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Why Alphabet's Waymo Can Prove the Naysayers Wrong

By Harsh Chauhan - Oct 20, 2018 at 2:00PM

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The self-driving leader is taking a different route toward monetization.

Self-driving cars are moving from sci-fi fiction to reality. Waymo -- the self-driving division of Alphabet (GOOG -0.08%) (GOOGL -0.16%) -- is a first mover in this emerging trend that could change billions of lives for the better. Waymo enjoys a massive technological lead over its rivals, as the company has poured time and money into this opportunity.

However, doubts have surfaced regarding the viability of Waymo's self-driving cars. The vehicles are reportedly so cautious that they border on being dangerous to other drivers in real-life environments, according to a report by The Information. Additionally, the company's reluctance to share its self-driving technology with automakers, which could turn out to be potential clients, is another factor that could hinder the growth of this business.

But it is too early to call Waymo's autonomous driving project a failed bet. The company has the necessary expertise to overcome the short-term challenges and monetize its technology in the long run.

Person reading a book inside a self-driving car.

Image source: Getty Images.

The Waymo model

A Bloomberg article recently pointed out that Honda (NYSE: HMC) was about to strike a deal with Waymo to develop self-driving cars. But the Japanese carmaker ultimately opted to invest $2.75 billion in Cruise Automation, GM's self-driving unit, to jointly develop a next-generation autonomous vehicle from scratch.

It is rumored that Honda went with GM, because Alphabet wasn't keen on sharing its technology. It simply wanted Honda to provide the cars and keep the control of the autonomous driving experience in its own hands. On the other hand, Cruise allowed Honda to take a closer look at its self-driving tech, and the deal was struck.

But this isn't the end of the world for Waymo. The company has so far followed a simple model of getting automakers to provide it with cars, and then slapping its autonomous driving technology onto those vehicles. It isn't surprising to see Waymo take this approach, as I mentioned earlier, it's leading the field by a fair margin in self-driving cars.

The California DMV reports that Waymo's autonomous cars drove 352,544 miles over a one-year period from Oct. 2016 to Nov. 2017, requiring manual interventions from human drivers only 65 times. This means that the self-driving system had to be disengaged just once every 5,596 miles in real-world test conditions.

By comparison, second-place Cruise Automation traversed 131,000 miles, requiring an intervention every 1,250 miles. This is probably why Waymo wants to maintain complete control over its self-driving technology, as it doesn't feel the need to dilute its expertise by opening the books to others.

Waymo is gaining acceptance

It would be wrong to say that Waymo's strategy will lead to the alienation of potential customers. The company's technological superiority has helped it score partnerships with several companies, including automakers.

Fiat Chrysler Automobiles is one of Waymo's foremost automotive partners. The Alphabet unit has been using Chrysler Pacifica hybrid minivans to test its ride-hailing service, and recently ordered 62,000 new cars from the automaker as it prepares to roll out the service commercially later this year. What's more, there have been reports that Fiat Chrysler could license Waymo's technology and deploy it in more of its vehicles, opening up another stream of revenue for Waymo.

British carmaker Jaguar Land Rover is going to supply 20,000 electric cars to Waymo for the latter's ride-hailing service. The deliveries of the I-Pace electric cars will begin in 2020, and Waymo believes that it could provide one million rides daily once they're on the road.

Meanwhile, the likes of Walmart, AutoNation, and Avis are also partnering with Waymo to ferry their customers in the Phoenix area. This makes it clear that Waymo is looking at the opportunity in the ride-hailing space to monetize its self-driving technology.

Nothing to worry about

The ride-hailing market in the U.S. is anticipated to hit $30 billion in revenue by 2022, up from an estimated $17 billion this year. Waymo just needs to corner a small share of this market to substantially boost its top line. As such, fears regarding the adoption of Waymo's autonomous driving technology are overblown. The company is focusing on a different way to monetize this business, and more importantly, it could make billions of dollars through this channel thanks to the tech-based advantage that it enjoys over rivals.

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