Car Wars – IV: How Do Driverless Car Fit Into Google’s Business

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Alphabet (NASDAQ: GOOG) and Apple (NASDAQ:AAPL) seem set to enter the auto industry. In a previous article, we talked about Apple’s motivation in building a car and in this one we will talk about Alphabet’s ambitions related to cars. Late last month, Google’s co-founder and President of parent company Alphabet, Sergey Brin, said that the company expects to team up with top-tier OEMs when it enters the market. [1] The technology giant has been building a self-driving car since 2009. Last year, it introduced a two-seat prototype that it built with the help of established suppliers like Bosch and Continental, and engineering firm Roush Enterprises. We expect the company to take a similar position in the car market as it took in the mobile phone market — giving its software assets (Vehicle Management System and maps) to OEMs who release the final product. It is possible that Alphabet might adopt Microsoft’s strategy of licensing out its technology for smart cars, as the latter company has done since the mid-1990s through its Microsoft Embedded Automotive business.   In this article, we will talk about what that means for Alphabet.

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Where Is Your B-Plan?

To be sure, business modeling is almost never a good way of thinking about software service-based companies. These companies always tend to first focus on building a product that solves a specific problem and only then concentrate on getting the unit economics right by finding the appropriate product-market fit. It is quite likely that the thinking behind developing autonomous vehicles at Alphabet right now goes something like this: “Let’s just build autonomous vehicles and target ubiquity in this large market as well.”

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The question we are asking is somewhat similar to if you went back to 2005 and put yourself in Alphabet’s shoes and asked yourself what your strategy with Android is going to be. In a series of events, Alphabet first developed a prototype Smartphone with a physical QWERTY keyboard but later reconfigured to support touch screen. In 2007, it filed for numerous patents in areas of mobile telephony. Later, it launched the Open Handset Alliance, and the first commercially available smartphone running Android (HTC Dream). In the beginning it was very difficult to imagine the evolution of the mobile phone from a special purpose computer to the thing that would replace PCs as the preferred computing device for much of the the world’s population. But successive iterations of software and hardware achieved the same level of sophistication as a PC, thus revolutionizing the smartphone industry. At the end of the day though, Alphabet’s efforts with Android still fed back into its core search ads business. Android was about increasing Alphabet’s reach, a way of getting more users into Alphabet’s ecosystem (search, mail, maps, browser) so that it could gather user data and surface out better ads.

However, the shift from PCs to mobile devices is changing how users discover information. According to a Global Web Index survey, the use of search engines among Internet users declined from 55% in Q1 2014 to 49% in Q1 2015. Recent information suggests that 44% of e-commerce shoppers go straight to Amazon with 31% starting with search engines and 21% on specific retailer’s website. [2] On mobile devices, where users spend most of their time inside apps, around 80% of the time is spent inside their three most used apps and consequently the lion’s share of searches is also confined to those apps. [3] Specific searches, such as for restaurant reviews, services, restaurant booking, discovery are conducted through apps that solve that unique problem alone — Yelp, TaskRabbit, OpenTable, FourSquare, respectively. Alphabet search has become the search of last resort on mobile devices. To arrest this trend, Alphabet is trying to build deep links into Android, its way of following users into apps. For this purpose, Alphabet built a service called Google Now on Tap that customizes the phone’s data based on location and time of day.

What’s To Gain?

Location-based services are an enormous strength of Alphabet’s offering and it is this that gives the company an upper hand over traditional car makers when it comes to building self-driving cars. You just cannot build a good self-driving car without owning strong mapping assets and these are currently owned by Alphabet and Apple. It is for this reason that Uber poached the Bing maps imaging team from Microsoft [4] and German auto makers purchased Nokia’s mapping assets called Here. [5]

Real-time location based data can be leveraged in a number of ways by Alphabet. Here are some services that we think they can build based on that information:

  • Heat maps that measure foot traffic in a particular location and also provide information about crowd density in the area throughout the day and earlier. This can help the cars in deciding which route to take and users in making efficient decisions about travel and commuting.
  • Filter deep link searches based on location. Imagine a user taking out their phone and asking it to find restaurants in a particular location. The phone shows results from an app that has this data. The user picks a restaurant, goes back to search and asks it to book a table in that restaurant and then books a ride to that location. Based on real time data about foot traffic can help these search results and reduce a lot of friction for users.
  • Alphabet can sell data to utility companies that run charging stations for electric cars allowing them to charge consumers for charging based on time-of-use data. They can also sell this data to insurance companies who can make informed decisions about premiums.
  • Alphabet can sell this data to real estate companies and chain brands to help them optimize site selection for locations by telling them which shopping locations are popular and which are not. Similarly, they can sell data about demographic trends to marketing companies and help them optimize their customer acquisition process.

However, it is not absolutely necessary for Alphabet to build self-driving cars to obtain all this information. Most of it can be obtained through mobile phones as well modulo absence of strong LTE connectivity in public places. It is for this reason hard to understand what exactly the company intends to do with this business just yet,  But as usual for Alphabet, it’ll probably iterate and evolve its products over time until it figures out a proper use case to build a business model around.

Read our previous articles in this series about Alphabet, Apple and Tesla (NYSE:TSLA):

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Notes:
  1. Alphabet sees ‘top-tier OEMs’ as partners on self-driving cars, 29th September 2015 []
  2. Amazon Commands Nearly Half Of Consumers’ First Product Search, BloomReach Study Finds, October 6 2015 []
  3. Apps Eat Digital Media Time, With Top 3 Capturing 80 Percent, September 23 2015 []
  4. Uber just bought part of Microsoft Bing’s mapping technology, including 100 employees, June 30 2015 []
  5. German regulator clears sale of Here to car makers, October 6 2015 []