When Google (GOOG, GOOGL) acquired social mapping startup Waze in late 2013, most of the articles I read suggested that the intention behind the purchase was to bolster the quality of Google maps. In light of recent developments surrounding Google's driverless cars, I believe Google has different plans for Waze.
Having paid a figure for Waze that was rumored to be roughly a billion dollars, I was curious to see what all the fuss was about. My wife downloaded the app to her phone on a road trip one day and we tested it out. The style of the application reminded me of a multi-player, casual flash game. Playing around with some of the features, my wife discovered that there was some sort of minor traffic accident ahead. When we passed the accident a few minutes later, Waze asked us for a confirmation of the incident, which we gladly supplied. I remember wondering if solo drivers were using the app or if they were having difficulty responding to confirmation requests while focusing on the road. It was a cool application but it depended on multiple-passenger car rides.
Then there was the whole fake story by TechCrunch that claimed Uber was buying a fleet of Google driverless cars. The story was completely made up - except that it turns out that Uber really does seem interested in driverless cars. And Google seems just as interested in Uber, recently investing $258 million in the startup.
Later, I read an article in Forbes that touted driverless cars as a disruptive technology, and claimed the push would be worth trillions of dollars for Google. The same author, Chunka Mui, also wrote a follow-up article that explores a number of really interesting ideas. The most intriguing of these for me relates to the kind of efficiencies that could be achieved when computers are coordinating transit for a whole mass of people. According to the author, cars are used on average less than 10% of the time (my wife and I use our car less than 5% of the time). If a fleet of vehicles were coordinating the transport of crowds of people, an algorithm could optimize routes and make excellent use of each vehicle in the fleet. If a Google car can be used many times more frequently than current cars are used, the usefulness of each vehicle begins to seriously reduce long-term ownership costs. Imagine that you shared a car with ten of your neighbors (who all happened to use the car at different times) and paid a tenth of what you normally pay for your car. Would you be interested? And beyond the reduced up-front cost, you would be insuring one car instead of ten so insurance premiums would suddenly be ridiculously reasonable. Wouldn't it be great to have 90% of the money you spend on transportation back in your pocket? And if Google were handling car maintenance, they could seriously reduce repair costs by having an abundance of spare, easily-replaceable parts, and specialized know-how as an outcome of controlling the makeup of their fleet. And driverless cars aren't just useful at peak hours. Imagine cars that whisk people to and from work during rush hour and deliver cargo during off hours. Imagine sleeping through the night while in transit to your friend's house ten hours away. Turn your garage into an entertainment room and throw away your keys. Transportation is about to enter a period of rapid transformation.
Beyond the many ways a driverless car could save people money - and we didn't even start to talk about not having to pay a driver - they also allow us the freedom to spend our commuting time being productive. Have a last-minute adjustment to make to your presentation? - No problem. Want to help other commuters avoid traffic? - Go ahead and respond to that Waze confirmation. But in order to take advantage of all that driverless cars have to offer, Google needs a fleet of vehicles on the road and a critical mass of people who are comfortable being chauffeured around by a robot. You see, Page and Brin aren't just giving consumers a new transportation option, they are building an entire mobile social network.
Successful social networks enjoy an incredible first-mover advantage. Consider how powerful Facebook (NASDAQ:FB) is. The main reason people join Facebook is to be where everyone else is. The more people join, the more enticing the platform becomes. If Google can organize a mobile social network early on, they will be able to exploit economies of scale that will drive costs down for the consumer and improve user experience to such a point that everyone will want to be a part of Google's network. Imagine for instance that Google had enough cars on the road that they could actually map out in almost real time all of the available parking spots. Trying to find a parking spot without a Google car could easily become a nightmare. The more people use Google's cars, the more enticing the product becomes.
Driverless cars are incredible, but they almost certainly lack a human touch. Waze offers Google a chance at bringing this human touch back into the car. To have access to a network of human eyeballs that supplement what Google car sensors can understand about the world is an extremely valuable thing, and well-worth the billion dollar price tag. Google knows that it needs to think of their fleet of unmanned vehicles as a social network and, from my perspective, they have chosen excellent allies in Uber and Waze (and for that matter, a slew of recent startups that Google has purchased that have expertise in things like complex cloud computing, high altitude UAVs, and robotics).
While I try to keep speculation out of my investing decisions, I do believe that driverless cars offer current Google investors an especially promising reason to hold their shares well into the future. When you employ a long-hold investing strategy, it is important that the companies you own will be profitable for many years. The longer you can hold a company before paying capital gains tax the better. Google's current advertising business is sound enough to offer investors a long runway of limited downside risk. In addition to this low risk, driverless cars offer Google investors the potential for substantial growth. Will driverless cars bring home the big bucks for Google? - Well, I certainly think so, but that remains to be seen. More importantly for Google investors though is that you can make this gamble without losing your shirt. Even if Google's driverless car project crashes and burns, you can still own an exceptional company that will continue to grow at a reasonable level. In other words: Google offers large long-term upside potential with low downside risk. Now, if only the shares were a bit cheaper.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I am a YouTube partner, which means that Google pays me for advertising that runs against my content.