Maxwell Wessel reports in Harvard Business Review:
Some of the same factors that have driven the transformation in IT help point the way toward the future of transportation. Namely, four themes from the growth of cloud computing help us understand why a shift to “cloud transportation” is underway.
Transportation is one of the world’s largest industries. The five largest automotive companies in the world generate more than 750 billion euro in annual revenue. The names in the industry are global brands – BMW, Ford, Daimler. Yet despite its size and stature, it’s also an industry in the midst of transformation. Today, new transportation vendors like Uber, Lyft, Zipcar, and Grabtaxi are changing our relationship with cars.
Few other industries with such a pervasive and tangible impact on each of our lives have gone through recent periods of similar upheaval. Information technology, however, is one of those industries. We all interact with computers on a near daily basis, and like cars today, the IT industry has been undergoing its own transformation over the past 15 years.
Some of the same factors that have driven the transformation in IT help point the way toward the future of transportation. Namely, four themes from the growth of cloud computing help us understand why a shift to “cloud transportation” is underway.
1. Renting is almost always cheaper than owning.
Historically, renting infrastructure has been relatively expensive. Any renter needed to both cover the profit offered to rental companies and settle for less customized infrastructure. That changed in the world of computing over the last decade – mostly due to the sheer growth in consumers of IT infrastructure.
Today’s cloud IT vendors have both the buying power and the operational discipline to minimize the cost to the customer of a unit of data storage or computing power. With the addition of self-service infrastructure, powered by scalable web interfaces, the cloud IT vendors are also able to provide incredible variety to their customers without dramatically increasing their costs.
The same shift can be anticipated in transportation. Huge vendors of cloud transportation — just like their counterparts in IT — have every incentive to optimize their fleets against cost per mile driven. Unlike the average consumer, cloud transportation vendors will attempt to ensure they (or their drivers) buy the most efficient cars per mile, service them optimally, and retire them on the best schedules. (Ever wonder why Hertz doesn’t have many cars with more than 30,000 miles?)
It may be a long time before cloud transportation companies offer anywhere near the same variety that ownership can confer. But for many of us, what they offer will be good enough. And when it is, we should expect renting to become cheaper than owning.
2. Network effects will be critical to performance.
In a world of cloud infrastructure (whether in software or transportation), there are a number of advantages to scale. Beyond purchasing power, scale helps companies establish strong network effects. In software, these network effects help draw new developers and consumers to a given platform, simplify application deployment and service, and streamline the act of finding relevant talent.
In transportation, networks create value in a couple of ways. The first is convenience. The more Zipcars in your city, the more compelling it is for people to sign up for Zipcar, and the more Zipcar locations can be supported. Similarly, the more Uber drivers there are in a city, the more likely people are to sign up for Uber, and the more likely drivers are to opt into it.
A dense network also limits transaction costs. Every mile driven by a ride-sharing driver with no customer in the seat is a mile of costs that need to be covered. But once a ride-sharing company has built meaningful network density, a driver might leave you on one corner and pick up his next rider only a block down the road.
In cloud computing, we’ve seen these network effects help solidify the position of massive players – locking new entrants out of the market. In the world of transportation, this is definitely a possibility and one of the primary reasons so many next generation companies are trying to expand so quickly.
3. Most of the old guard will struggle to adapt.
As is the case with most waves of disruption, suppliers trying to make the shift to cloud business models will struggle to adapt.Why? Mainly because the most valuable customers in their portfolio today aren’t necessarily the most valuable customers in the new world. Today, car companies might treasure the luxury customer willing to pay for a highly customized interior. Tomorrow, the best segment to own might be the B2B buyers who are buying at massive scale. Unfortunately, these new buyers have different needs entirely. They’ll care about extremely minute efficiency gains that even the pickiest individual buyers wouldn’t even notice. They’ll look for cars that cost little to maintain, get great gas mileage, and last forever. And in a world with driverless transportation, they may want cars with very different service models, layouts, and architectures.
The theory of disruption would suggest that, for these reasons, traditional automakers will struggle to make the shift, even armed with the massive scale and brand advantages they have today.
4. Change will be slow, and edge cases will persist for decades.
If the cloud revolution in information technology has taught us anything, it’s that edge cases will persist for decades. Despite the known advantages of cloud computing, we’re far from a world where cloud can do everything. But for the vast majority of companies, cloud is a godsend.
Transportation will follow a similar path. We’re a long way from being able to serve many suburban and rural areas with next-generation infrastructure. Genuine car enthusiasts might never make the shift. And there is nothing in place today to help address the edge needs of those doing things like hauling junk, transporting construction tools, or moving people long distances on a regular basis.
Beyond the purely functional limitations of the technology, regulatory issues will persist for decades. We’re seeing the beginning of these issues arise with the questions surrounding the employment status of Uber and Lyft’s contract employees. We’ll only see more of these issues over time. Regulatory issues haven’t slowed cloud computing all that much — but then, data security seems almost insignificant when compared to the physical safety of our loved ones and children. Background checks and security screening issues will be ever more critical in a world of transportation marketplaces. Adapting rules, testing product, and creating the software to enable driverless cars will take quite some time.
But just like with cloud IT, even if we don’t see everyone move en masse, the change will be noticeable. And it will be noticeable soon. Within years, we’ll have trends that point the way toward a very different future.
A decade ago, it was clear to a lot of thoughtful folks that cloud software was going to be the clear choice of the future. Today, the same theme seems to hold for transportation. We should assume that cost advantages will favor the cloud vendors, that scale will improve performance, that the old guard will have to adapt to flourish in the new world, that the edge cases will slowly fill in, and that the change is coming — eventually.
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