Mobility-as-a-Service — Turning Transportation into a Software Industry

Soon, we will not own our cars anymore and will instead use mobility services to go where we need to go, incl. for commuting. Most urban parking spaces will disappear, and concerns over CO2 emissions from cars will be a thing of the past. And this will be yet another chapter of software eating the world.

The following thought experiment may convince you that not too long from now most people will choose not to own a car anymore. Step 1: It’s the future. You have just bought your first fully autonomous car and let it drive you to work this morning. It was a little scary at first, but you forgot about the lack of a driver quickly, and now you are in your office.
What is the car doing right now? Right, it is sitting in the parking lot, doing nothing other than perhaps charging. What a waste! Before cars were autonomous, there was not much else a car could do when you didn’t need it, and so cars spent 95% of their lifetime being parked, sometimes at cost to their owners. But now that your car can drive itself, it can make itself useful even when you don’t need it. Step 2: So why not let your car act as a cab when you are not using it, and make some extra money and potentially avoid parking costs? Great idea! But how are you going to manage this? How are you going to get customers, process payments, and deal with day to day operational problems? In the end, you don’t want to run a cab business, you just want to reduce the cost of car ownership. Step 3: There’s got to be a way to outsource this management though, right? Private-autonomous-car-cab-service outsourcing. Yes, they do exists. But! You are not the only one thinking like this and so there are as many cab services as there are private autonomous vehicle owners, i.e., a lot! As a result, there is an over-supply of autonomous cabs and the price you can charge for your own little cab service, outsourced or not, is rather low. Step 4: Why then own a car in first place? Instead of paying a lot of money upfront for buying the car and then having to deal with all the hassles of car ownership incl. insurance, maintenance, filling it up, repairs, parking, etc., while only making a little bit of profit from the cab service, why not just use one of those many, many autonomous cabs out there whenever you need a ride? Due to the over-supply, and the lack of a driver who needs to get paid a reasonable salary, the price for such services has come down tremendously and it is now economically feasible to commute by cab in many urban areas. This will be great news for anyone who can’t drive, such as children and the elderly — and perhaps some college kids on their way home from a party. Children and teenagers who will have started getting around by using autonomous vehicles will also probably not come around when they turn 16 and demand to get a license and buy a car. There are a lot of other things they’d much rather spend their time and money on.

This thought experiment suggests that at one point in the future, people will no longer own cars, and instead consume mobility as a service. Whether it will be the year 2020 or 2040 doesn’t even matter. Once we have convinced ourselves that it will happen eventually, we might as well start preparing for this. And this is what the private sector is doing. So-called ride-sharing services like Uber and Lyft are already preparing this future and the amount of money they raised leaves no doubt that they are able to convince a lot of people that mobility-as-a-service is a growing market. Americans spend about $300B on gas alone each year, and this is only a fraction of the total cost of car ownership. Hence, the money to fuel this new market is certainly there and it is big! And trends like this can become self-fulfilling prophecies: once a lot of people believe a market transformation like this is going to happen, and it is feasible from a technical and financial perspective, then it will happen. And the more people believe it and the more money is behind it, the faster the transformation will take place.

This phenomenon where a service replaces a product is nothing new. Marketing wisdom has been for years that buyers buy an “experience bundle” not a thing, not a product. As Leo McGinneva clarified: “People don’t want quarter-inch drill bits, they want quarter-inch holes” [https://rites-of-passage.com/images/Levitt_TheMarketingImagination.pdf?]. In the business world the same concept explains one of the most significant changes of the past 60 years: the conversion of a significant amount of revenue from the sales of goods into revenue generated from services [https://www.oecd.org/industry/ind/2090561.pdf]. GE, Xerox, and more recently Amazon Web Services are all good examples of this. GE started selling “Power by the Hour”, where they leased jet engines to airlines rather than selling them. The service included maintenance and everything else that was required to keep planes flying. And that was all airlines cared about. They didn’t want to own the engines. Similarly Xerox started selling print services instead of printers. One of the benefits of a service based business model to the buyer is the ability for pricing that aligns better with actual usage, rather than projected usage. And now there are signs that the same conversion from products to services is happening in the consumer market as well. And let’s face it: who wants to own a car? They cost money for insurance, require space for parking which can come at a premium, especially in urban areas, require maintenance, washing, cleaning, and after a certain point require a lot of repairs. Apart from the aesthetic pleasure, owning a car is mostly a pain. The only reason most of us still want one, is because they are such a convenient way of getting around and only by owning one do we have the flexibility to get around reliably and cheaply. But those things are mostly qualities of the usage of the car, not the car itself, which means that they can be designed into a service offering as well.

Ramifications

Disruptive changes like this open the door for new entrants to the market. Market participants know this as the risk of substitution. Established players need to be aware that their current competitors may not be their most dangerous competitors of tomorrow. As for mobility-as-a-service, the biggest existing industry at risk of substitution is the car industry. It may not be clear yet whether the grand total of all driven vehicle-miles will increase or decrease with the availability of self-driving cars and the service oriented precursors of this future. But one thing is certain: the buyers of cars will be different. Instead of marketing and selling to consumers, car manufacturers will need to sell to service providers. Marketing to consumers may still be important depending on how the business model and competitive landscape among service providers will look. Providers may compete on the types of vehicles they use and hence a consumer’s image of a certain brand of car may still matter. But nonetheless, the competition to be fought by car makers will be different and new entrants who may be faster to understand and adopt to the new requirements may be able to out-do established players. It is also conceivable that car manufacturer themselves will stop selling cars and provide services based on them instead. This would very closely resemble GE’s Power by the Hour, and would bring along the same benefits for car makers as it did for GE.

