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A Bet on Uber Is a Bet on Self-Driving

On Friday morning, Uber executives rang the opening bell of the New York Stock Exchange as their 10-year-old, $82 billion company went public. The IPO is significant, even in a year chock-full of important IPOs: It's the largest by a tech company in the past half decade and the second by a ride-hailing company in the past two months. Uber shares fell 7.6 percent on their first day, from the IPO price of $45 to $41.57.

But the most important activity Friday for Uber’s future may happen 370 miles away, in Pittsburgh, headquarters of the company’s Advanced Technologies Group. If Friday is like any other for ATG, autonomous vehicle safety drivers will pilot a handful of sensor-laden SUVs on short test trips around the city’s Strip District. They will collect data on road situations and probably run through a few trials conceived by the company’s engineers to ensure their software is working properly.

If it works, that self-driving technology might finally lead the ride-hailing company to the kind of profitability its investors—who have sunk more than $22 billion into Uber already—would like to see. At least some day.

“I’m not sure [automated vehicle tech] is necessary for ride-hail companies to get to profitability, but it does feel like once they’re able to achieve that, then they have an opportunity to be wildly profitable,” says Barrett Daniels, a partner in the national IPO practice at Deloitte. Investors may need to be patient; Uber’s operating loss last year topped $3 billion. “The question is, does that mean 2025 or 2035? I don’t know,” Daniels says.

In 2016, then-CEO Travis Kalanick said the quiet part out loud when he argued that autonomous technology—that is, getting rid of drivers—was existential for the ride-hailing company. “What would happen if … we weren't part of the autonomy thing? Then the future passes us by, basically, in a very expeditious and efficient way,” he told Business Insider.

Since then, Uber has poured money into the Advanced Technologies Group’s work—nearly $1.1 billion since 2016, including $457 million in 2018, according to Uber’s public S-1 filing. “We believe that autonomous vehicle technologies will enable a product that competes with the cost of personal vehicle ownership and usage, and represents the future of transportation,” the company wrote in its prospectus. It continues to invest despite slowing revenue growth, which fell by half in 2018.

It hasn’t always been smooth. Last year, an autonomous vehicle being tested in Arizona struck and killed a woman. Uber subsequently shut down its Arizona operations and halted its testing for nine months as it revamped its safety operations. After the company relaunched limited testing in Pittsburgh late last year, ATG head Eric Meyhofer pledged “we’ve made safety core to everything we do.”

Nonetheless, Uber’s investment in autonomy makes sense, because it spends tons of money on drivers—on recruiting them to a job that can be unpredictable and low-paying, and on incentivizing them to travel to where riders want to go. Drivers typically receive roughly 70 percent of each fare. In addition, Uber says it spent $1 billion in 2018 on driver referrals and “excess driver incentives”—that is, incentives the company paid out beyond what the driver brought in in revenue. The incentives alone totaled $837 million last year, up from $531 million in 2017. (A lot of this money went into creating incentives for drivers new to Uber Eats, the company’s delivery service.)

The money Uber spends on drivers could climb further. On Wednesday, small but noisy crowds of ride-hail drivers and their allies took to sidewalks across the world to demand a minimum wage, a greater share of IPO proceeds, and to be considered employees, rather than contractors. The boycott didn’t seriously disrupt ride-hail service, but it attracted the attention of some political heavyweights, injecting the issue of gig-economy work into an already fractious national tech policy debate. Expect Uber and its ilk to spend serious money on beating back new labor regulations, driven in part by precedent-setting class actions in important states like California. Or, as Uber put it, bloodlessly, in its prospectus: “Our business would be adversely affected if Drivers were classified as employees instead of independent contractors.”

Uber also noted in its prospectus that the competition for drivers is particularly vicious in “large metropolitan areas,” exactly the places where it books most of its rides. And where it will need to continue duking it out with rivals Lyft, Didi, and Ola. Unless someone makes a major acquisition—as Uber recently did by beginning a merger with Middle Eastern competitor Careem—the company may have to continue to pour money into the seemingly bottomless pit of driver recruitment and retention.

Enter robot taxis, though, and the sea change Uber once promised—No more personal cars! For anyone!—could, perhaps, come to pass, especially in high-density cities. “If people don’t have cars anymore, they might use ride-hailing to do literally everything,” Daniels says. “The sky is the limit.”

In its quest for profitability, Uber has opened up some side hustles. Drivers are less important in, say, an Uber dominated by its new (and capital intensive) bike- and scooter-share services or in a world where Uber Freight—the company's trucking brokerage platform, which recorded $359 million in gross bookings last year—takes off. As unprofitable companies continue to make bids for IPO, it’s been increasingly clear that investors are somewhat comfortable with the idea of taking long-term bets, be they bikes or flying taxis or even robot cars. The real question is how long they’re willing to wait.

Updated 5-10-19, 1:35 pm ET: This story has been updated to reflect the start of trading in Uber shares.

Updated 5-10-19, 5:40pm ET: This story has been updated to reflect the close of first-day trading.

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