It seems as if everyone is trying to get into the self-driving car business these days. Tesla Motors (NASDAQ:TSLA) thinks it's the future of driving, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) has logged some 1.7 million miles in its tests, Uber is testing self-driving cars that could eventually become taxis, and even Apple (NASDAQ:AAPL) has supposedly been testing the technology.
One big question now is: What business model will be best for self-driving cars? The answer may center around where they would add the most value to society.
Need a lift?
The average car is parked, literally doing nothing, 95% of the time. For an expensive piece of equipment, that's a pretty low utilization rate no matter how you look at it. Self-driving cars could make it easier, and cheaper, to share rides among a fleet of vehicles, saving money for consumers and making money for fleet owners.
The first company for investors to think of here is Uber, which could use its technology and self-driving cars to replace not only taxis, but also taxi drivers, around the world.
Google has also reportedly looked into creating its own ride-sharing service, but a more logical solution could be a partnership between the two. Google is a major investor in Uber, and its Maps app is integrated into the Uber platform. Working together, they could develop the needed technology for driverless ridesharing and have a business model ready to generate billions in revenue right off the bat.
Think about the savings self-driving cars could enable
One of the biggest costs associated with catching a ride in a car that's not your own is the cost of the driver itself. Just look at the numbers: The federal rate for milage deductions, which is based on the "fixed and variable costs of operating an automobile," is $0.575 per mile in 2015. That's about what it should cost to drive a car, even accounting for the low utilization I discussed above.
UberX in Minneapolis, where I live, charges $1.30 per mile, plus $0.17 per minute, and a $0.60 base fare. In San Francisco, rates are even higher, at $1.30 per mile, $0.26 per minute, and a $2.20 base fare. What's notable is that the spread between the federal milage rate and UberX's rate pays for the driver's time, Uber's technology, and any profit as well.
If the time of the driver wasn't needed and Uber could deploy self-driving cars, it's conceivable that they could cut costs and increase margins at the same time. The value in the self-driving business model is in replacing the costly driver's time, which wouldn't actually be necessary to get someone from point A to point B.
Theoretically, the same model could be deployed by Google or Apple or another app service like Uber. Sharing self-driving vehicles could also be a very viable option in the future. But the savings is in eliminating costs associated with owning or operating a vehicle.
The best business model for self-driving cars
If self-driving cars become a common sight in the U.S., I don't think it'll be automakers who benefit. In fact, they could see less demand because the sharing economy could use self-driving vehicles as a shared asset through companies like Uber.
The real value from a business-model perspective will be with companies that can take friction out of the market and lower costs for everyone. Uber is a front-runner because it could lower the cost to use its service if the company doesn't have to pay drivers, and maybe even make it cheap enough for consumers to choose to forgo owning a vehicle altogether.
That's the kind of business model that will work in self-driving vehicles, and it's why Uber, Google, Apple, and other tech companies are pushing this technology forward. Now it's time to see if they can make the safe enough to garner widespread adoption from consumers.