While almost all car makers seem to be preparing for the self-driving future, with new autonomous technology being announced on an almost monthly basis by now, it is unclear how many of them have taken note of the larger trend of mobility-as-a-service. Daimler is a positive example. Their recent acquisition of both a car sharing service (Car2Go) as well as a trip planning smartphone app (RideScout), is indicative of an understanding of what the components to a successful mobility-as-a-service strategy of the mobility market of the future will be. On the aggressor side, i.e., the possible source for substitution, service companies like Uber and Lyft, Bridj, and RidePal seem to be in pole position to occupy lucrative market positions in this future market. What all of these companies have in common is an enabler for disruption that we have seen unleash its power in many other industries before: software. As Marc Andreessen says, “software eats the world”, and the mobility market and the car industry are not going to be an exception from that.

It would be short sighted, however, to think that the role of software in this transformation from a products oriented market to a services market would be limited to just enabling autonomous car technology. It goes well beyond that. Because self-driving technology is only one trend that is happening. Another one is, of course, the connected consumer, whose smartphone can continuously communicate with the cloud and hence any number of new services. This level of real-time information about your customers will allow new mobility-as-a-service providers to better target their service, optimize their fleets of vehicles in real-time, allow for new forms of ride-sharing that will ease congestion and lower the cost of transportation for riders, and last but not least provide urban planning departments with unprecedented data to base their decision on.

Opportunity

The resulting opportunity for urban transit optimization is not be underestimated, nor its potential for reducing energy consumption and slow climate change. In 2013, 25% of the energy consumed in the US, was used for transportation of goods and people [https://www.eia.gov/totalenergy/data/monthly/pdf/mer.pdf]. There is significant potential to reduce this energy consumption by merging trips into larger vehicles in real-time, given information about current demand [https://blogs.parc.com/blog/2014/11/the-potential-of-ridesharing-to-ease-congestion/]. Different types of car-pooling, including dynamic, real-time versions, have been tried many times, by many different organizations, entities and geographic regions, and with different mechanisms of encouraging this sustainable behavior. But there hasn’t yet been a huge success for it. The reasons for why it doesn’t usually work in practice have been studies, too. One of the most commonly stated obstacles is the flexibility and reliability of using such a service instead of driving one’s own car. Yet, public transit is a form of ride sharing, and if we measure success in terms of people moved per day, it is hugely successful. Why is that? Perhaps because the business model is different: Trains and buses will run, even if you are the only rider one on them, or even when they are empty. There are other factors as well, such as the anonymity and unstated understanding that riders don’t need to talk to each other, even when sharing a tight space. This, ironically, even seems to outweigh the need for personal space sometimes stated when asked about reasons for not car-pooling: in rush hour you may be literally bouncing against and touching strangers while standing on a subway train.

Seeing ride-sharing from the perspective of public transit, and envisioning the new means of scheduling vehicles on-demand and plotting their routes based on the specific needs of the riders assigned to it, hence doesn’t seem so far fetched and out of the question anymore, and companies like Bridj [https://bridj.com] are already going in this direction. Just like in public transit, reliability can be easily accomplished by more money. For instance, if there is no car-pool available for your requested ride, a personal vehicle may come and pick you up. With this kind of guarantee, travelers can be entices to participate in a service and thus generate the critical mass at which synergies can be exploited, via more sharing — potentially significantly reducing the environmental footprint and energy used. Remember, users don’t care about the product, they care about the experience, i.e., getting from A to B while meeting specific time constraints and a certain level of quality. Hence, it all comes down to negotiating and satisfying a service level agreement with the traveler. Better, more reliable service costs more. Accepting less reliable service and perhaps having to wait longer for a ride at times will be cheaper subscription, just like public transit is. All of a sudden, the way mobility is sold and consumed looks a lot like the way computational resources are sold and consumed in the cloud: as a service.

Overall, mobility-as-a-service will be a good thing for most travelers as well as the planet. Services are a lot easier to optimize than several million peoples’ individual behaviors, and since cost and environmental impact are actually correlated in transportation, service providers will have the financial incentive to do this optimization in a way that will mostly benefit the environment. This new ability to optimize is due to a less local and more global view of demand and supply, and due to the fact that the control of the service can be exercised by software. This software may initially resemble the computer-aided dispatch software many para-transit providers already use, but it will scale to much larger fleets of vehicles and trip requests, consider various kinds of personal preferences and constraints, and take into account the full spectrum of possible vehicle types (cars, mini-vans, buses, etc.). On top of that initial layer of low-level service-control and request software there may be more layers of software such as search engines, recommendation engines, various kinds of visualizations, and even games (Scotland Yard [https://en.wikipedia.org/wiki/Scotland_Yard_(board_game)] anyone?).

The beauty of software is that it is extremely cheap to develop compared to hardware, it can be collaboratively designed, created and improved, and it can be tested and verified. As a result, domains that become software driven experience a boost in innovation as there are so many interesting algorithms that have already demonstrated value in other domains that can now be readily applied to this new domain at very low cost and often with comparable value. To maximize the impact of this new source of innovation in the mobility domain, data exchange platforms and services should be designed with open APIS, in order to invite and enable the open-source community to develop innovative new algorithms for this new platform.

Software may eat the world, but not the planet. In fact, the opposite may be true in mobility: software may help us stop eating up the planet’s resources and instead help us use them more intelligently.