Alphabet's Taking Its Battle With Uber to the Streets

Uber recently settled a lawsuit with Waymo, an Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) subsidiary, for $244 million in Uber stock. Waymo sued Uber after the latter acqui-hired a former engineer that stole trade secrets from Waymo on his way out from the company. The move certainly put a wrench in Uber's automated vehicle developments.

The end of what could have been a very long drawn-out lawsuit came just after Waymo received approval from Arizona's department of transportation to operate a "transportation network company." You might know them better as "ride-sharing companies" like Uber and Lyft.

But what will make Waymo different is that it won't be paying drivers. The company plans to operate a fleet of automated minivans in what could be a glimpse at the future of transportation.

Arizona is just the start

Phoenix was the first test site for Waymo's ride-sharing service. With the approval of the Arizona department of transportation, it can now start charging users for the service.

But during Alphabet's fourth-quarter earnings call, CFO Ruth Porat told analysts that Waymo will expand the rider program to more states. How quickly Waymo expands will likely depend on regulatory approval with regard to automated vehicles as well as its success in Arizona. Investors should expect the company to take its time with the roll-out, especially considering the increased focus on Alphabet's Other Bets financials since the company restructured in 2015. Those Chrysler Pacificas ain't cheap!

Waymo also sees applications beyond ride sharing. Automated vehicles could provide tremendous benefits to logistics and delivery services. Not to mention the benefits to Waymo's sister company, Google, through mapping data or data collected from passengers, like where they're coming from and where they're going.

Can self-driving cars make ride-sharing profitable?

Even with $37 billion in gross revenue last year, Uber still managed to lose $4.5 billion. One of its biggest expenses is its payments to drivers, which totaled about $8 billion last year. Uber is actively cutting the percentage of gross revenue that goes to drivers with the rate falling to 72% over the second half of 2017 compared to 78% in mid-2016. Still, it's a long way from becoming profitable.

But self-driving cars could make ride-sharing a profitable endeavor. It replaces a major marginal cost -- a driver -- with a relatively fixed cost -- a vehicle. As the operation scales, the fixed costs as a percentage of revenue can decline quickly.

Other competitors will enter the market soon, too

Waymo might be the first to market with a self-driving ride-sharing service, but it will be followed closely by General Motors (NYSE: GM), which expects to enter the market in 2019.

GM has the advantage of producing the cars itself, and it's at the forefront of lowering the cost of LiDAR systems, the key hardware component of vehicle automation. Those cost advantages could put pressure on pricing for existing competitors.

Other automakers have also looked at ridesharing as the natural implementation of self-driving technology built into their vehicles.

Waymo may be able to survive a competitive pricing environment. As mentioned, the operation could serve as a great source of data for Google, leading to better revenue growth at its sister company. Uber and other stand-alone ride-sharing services might not be able to cut it without those cost advantages.

Either way, both companies need to put the pedal to the metal and get those self-driving cars on the road.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A and C shares). The Motley Fool has a disclosure policy.