The relationship between new technologies and investors can be summed up by a term known as the Gartner hype cycle.
Tracking investor sentiment in relation to disruptive forces, the Gartner hype cycle says that when a new technology arrives, investors at first get irrationally excited about its potential and then disregard it when the ideas don't immediately result in concrete market opportunities. Then, when the technology finally does arrive in a business-driving way, it is barely covered in the news and gets little attention from investors.
Self-driving vehicles have followed this exact trajectory. Five to 10 years ago, executives at companies such as Uber (UBER +1.83%) and Tesla were hyping up autonomous vehicles as something that would change the world in just a few short years. When this didn't happen, investors stopped putting time and effort into the sector.
Waymo, Alphabet's (GOOG +0.93%) (GOOGL +1.37%) self-driving division, has opened up its autonomous taxi network to consumers, with rides available in Phoenix, Los Angeles, and San Francisco. To accelerate the growth of this taxi network, Waymo also announced a partnership with Uber, allowing its millions of users to book rides on Waymo vehicles directly from the Uber app.
Here's what this collaboration could mean for both Alphabet's and Uber's businesses.
NYSE: UBER
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Bringing autonomous driving (slowly) to the masses
Unlike other ambitious (some might say reckless) car companies, Waymo has taken a methodical approach to building its autonomous taxi network. It starts by mapping a city in three dimensions with LIDAR systems. Then, it runs extensive testing and preparation to build a geofenced area where its self-driving algorithms can operate with extreme safety.
Once this computer-defined fencing is created, the company must get regulatory approval to launch its service to customers, sometimes in only a limited manner. As you can guess, this can be a very slow process, sometimes taking several years from start to finish, even though Waymo already has a lot of the base technology completed.
Today, Waymo services more than 10,000 taxi trips per week without any major safety issues in its three pilot cities. By next summer, the company hopes to grow its weekly ridership tenfold.
In order to achieve this ambitious target, Waymo needs to greatly increase the number of riders looking for trips in these self-driving taxis. Uber, with over 100 million monthly active riders (mostly in the United States) can be a fantastic way to grow demand for Waymo's new taxi network, especially as the Waymo network expands to more cities across the United States over the next few years.
NASDAQ: GOOGL
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Is Waymo a disruptive risk to Uber?
An Uber investor might argue this partnership will be good for the company: Waymo is spending all the money to build out the autonomous taxi network, which Uber can easily profit from by taking a cut of every trip booked through its mobile app. It also further improves Uber's value proposition for consumers in relation to competing platforms such as Lyft.
While this is definitely true in the short term, I see Waymo as a giant competitive threat to Uber over the long run. The key reason is that Alphabet, the parent company of Google Maps, owns Waymo. This is one of the most popular apps in the world, with billions of users.
What's stopping Alphabet from embedding the Waymo service into Google Maps after its network gets fully built, bypassing Uber entirely? With no drivers and a limitless pocketbook (thank you, Google Search), Waymo will be able to severely undercut Uber on price. Easy distribution, a technological advantage, and lower costs is a powerful combination that Uber investors should not take lightly. On the other hand, Alphabet investors should be quite pleased with Waymo's business potential.
During the peak of a Gartner hype cycle, investors overrate the threat of disruption from new technologies. When the technology arrives, they generally underrate its effects in a "boy who cried wolf" situation. Don't fall prey to this with Uber. Autonomous vehicles are finally here and could upend the ride-hailing company's entire business model within this decade.
