Is Tesla a new Uber?

Uber’s prospects may not be as bright as its current 60bn$ valuation implies. Travis Kalanick, the company’s CEO, has once said that if Tesla cars are autonomous by 2020, he wants to buy all 500,000 that are expected to be produced. The problem though may not be with availability of the autonomous vehicles, but that Tesla won’t sell.

In a recently released strategy note describing the company’s plans for the next decade Tesla CEO Elon Musk stated:

“You will also be able to add your (VK: autonomous) car to the Tesla shared fleet just by tapping a button on the Tesla phone app and have it generate income for you while you’re at work or on vacation <…> In cities where demand exceeds the supply of customer-owned cars, Tesla will operate its own fleet, ensuring you can always hail a ride from us no matter where you are”.

It looks like Tesla is going to compete with Uber, and possibly replace it.

Uber’s investment case is based on the following tenets: 1) staying a leading transportation network company (taking market share from the traditional players, and being one of the best among the new ones), 2) low capital intensity (Uber does not own vehicles), and 3) high margins and profitability. To justify current valuation of about 60bn$+ Uber cannot afford to lose any of those three characteristics. But if the (not so distant) future of transportation is indeed autonomous, they are more likely to keep only two. Any two in fact.

Scenario A. Uber stays a network of human-driven vehicles. New players (like Tesla, or Apple) come and, offering customers a better experience, make Uber obsolete. In this scenario keeping 2 and 3 leads to losing 1.

Scenario B. Uber acknowledges the challenge and becomes a player on the autonomous transportation market (buys 500,000 Teslas as Kalanick suggested). The company loses 2 but keeps 1 and 3 (3 is held as high capital intensity justifies sustainability of high margins).

Scenario C. Can Uber avoid becoming an asset owner, remaining instead a service provider for someone else’s autonomous Teslas/iCars/etc and the passengers in a similar way it currently connects the human drivers and the passengers? This is possible but not if Uber sticks to its 20% lead generation fee.

Currently Uber enjoys a first mover advantage, deals with millions of unconnected drivers (who have zero bargaining power), and operates on an unsaturated market. Uber sets the price and enjoys exponential growth. Arrival of the autonomous vehicles can change relative importance of the various constituents of the value chain and their share of revenue.

First, autonomous taxi service will be a superior experience – standardized quality and very safe (driving wise and driver interaction wise). The cost of this superior service will also be cheaper than today’s taxi (Uber included), as there will be no need to employ a human driver. Autonomous Tesla vehicles, as well as iCars/etc, capable of providing a better and cheaper taxi service, will sell with pre-installed native uber-type apps, threatening to make Uber a kodak of the emerging digital transportation. Uber adaptation to the age of autonomous transportation may turn out to be a disruption for Uber, a recent disruptor itself.

Another development is that autonomous vehicles will complete commoditization of the taxi service. At present the taxi service package includes undifferentiated time and miles driven, but the quality of the whole experience may vary. When the taxi service is fully standardised, the pricing mechanism may not be different from that of the online adverts – when you open a webpage competing advertising agencies make bids for the available ad space and the highest bid wins. Similarly when you press a button to order a taxi the competing autonomous vehicles would make bids for your order at an auction. Lead generation fees, and taxi pricing generally, won’t stay unaffected. (The taxi market may be ripe for the introduction of the auction-based pricing, autonomous vehicles or not, but autonomous vehicles would facilitate the shift.)

How low can the lead generation fees get? Banks, for example, channel credit at 2-5% margin, transfer payments at 0-1%, and facilitate trades for as little as 0.01%. Online ticket booking service, probably a more relevant example, costs about 2-3%. Matching passengers and vehicles can cost at least an order of magnitude lower than 20% – this is how much Uber drivers pass to Uber at the moment.

The prospect that Uber faces in Scenario C is losing 3 to keep 1 and 2.

To be the ultimate winner in business a service provider needs to be the best one, not necessarily the first one. Examples of late arrival and taking it all vary from Walmart to Google. In the end Uber may indeed end up buying thousands of autonomous Teslas, but then it will be a different company with different economics.