Uber has suffered a series of troubles early this year, from sexual harassment claims by a former staff engineer to an intellectual property theft lawsuit by Google unit Waymo. But Uber’s most longstanding, recurrent, and core problem stems from its relationship with its contract drivers.

It’s not surprising that Uber is seeking an escape from that relationship with an ambitious plan: to dial drivers out of its business model altogether by replacing them with self-driving cars. Among the pressures the company has been facing: Cities have demanded background checks on drivers to protect passengers, while drivers have sued for the right to be recognized and compensated as employees. That conflict got personal recently for CEO Travis Kalanick in a confrontation recorded during one of his own Uber trips, when the contract driver reproached him for lowering Uber fares, thus slashing the driver’s income.

Like Uber, top competitor Lyft is also making a bet that self-driving cars will provide a long-term path forward for ride-hailing companies. Innovative car manufacturers and startups have jumped on board, with plans for taxi or ride-hailing businesses based on fleets of autonomous vehicles.

But are they all chasing a mirage?

The question bubbling up now is not whether self-driving cars can be made to work. It’s whether anyone could make much money in the long run by deploying them as ultra-high tech taxis. Pilot vehicles studded with sensors, lasers, and cameras are already cruising the streets on test runs in various cities. What isn’t clear is how Uber, Lyft, and the carmakers are going to engineer the business model of a driverless taxi service of the future so they all—or, indeed, anyone—can make a profit. Business analysts and investors are starting to raise these questions as self-driving technology comes closer to commercial reality.

Gartner senior automotive analyst Michael Ramsey says believers in the potential of driverless taxi companies focus on the cost savings in getting rid of drivers—but they ignore the new costs that would arise once they’re gone. Could a trip in a high-tech car, sophisticated enough to drive itself, possibly cost the same as, or less than, a conventional taxi ride? It’s been that kind of competitive pricing that allowed Uber and Lyft to become mass transportation providers.

A traditional taxicab company with its own fleet and drivers is no high-margin business. Still, the ride-hailing companies have been able to compete with taxis on the price of a trip—in large part because they own no cars at all, and define their drivers as independent contractors. Yet even with the immense advantage of acting as virtual transportation companies, Uber and Lyft aren’t profitable—their operations are still subsidized by billions of investor dollars.

“Existing ride-hailing companies with human drivers don’t make money,” Ramsey says.

But if a ride-hailing company like Uber says goodbye to its drivers, it will also be saying sayonara to its virtual fleet—the drivers’ personal cars.

Uber can only forego the use of those cars by replacing them with much more expensive driverless vehicles, which are bristling with cutting-edge technologies such as laser guidance systems, artificial-intelligence software, sensor networks, and robotics. Either a ride-hailing company, or its business partner, would need billions of dollars to buy or manufacture such high-tech fleets. Someone involved in the endeavor would also have to bear the manifold expense of operating the pricey cars—a long list of costs, from maintenance to DMV fees, that would likely be higher than Uber and Lyft drivers now pay for their relatively modest vehicles.

Moreover, the financial rewards in store might only be a share of any profits from the commodity fares that consumers have come to expect after years of price wars between the two top ride-hailing companies.

“It doesn’t make sense,” Ramsey says. “The autonomous fleet idea has so many holes in it.”

(We reached out to Uber, Lyft, and several automakers for their views, but they weren’t able to comment by the time this story was published. We look forward to updating the story if they weigh in.)

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Might Uber and Lyft be able to outsource their self-driving fleet ownership entirely, the way they have avoided operating physical fleets so far by contracting with individual drivers?

Last year, Mercedes-Benz manufacturer Daimler agreed to own and operate driverless vehicles at some point in a partnership with Uber. GM has formed an alliance with Lyft to combine ride-hailing with autonomous cars. It remains to be seen how Uber and Lyft would divvy up responsibilities with the carmakers, split the expenses, and share the revenue if these pilot ventures ever reach a commercial scale.

“Uber and Lyft, what they really want is to not own any of these cars,” Ramsey says. “They’re hoping a fleet operator will come along with $10 billion and buy them.” By his rough estimate, Uber would need about 60,000 self-driving cars to duplicate its current U.S. network of conventional vehicles and drivers.

But what financial upside would exist for a carmaker or other fleet operator to maintain thousands of self-driving vehicles on call for Uber or Lyft?

The cost of running such an autonomous fleet could be enormous, starting with a fat sticker price for each … Next Page »

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