To The Moon

It’s an industry I think could be worth trillions of dollars as we transition from vehicle ownership to transportation as a service, taking back both time and capital from the current model of transportation. But we don’t know when the market will materialize or who will win, although I highlighted six stocks that I think have a leading position in one form or another.

Coincidentally, $Uber(UBER)$ CEO used this week to introduce his autonomous driving vision for Uber. Not surprisingly, it involves the company being a marketplace for human drivers and potentially dozens of autonomous driving companies.

It’s worth analyzing how Uber’s business model fits in an autonomous world and how autonomous vehicle players can both benefit and compete with Uber as they grow.

Uber’s Vision

The vision for Uber is pretty simple. Expand the current marketplace (the app that connects riders with drivers) and replace human drivers with autonomous vehicles from anyone/everyone they can.

And we think autonomous can be very, very high-quality supply that comes onto the marketplace over a period of time because it's going to take some time to scale up and it's going to increase the total addressable market certainly in mobility and delivery and freight as well. So we think increasing supply can actually improve our marketplace overall.

Dara Khosrowshahi, CEO

The supply piece is critical. In a marketplace like Uber, they want as many suppliers as possible and to serve as many use cases as possible. If an autonomous vehicle can pick up a passenger on one trip and a bag of groceries the next, that’s great for Uber.

What Uber needs is many suppliers to emerge. Uber can’t have a single source of autonomous supply, or either profit will be squeezed to zero, or the autonomous fleet will build a marketplace of its own.

We're already working with over ten autonomous players in the mobility delivery categories. We've had a few we work with Waymo, but we've had a few cool announcements recently in terms of announcing that we're going to be working with Cruise and as they expand their offerings and relaunch and for example a company called Wave in the UK.

Dara Khosrowshahi, CEO

In the U.S., the only two real players right now are Waymo and Cruise. But Dara is hoping more suppliers emerge.

And his pitch, for now, is that he can bring customers at scale to the fleet, which would be difficult to do on their own. After spending billions of dollars on development, there will be an economic incentive to keep autonomous vehicle fleets busy, and Uber thinks that’s an advantage it brings.

Hardware and scaling and making the economics work is going to be a lot more work. And based on what we see, there are going to be multiple providers and multiple winners in the space, so to speak. It's not going to be a winner-take-all market. In terms of what we provide, the autonomous players, we're already seeing with autonomous players that we work with, we're able to drive much higher utilization of those assets.

Dara Khosrowshahi, CEO

The theory makes sense and inadvertently makes the case for a company like Mobileye, which would take a horizontal services model to the autonomous vehicle industry, unlike more vertically integrated players like Waymo and Cruise. Tesla — or Tesla owners with Level 4 FSD — could be a supplier to Uber as well.

However, the theory of the case could run into some challenges as autonomous companies scale.

Aggregation Theory In Reverse

Uber’s strategy makes sense, given the limitations it’s working with as a business today. Uber’s business is a perfect example of the winner-take-all dynamics of the smiling curve — which you can read about here — or aggregation theory, as Ben Thompson calls it.

Aggregation Theory is a completely new way to understand business in the Internet age. Business schools suggest that with the right frameworks, an executive can understand how to manage all kinds of problems: what happens, though, when many of the inputs to those frameworks are zero?

Zero distribution costs. Zero marginal costs. Zero transactions. This is what the Internet enables, and it is completely transforming not just technology companies but companies in every single industry. Old moats are gone — and new ones can be built — and Aggregation Theory helps you identify both.

Aggregation Theory by Ben Thompson

The company that can digitize the hardest problem — in this case, connecting riders with drivers — will not only win the market but continue to attract more supply and demand as it scales. And they ultimately have pricing power, despite being bigger than competitors, compounding their advantage.

Uber intends to use the same strategy in autonomous driving. However, a feature of aggregation theory is the commoditization of supply. One driver is the same as the next on the Uber app, and no individual driver has any negotiating power over Uber.

Will that change in an autonomous world?

Returns on the Scaling Infinite Problems

There are a few reasons Uber’s vision may not play out as hoped.

1. Uber would be aggregating a handful of autonomous vehicle suppliers rather than millions. The power dynamics would shift on a relative basis from Uber to supply.

2. If suppliers generate varying returns on investment, the higher ROI companies would likely grow faster and gain more power in the marketplace.

3. Suppliers are simultaneously competitors.

4. Suppliers would be free to negotiate wholesale deals (ex., Target/Walmart deliveries, off-hour deliveries for businesses, ride share blocks for businesses). In this case, Uber is where excess supply is offloaded, which isn’t ideal.

I’ve modified Thompson’s image above for Uber’s model with autonomous fleets added as a supplier. As $General Motors(GM)$ Cruise and $Alphabet(GOOG)$ $Alphabet(GOOGL)$ Waymo become suppliers, they take some of Uber’s demand. But they’re also building apps and ride-sharing apps themselves. Incrementally, a few customers will simply go directly to Cruise and Waymo for their rides.

What happens to this model as autonomous vehicles proliferate?

Human drivers become a smaller percentage of the supply (even if overall supply increases), and autonomous vehicle platforms are a larger percentage of the supply. I’ve shown Cruise and Waymo in the image below because they’re the first two Uber partnerships, but Uber’s supply may become an increasing number of autonomous fleets that are also building their own apps and ride-sharing platforms, all siphoning off customers.

Cruise and Waymo could withhold supply that’s not profitable to them.

They could negotiate higher rates than human drivers.

They may only provide supply during “undesirable” hours. (this is the problem iBuyers had, being forced to buy homes no one wanted because there was plenty of demand for “good” homes)

Uber’s take rate (the percent of each $ a customer spends that Uber keeps) could decline under these dynamics. And it’s a jump in take rate that drove Uber to profitability. That could quickly unwind.

Uber is playing the best hand it has, but if the autonomous vehicle industry is dominated by a few players, Uber’s power position could be in jeopardy.

Uber’s Play Is the Only Play

I don’t write this to criticize Uber’s strategy with autonomous vehicle platforms. I think it’s the right move.

But it’s also worth understanding how the industry could play out to the benefit or detriment of Uber.

As much as I’m invested in autonomous driving companies, you can be assured I will be back to analyze the industry’s changes over the next decade.

https://asymmetric-investing.beehiiv.com/p/uber-autonomous-driving