Most of the press reported a research report from UBS securities claiming Waymo is now worth $75B to Google because it is poised to dominate the robotaxi business. In addition to this, it claimed that business would be $1.2 trillion by 2030, with an additional $472 billion for "in car monetization." (Total Google revenue was $110 billion in 2017.)

(I can't find the UBS report itself, if you can send it to me, please do.)

In general, I agree with the first part, and have been saying so since the beginning. For investors, the main problem has been that this mega-huge business that anybody would like to invest in has been buried inside the $750B market cap of Alphabet/Google itself.

But I want talk about this idea that in-car monetization will be 40% of the revenue (or 28% of total revenue) of a robotaxi business. This reminds me of the very frequent claim that "Rides will be free, paid for by ads." In fact, when Google first came out of stealth with the project, this was a very frequent suggestion. After all, Google is pretty much 100% an advertising company, so if they're making a car, it must really be about advertising. The UBS forecast pretty much puts that down -- transportation is a much bigger business than advertising. Your robotaxi will be more like an extension of your living room or office. Apartments don't get 40% of revenue from "in-room monetization."

But will ad revenue, or other "monetization of the data" from transportation become an important factor, even a dominant one? Could it be the most profitable aspect of running a robotaxi service as some suggest? Or does it make sense that rides will commonly be free, supported by some sort of advertising?

No

Trends can change, but for now the answer is it will not. The transportation industry is a much larger industry than the advertising industry. That doesn't mean that can't flip, but most proposals involve the tail wagging the dog.

Much more likely are rides subsidized by destinations, and most of all by employers. If most commutes are paid for by companies, that has big consequences.

Driving costs $20/hour today

Today, most sources suggest that operating a private gasoline car costs about 50 cents/mile for a medium car (plus parking.) Older cars can be cheaper than that, and fancy new cars are more expensive. We like to price driving by the mile, but it might make sense to price it by the hour instead. (The age of most motorized vehicles, like planes and boats, is measured in engine hours.)

On a basic level, with the average speed of 40mph for cars in the USA, you can multiply that out to $20 as an average cost per hour. In fact, it's pretty clear that fast highway miles don't cost nearly as much as slow city miles. Gasoline cars are more efficient at highway speed, and on the highway they run in one gear, at near constant revs, without much braking and acceleration, well cooled. The city involves starting and stopping which don't just make gas mileage worse, they add more wear. Some types of wear (like wear on the interior) are very much by the hour.

It doesn't matter what you exact calculation is, $20/hour is a pretty decent proxy for the average. Electric cars are cheaper. They are more efficient at low speeds than fast ones, use cheaper energy and have lower maintenance. The main thing that wears out is the battery, which wears out based on how hot it gets from things like high acceleration, regen braking and fast charging, as well as the number of discharge cycles.

I've predicted that robotaxi operation will be much cheaper -- we'll get into that below.

Advertising makes around 60 cents/hour!

Let's start with TV advertising, which gets the largest share of ad dollars at 38%. Running a 30 second ad spot varies in cost, but $20 per thousand impressions (CPM) is a typical number. That means the advertiser pays 2 cents for every person watching the program. (Not all will be watching the ads, as some leave the room.)

If you watch an hour of TV it will have about 30 of those ads spots, taking 15 minutes. So the Network earns 60 cents for bringing your to their sponsors. 60 cents an hour. By the time it gets from the network to the studio and the actual creators, it's a lot less. You probably get well under 40 cents of programming in exchange for watching 15 minutes of ads. (You can't buy the programming for 40 cents from the studio though, advertisers get a wholesale price and a viewer premium by making it free.) Well under minimum wage.

Some types of advertising do better. Print media actually get three times as much revenue per hour of your time. That's because it's so quick and easy to flip past the ads in magazines and newspapers as you read. If you like an ad, you pause on it and spend more time with it. The rest of the media tend to have similar ratios of time to revenue.

There are specialty types of promotion which do better. If you are advertising to billionaires, you're going to pay a lot more because you earn much more, but the billionaires are cautious with their time. The internet is a strange beast too. It has the same ratio for all internet use, but the distribution of money is not even. Your money goes to companies like Google and Facebook, but you don't spend that much of your time on Google. You search quickly, glance at ads and click on them enough to make Google very profitable, and then go on your way to free sites.

The other most lucrative types of promotion are the ones that trick people -- such as the timeshare pitch session.

Something bringing in 60 cents/hour can't pay for a $20/hour car ride.

