New Year’s Eve surge pricing reminded everybody why we love to hate Uber so much. But it raises an interesting question: When self-driving vehicles become widespread and there is no need to coax human drivers out on a holiday evening, what will happen to surge pricing, and therefore to Uber?
Uber is one of the largest and fastest-growing private companies in the world, with the latest reports saying its valuation may be over 60 billion dollars. The six-year-old car hailing app is the poster child for Silicon Valley’s miracle: the meteoric rise and exponential user adoption of an incredibly handy software tool. But new forms of transportation have come on ‘like a steam train’ before and then lost their momentum. Uber’s success is predicated on disrupting personal transportation. Historical precedent tells us that this will probably be its demise as well.
Throughout history, great social transformations have come out of transportation. From Roman roads and railways to airplanes and the shipping container, transportation infrastructure has always been the vascular system of society. Any improvement upon it, however minor, has had tremendous impacts on the health and welfare of the entire social organism. Even more so than the end of the Civil War, the completion of the first transcontinental railroad in the U.S. in 1869 marked the moment when the United States became a single, unified nation.
Uber represents a new transportation revolution: the shift from private car ownership to on-demand service consumption. And Uber, as well as its competitor Lyft, make no secret of their ultimate goal. They intend to replace human drivers with self-driving software.
But this could prove their undoing. When automated vehicles reach mass-market adoption, it will be much more challenging for ride-hailing apps to stay as profitable as they are now. In that sense, there is a direct parallel between Uber et. al. and for instance, the train.
At first, taking the train for personal travel was an inconceivable luxury, reserved to a select elite. Over time, as rail lines expanded, the train turned into a mass consumer good, sometimes public and sometimes privately-owned. The subway lines underneath most major world cities are exhibit A in that story. In Paris, London and New York, subway buildup occurred at the turn of the 20th century. Subways helped empty the streets of horse-drawn carriages, which had the unfortunate disadvantage of polluting cities with mountains of manure.
It is almost certain that Uber (and its competitors) will eventually follow along the same glide path as these early public transportation efforts. Just like the train or the subway, after several decades, the use of point-to-point, automated personal transportation will be so trivial that it will be hard for private companies to extract premium prices from consumers. There will be too many competitors and the technology will be reverse-engineered. One can easily envision that once Uber deploys self-driving cars it will also begin to offer monthly passes or subscriptions like mass transit agencies.
But there is a twist: surge pricing. Surge pricing is Uber’s killer app. It is the mechanism that helps regulate supply and demand in real time. Surge pricing enables Uber to manage scarcity of drivers in the face of spikes in ride requests. It entices drivers to pick up rides, and at the same time it weeds out customers who are not willing to pay the higher price.
In that sense, even if Uber were to become a publicly-operated, citywide transportation infrastructure, it would still have to use surge pricing. It would not make sense without it, because surge pricing is the market solution that allows you to get your ride fast.
Surge pricing and its effect on drivers’ and customers’ behaviors is the key difference between Uber and say, the subway. The subway equivalent of surge pricing is to jam yourself uncomfortably against many other riders. That is the additional non-monetary price you have to pay.
Let's game this out as a thought experiment: Uber will roll out self-driving cars alongside human drivers in a few select cities at first. This will help smooth out supply and demand for rides. Past a certain point, drivers will be put in naked competition with their self-driving alternatives. In the cities where self-driving vehicles are available, surge pricing will gradually lose its edge and its incentive powers for drivers and riders alike as more robotic cars are deployed.
In the long run, the most likely scenario is this: cars will be sold equipped with self-driving capabilities. It is not a matter of how but when. Self-driving technology is going mainstream fast. Major auto manufacturers are working to bundle self-driving as a basic, standard feature for the time when safety and insurance regulations will require it. General Motors recently announced a 500M investment in Uber competitor Lyft to develop a fleet of self-driving cars. Consequently, I would wager that the bulk of self-driving cars on the road will not look like those sympathetic Google golf carts. The future almost always look like the present, with minor changes that are not necessarily distinguishable at first sight.
When self-driving comes standard, your (electric) car will truly be a networked computer on wheels. When not using it, you will have the option to put it in Uber mode, whereby it is made available to automatically pick up rides and to earn residual income on your behalf without you even leaving your couch. If every car comes with self-driving capabilities and Uber pre-installed, surge pricing might go the way of the Dodo, because the problem of momentary scarcity will be solved for good.
The likelihood of an Uber- or Lyft- enabled available car in your immediate vicinity will increase dramatically, as a good number of your neighbors may have one. The supply of self-driving cars will not be nearly as constrained as it is now with human drivers. In fact, chances are that in cities it will always exceed demand: just think for a minute of all the lifeless, parked cars at any one time in your neighborhood. Even if a fraction of them were made available for rides by their respective owners, it is fairly obvious that surge pricing will not be happening very often. In this configuration pre-installed Uber, Lyft or (Didi Kuaidi in China) will see their function reduced to a booking and scheduling software agent.
Pre-installed self-driving mode naturally raises the question of individual car ownership. Why even bother buying a car when you can get one on-demand at any time? The only advantage of ownership will be for the occasional family road trips. Even then, weekly or monthly rental might pencil out better. Fleet operators might have distinct efficiencies of scale.
Ultimately, as self-driving service expands, personal vehicles will most likely turn into shareable public goods. Give it a few decades and the urban blight of massive parking structures and parking meters will go away—along with surge pricing.
Seen from here and now, it all seems somewhat comical. Empty cars speeding up on the freeway will be a common, unremarkable sight.
Manu Saadia, the author of Trekonomics, hails from Paris, France. He lives in Los Angeles where he helps tech startups get off the ground. His first and only passion is the future.