienced/incentivised to add more taxis to the supply when there is peak demand. This is due to the fact that autonomous vehicles do not care at what time of day or night but they are out collecting individuals.
Furthermore, driverless cars will inevitably be used for much longer durations of the day, we estimate in the region of 21-23 hours a day and may potentially only be parked/idle when they are in need of cleaning and repair. Research shows that currently privately owned vehicles are parked for around 94-95% of the time and therefore they wear out over the course of a decade or so, with almost nonstop driving per day this damage will occur in a shorter space of time. Also, privately owned cars are used on average for trips lasting around 8-10 minutes 2-3 times a day, this may increase to around 50 trips per day with non-stop driverless cars. This poses a problem for the durability of the vehicles as most vehicles only get used at a constant rate of two years that is averaged over one decade i.e. most of the time cars are kept on the driveway and therefore are not experiencing wear & tear. Therefore, Uber will need to leverage advances in material science to ensure that the seats are more durable if they are to get maximal value from the vehicles themselves. Also, if the cleaning process of the driverless cars is automated also then it may in fact be beneficial for the cast to become more modular i.e. more like a pit stop. Whereby the wheels are removed and the seats are removed for cleaning. As a result, the seating would benefit from being made from more lightweight materials that can allow the robotics to remove the seats for cleaning. The idea being that if the seats are more lightweight the robotics would use less energy to extract the seats and also it would improve fuel efficiency as the car would not have to use as much energy moving around as heavier car. Therefore, it seems logical that given the private ownership will likely decrease and individuals will prefer to user a ride-hailing service to get to their destination, parking garages will become obsolete if they continue to try to serve the average citizen, however in this scenario parking garages will be the ideal places to establish infrastructure that will repair clean and charge these autonomous fleet of cars in the future.
Finally, Uber Eats will face a challenge too from the drone deliver fleets that could emerge in the near future. Therefore, it would be wise for Uber to pivot in this direction somewhat for this part of their business model to be safe. However, all this and the above will require Uber to make significant R&D investments in order to become a relevant player in the driverless cars sharing economy. Unfortunately, we don’t see this happening given the pressure that the Uber management is getting to streamline the company’s operations after years of spending bonanza. Hence, Uber could unfortunately find itself in 5 - 10 years needing to merge with a legacy automaker such as GM or Ford, or maybe even get snatched by Tesla!
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Disclosure: We have no positions in Uber, and no plans to initiate any positions within the next 7 days.