Ad-driven ride

You don't, and won't, spend your whole time in the car consuming ad-supported services. And when you do, it's not very likely you will consume services and media from the ride vendor. Most of the time you are going to be just using your phone, consuming media on it, or doing all the other things you like to do on it. That's what passengers sitting in cars and transit do today.

The robotaxi will have a big screen and nice speakers in it, but I predict these will mostly be peripherals to your phone. When you want to watch a movie, you will be as likely to use a subscription service like Netflix as to watch ad supported video. Whatever you want to do, you will prefer to get it through your phone, where you have everything set up the way you like it, and have a user experience you know and selected.

This is even true for travel related services. When you are riding and feel like getting a bite to eat, will you go to the system of the taxi you're in, or will you just use your phone? Your phone knows where you are and unless the car deliberately locks it out of this information, it will know as much as the car about where you're going. I don't want to ride in a car that refuses to tell my phone such things, but since I almost surely ordered the ride using my phone, it knows anyway.

I can't imagine people preferring to trust the "free" advertising-biased recommendations on where to eat coming from a car's console, over the restaurant recommendation tool they already like to use in their phone, which is also free. (The phone apps often have their own ad support.)

So just what are these services you will use in the car? Of course, my imagination and yours are limited, so I am sure people will dream some up. Perhaps some games. But it's hard to see how the phone people won't also think these up, or how the car-based services, which change function and UI every time you use a different type of car, will get that much of the pie.

Of course, with 2 people in a car, you could get twice the ad revenue. But even though the roof of a bus or subway is lined with ads for the dozens of people on board, the advertising revenue doesn't dent the cost.

Specialty hardware based services

If a car contains special physical features, people will be keen to use them. I'm sure there will be cars designed just for having a party with friends. Or sleeping in. Or picking up kids at school. Or even playing an interesting new game. People will pay for that, and maybe in certain cases they would let the special feature be paid for by advertising. We'll see.

Free ride to the sponsor's establishment

Much more likely will be sponsored rides with a specific goal. A nice restaurant might offer free taxi service to and from the restaurant. It's not going to be expensive to offer this. This might be particularly appealing for bars -- eliminating drunk driving risk, as it could. It's possible that offering such a free ride might become an industry standard -- if all the other bars offer free rides, you might have to as well. It will be a good way for ride companies to lock in business by making exclusive deals with particular locations.

Of course the rides will not be free, you will pay for them in the drinks, and people will know that, but people have a bad habit of easily being tricked by such things and even getting used to them. I mean many places have free or validated parking, even though parking can be quite an expensive thing to provide, but customers come to expect it. Such rides might try to "lock you in" to a particular bar -- leave for another bar and you don't get your free ride home -- but then the other bar probably offers that ride to get you over. Restaurants don't expect you to hop to a rival restaurant so they don't have as much problem, and you want the freedom to wander afterwards anyway.

Stores might have a harder sell. Most people like to visit more than one store on a shopping trip. Malls could make a comeback in this way. With bars and restaurants, you know people are going to eat and drink, and can even insist on it: "Free ride if you order food." With a store, a person might take the free ride, browse for 5 minutes and head to their real destination. Stores can't easily force you to buy.

I have suggested that the neighbourhood elevator -- a local shuttle to bring neighbours to the shopping street -- might well be free and sponsored by the merchant association. That's an easier sell than a ride that binds you to a single store.

Free ride to work

Employers might offer free commute rides. First of all, it's a nice employee perk, and many employers already offer free bus service to the office now. (European companies always give management employees a free leased car, too.)

Employers can even try to make it efficient, when they notice two or more staff that they could put in a carpool, they would do it. Everybody's going to the same destination, and it's a free ride from your employer, so you will not complain if the car pauses to pick up a co-worker. (Unlike today's carpools, it will never take you out of your way, since other robotaxis can bring the co-worker to the meeting point along your path. You might have to leave the highway.) Employees can even push the "No, I'm running tight for a meeting, don't carpool me today" button.

These are free rides, but not ad sponsorship. The employer is probably happy you will do work in the vehicle, of course. This is just business, and since if you paid for your own ride it would be with money you got from your employer, it's a wash, and actually a big win for tax reasons if the taxman doesn't try to stop that. (Further notes say that private taxi rides would be taxable benefits but van rides might not be taxable.)

Employers -- and other locations -- have a huge incentive to offer free rides: They no longer need parking. This can be a major cost saving in denser areas, and growing companies surrounded by parking lots suddenly can have space to build new offices.

