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Raz Godelnik headshot

Why Uber Won't Stop Testing Autonomous Cars in San Francisco

By Raz Godelnik

Uber started testing the use of autonomous cars in San Francisco last week, following earlier tests that began in September in Pittsburgh. There was only one caveat: According to the California DMV, “Uber needs a permit to test its self-driving vehicles,” which the company doesn't have.

Uber has a different perspective on the issue, claiming the regulations don’t apply to the cars it tests in San Francisco as they’re not truly autonomous and are not capable of driving “without … active physical control or monitoring.”

As Anthony Levandowski, who runs Uber's autonomous car programs, put it: "You don’t need to get belts and suspenders or whatever else if you’re wearing a dress." Uber also made the case that the technology in its self-driving cars is similar to Tesla’s autopilot technology, which doesn't require special permit.

Uber said it has no intention to stop the testing in San Francisco in defiance of an order from the California DMV, at least until the company gets the permit. This week, the California Attorney General's office also joined this legal battle, sending Uber a notice with a similar message to the DMV's.

While it is clear that the last word has not been yet said in this case, it is interesting to evaluate what’s behind Uber’s combative response.

Why did Uber choose to pick up a fight in a place where so many other companies -- including Google, Ford and Tesla (yes, the same company Uber used to make its case) -- didn’t have any problem applying for and receiving the DMV testing permits? Also, if Uber knew about these California requirements, why conduct the testing there and not somewhere else with requirements similar to those in Pittsburgh, where the company had no issue at all?

The reply I believe can be found it Uber’s business model. I’ll try to make the case that you can find clues in each of the five components in my business model framework. As I described last October, I add in my framework the elements of ‘mindset’ and ‘culture’ to the more traditional business model components (value creation, delivery and capture) to provide crucial context informing how value is actually created, delivered and captured.

Mindset: Uber is considered by many the latest poster child of creative destruction -- a term mostly identified with economist Joseph Schumpeter, who described it in 1942 as a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

It seems that Uber has happily adopted this image of a new entrant destroying the value created by outdated incumbents as part of an innovation mechanism required to keep the capitalist machine running. This view is also aligned with the narrative Uber created around clashes it had in the past with regulators on various practices -- this is not a case of company that ignores the law or has no ethical backbone but of a company that, like in many other cases of creative destruction, has to deal with outdated regulation that had value decades ago but now “exists to preserve a century-old monopoly for a connected few.” Is it really surprising that the company has 120 employees in its legal team?

This narrative can be seen in the company’s comments last week -- arguing, among other things, that some states and cities understand the complexity of operating self-driving technology and “have recognized that complex rules and requirements could have the unintended consequence of slowing innovation.” It concluded simply by saying it hopes California “will take a similar view.”

Culture: As the most valued startup in the world, it is no wonder that Uber reflects Silicon Valley's startup culture. Cultural traits that are common in the Valley -- such as entrepreneurial drive, focus and discipline, risk-taking, and competitiveness -- are manifested, for example, in Uber’s competences that include innovation, execution, quality obsession, fierceness and super pumpedness, among others.

However, the Valley’s culture is not just about enthusiasm, agility, experimentation and disruptive thinking – it has brilliantly created a powerful ethos of successful entrepreneurs, from Steve Jobs to Mark Zuckerberg that do whatever it takes to realize their vision. Uber, as we can see, definitely subscribes to this model – taking the 'don’t beg for permission, ask for forgiveness’ approach to the next level with its own “win-at-all-costs approach” and “always be hustling” mantra.

Value creation: Uber is maniacally focused on creating a great experience for its customers. And it seems that self-driving technology is becoming crucial to the company’s premise to provide riders with a seamless, delightful experience.

Thus, any delay in applying this technology becomes unacceptable from the company’s point of view. The growing importance of self-driving cars to Uber’s value proposition can be seen using the ‘job-to-be-done’ theory -- i.e., the idea that people have a certain job in mind that they hire a product or service to do. Jobs are not just functional, but also have social and emotional dimensions.

On the functional level, autonomous technology helps Uber preserve its ability to offer a reliable and affordable service, especially with regards to reducing the costs of Uber’s rides.

On the social level, which is about how customers want to be perceived by others, self-driving cars add a unique dimension to the rides -- allowing riders to use cutting-edge technology to get from point A to point B (and show the world on Snapchat or Twitter).

Last but not least, the emotional level (how the customer feels or wants to feel) is extremely important: Ride-hailing service is great, but it is almost a commodity now, when competitors like Lyft or Juno provide their own Uber-cloned services. The excitement factor is fading, and what used to be fun and cool has become just another routine. Self-driving technology brings back the cool factor into ride-hailing and, at least for now, gives Uber the edge over its competitors that still need to use humans to drive the cars – how boring!

Value delivery: Uber describes itself as “nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation.” This description does not just represent the Uber’s legal argument against classifying its drivers as employees, but also the way Uber perceives itself -- which is as a technology company using a sophisticated algorithm to deliver its value proposition.

However, I believe this description is not totally accurate. It suggests that the algorithm equally serves the riders and the drivers, but it seems the drivers are more a part of the algorithm than are served by it.

As Alex Rosenblat explains: “Uber’s neutral branding as an intermediary between supply (drivers) and demand (passengers) belies the important employment structures and hierarchies that emerge through its software platform.”

It is not that Uber does not care about their drivers (some reports show the company makes more efforts on that end), but it seems to approach them overall as code lines in its algorithm: The company tries to improve them to make the algorithm better, but as soon as it finds better code lines (i.e. driverless cars) it would move on, changing its description to ‘a neutral technological platform, designed simply to match driverless cars and passengers.’

Value capture: It's likely that no company represents the new economy better than Uber. But when it comes to capturing the value it creates, Uber acts like an ‘old economy company’ that subscribes to the shareholder primacy doctrine. In other words, in Uber’s world shareholder value maximization is prioritized over any other stakeholder interests, which means profitability is extremely important to Uber.

However, so far Uber is losing money -- a lot of money. In the first nine months of the year, Uber lost “significantly more than $2.2 billion,” Bloomberg reported. Other reports claim the unit economics of an Uber ride is still flawed with “passengers on average only paying 41 percent of the actual cost of a trip.” The investors that sunk so far $11.46 billion into the company are aware that their money is used to subsidize rides as part of Uber’s monopolization strategy and probably believe this strategy will prove itself over time.

Given that Uber likely has little appetite to increase its rates and that drivers represent the highest share of its overall costs, the only realistic way for Uber to keep its valuation high and its investors happy is to move quickly toward using self-driving cars on a greater scale. It’s not just that “when there’s no other dude in the car the cost of taking an Uber anywhere becomes cheaper than owning a vehicle,” as Travis Kalanick, Uber’s co-founder and CEO put it, but also that the company will no longer need to deal with the ‘headache’ of labor issues and the risk that the costs will actually go up due to court decisions.

Given these circumstances it couldn’t be clearer why Uber will let no one stand between the company and its only path toward profitability: self-driving cars.

Image credit: Flickr/Foo Conner

Raz Godelnik headshot

Raz Godelnik is an Assistant Professor and the Co-Director of the MS in Strategic Design & Management program at Parsons School of Design in New York. Currently, his research projects focus on the impact of the sharing economy on traditional business, the sharing economy and cities’ resilience, the future of design thinking, and the integration of sustainability into Millennials’ lifestyles. Raz is the co-founder of two green startups – Hemper Jeans and Eco-Libris and holds an MBA from Tel Aviv University.

Read more stories by Raz Godelnik