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When Google revealed that they had been building and experimenting with self-driving cars, many people including us wondered what could possibly be the business rationale for doing such a thing. The latest theory is that Google might offer a service to drive people around and use that to collect data. And maybe it’ll do that.
But we can now “reveal” the secret business plan behind Google’s self-driving cars. We hope you’re sitting down, because it’s revolutionary: when you make a great product that solves an important problem you will tend to end up with a great business.
So maybe Google will do the car-service thing. Maybe it will build a subscription/metered service that’s a cross between Uber and ZipCar where you can order a car from your phone and be driven around to wherever you want to be. Maybe it will licence its technology to car makers. Who knows.
But it seems pretty obvious to us that if Google can perfect self-driving car technology that can be a huge business.
People sitting in transit for hours is one of the biggest drags on productivity and therefore the economy, not to mention the environment and well-being. And let’s not forget the fact that car accidents, most of which come down to human error, kill lots of people each year.
It seems pretty obvious to us that there’s tons and tons of money to be made solving that problem.
The weaker form of the argument against Google’s self-driving cars is that Google is a search company and it should focus on its core business.
Corporate finance ideology demands that companies focus on their core competency instead of trying to “diversify” because diversification is up to the shareholders. A company that makes shoes shouldn’t also make coffee machines because companies are run for the benefit of shareholders and if shareholders want exposure to the shoe sector and the coffee machine sector they will buy a shoe stock and a coffee machine stock, unless there are “synergies” and “efficiencies” and “economies of scale” in making shoes and coffee machines at the same time. And that’s all fine in theory (even though nobody believes it in practice, which is a topic for another day).
But the flip side of that is that if shareholders don’t want Google to diversify into self-driving cars they can just sell the stock or fire the CEO, and that doesn’t seem to be happening. (That’s complicated by the fact that the CEO is also a huge shareholder but presumably the non-robots who bought the stock knew that going in.)
At the end of the day, management’s duty to shareholders is to increase the net present value of future cashflows.
Can self-driving cars accomplish that? You bet they can.
One way of looking at Google is that it’s a search company. Another way of looking at Google–and we’re speculating, but we think that’s the way Google CEO Larry Page looks at it–is that it’s a company whose core competency is hiring the world’s most talented engineers, getting them to figure out ambitious solutions to big problems, and then figuring out a way to make money from that. That’s pretty much how it was envisioned in 1998, and we’d say it’s served them pretty well so far.
Don’t like it? Don’t buy the stock.
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