Consequences of free rides

Free rides to destinations do not count, in my book, as "in car monetization." It's just another way of selling taxi service -- you sell it in bulk to employers and establishments.

As I described above, if it becomes popular for a class of destination to offer free rides, that will push all the others to do so. Only the more educated consumers will understand deep down that the ride is not really "free."

If this does become popular, it could make a big change in the economics of car ownership. There is much debate about how many people will want to own their robocar compared to those who live the all-taxi life. But if half your rides -- especially your commute -- become expected to be free, it pushes people strongly away from ownership. It also pushes them away from even ownership of a manual car. The free commute would immediately drop ownership in most households from 2 cars to 1. It might overcome the fear of the vehicles.

We could see negative consequences too. Companies might make this Orwellian -- it allows them more control of employees, and records when they come and go, can even force them to travel at certain hours. (Want to come in late? Pay for your own ride.) You will have far fewer rights on a ride you didn't pay for, and you'll put up with more problems. Just as having employers pay for health care has come with lots of gotchas, we might see some parallels in transporation.

Governments could see powerful levers if companies are paying for most of the rides at rush hour. Levers they could never apply to private drivers can be applied to companies. This could mean better traffic management and lower emissions, but also to over-control of the city.

But the ride will get cheaper

As indicated, I forecast that riding in a robotaxi will get much cheaper than $20/hour. Perhaps as low as $4/hour in the city, and $10/hour on the highway.

I have a detailed article on Robotaxi Economics exploring some of these costs. Be warned though, Uber charges 40 to 50 cents/mile right now (20-25% of your fare) and doesn't make money, and Uber pays no car or driver expenses -- only insurance, operations, software, marketing etc. That suggests the problem is hard.

But it's still not enough. We need both transportation to get 5x cheaper, and we need advertising to get 7x more effective, before an urban ride can be paid for by ads, and you'll have to spend the entire ride using the service to get that free ride. Just to save a buck or two.

And you also have to somehow pay for what the ads are embedded in. Unless you imagine people would just sit staring at ads for no other purpose than to get ride credits. I hope not.

But isn't data the new gold?

Advertising can't pay for rides, but some people write that having all the data that comes from transportation will be a true source of value. It will have some value, but it's not really a lot more data than is already learned by companies like Waze, Google and Apple Maps, cell phone companies and companies like Uber and Lyft. Nice, and a good niche business, but again it's the tail wagging the dog.

Can advertising get more effective?

Many people have hope that as ad targeting gets better, advertising can become more effective, and get higher revenue per impression. The theory is that if you only see ads about things you are truly interested in, you are much more likely to buy the products, and the advertisers will pay more.

That works to a degree. It's one reason that web search ads work -- you are actively looking for something, and you get ads for the thing you are looking for.

That's different from general advertising. Here, people imagine that you might watch a TV program, but because the system knows you are in the market for a car, and trying to plan where to vacation this summer, and have a small baby, you see ads only directed at these known interests. This can be creepy, or it can be designed to be delivered only by your own computer that gets to know these things about you but not report them back to HQ.

I have doubts this can work. For one, I find ads that are related to my interests to be more distracting and thus more annoying. Only rarely do they inspire thoughts of, "Oh that's handy, I am looking for a car and there's an ad for Ford."

Most of all, though, I don't think you can boost inequality that much. Ads exist to manipulate our buying choices. The better they are, the more sponsors will pay, and the more they manipulate me. Every dollar sponsors pay is often a dollar of negative value to me. We may not realize it consciously, and as such advertisers do get away with it. But there's a limit. To be effective, an ad has to make me buy something I would not otherwise have bought, or to keep me buying what I already buy and not wandering off to the competition. If it's not doing that, why would advertisers spend money on it?

As such, I believe there is a cap on the value of an ad impression to an ordinary middle class person. The higher the price for the ad becomes, the more it's manipulating the target. People should resist that. (This is different from the higher value of ads delivered to wealthy people. Those are expensive because those people spend more, not because you are better at manipulating them.)

Consider the extreme -- advertising so effective that people always clicked on it or always bought the products advertised. Sponsors would pay a lot for such ads, but targets would start to resist them for just that reason.

There are some counter examples to this. I will examine this more in an article that is more about advertising than about robocars.

Are there any forms of advertising that could be lucrative enough to pay for a ride? Let us know in the comments.