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Why Google's rumored ride-sharing service should terrify Uber and Lyft

Google executive David Drummond holds a seat on Uber's board.
Google executive David Drummond holds a seat on Uber's board.

Google is on the verge of getting into the ride-sharing business, creating a rift with the market leader Uber, Bloomberg reports. Uber and Google have been allies since Google invested $258 million in Uber in 2013 and got a seat on its board of directors. But Bloomberg says David Drummond, the Google executive who holds that Uber board seat, has recently informed Uber of its plans to get into the market itself.

Bloomberg suggests the move is part of Google's larger plan to build a business around self-driving car technology. That would make a lot of sense.

A lot of people assume that a self-driving car is a product that customers will buy the way people buy conventional cars today. But Google has never been very good at selling physical products; its strength has always been in the provision of services. And that makes the taxi business the perfect place for Google to introduce its self-driving car technology.

Another advantage of renting self-driving cars instead of selling them is reliability. Manufacturers will face lawsuits every time a self-driving car injures or kills someone, so they'll want to do everything they can to prevent errors. And this will be easier to do if manufacturers, not customers, own the vehicles. The last thing Google wants is for a car to crash because its owner forgot to bring it in to replace a key sensor. If Google owns all of the cars running its software, it can ensure that software is upgraded promptly and defective hardware is swapped out immediately.

Another reason to start in the taxi business is that, for all the talk about Uber and Lyft being disruptive business, they are themselves ripe for disruption. When you take an Uber ride, the majority of the fare goes to pay your driver. With no driver, Google should be able to charge dramatically less than Uber and still make a profit. That big price advantage won't exist if Google tries to sell cars to consumers directly.

To capture the taxi market, Google needs an Uber-style ride-sharing service to pair with its self-driving technology. It could try to acquire Uber or Lyft, but these companies are now worth billions of dollars.

So, according to Bloomberg, Google is going to build its own service. This would be an uphill struggle if Google were just trying to create another conventional ride-sharing business, since Uber and Lyft have a huge head start. Ride-sharing services are hugely dependent on what economists call network effects: the more drivers you have, the more attractive the service will be to passengers, and vice versa. Google will be starting with zero drivers and zero passengers, putting it at a big disadvantage.

Luckily, Google has a lot of money. It can afford to heavily subsidize the service while it develops the software and expertise it needs to connect customers with rides. Then, once the self-driving technology is ready to go, it can beat Uber and Lyft with much lower prices.

Disclosure: My brother is an executive at Google.