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Waymo's Race to Catch Up By Jeff Brown, Editor, The Bleeding Edge 
The timing isn’t a coincidence. Alphabet (Google) has just thrown down the gauntlet. And it’s no wonder… Tesla has made ridiculous progress on autonomous driving over the last 3–4 months – culminating in the product announcements for the Cybercab and Robovan on October 10… Now Waymo, a subsidiary of Alphabet, has announced that it just raised a $5.6 billion Series C funding round. 
Hyundai IONIQ 5 Integrated with Waymo Driver | Source: Waymo The lead investor, not surprisingly, was Alphabet (Google). Andreessen Horowitz participated, as it had done before in the Series A and Series B rounds. Yet the other investors were later-stage private equity investors like Silver Lake, Tiger Global, Fidelity, and T. Rowe Price. Usually, when we see names like Fidelity and T. Rowe Price – both big names in mutual funds – it means that there is a likely initial public offering (IPO) on the horizon. But that’s not why Waymo needed the money. Waymo’s Fundamental Problems Waymo has two major problems. The first is that it is bleeding cash, and it needs funding. Waymo falls under Alphabet’s “Other Bets” reporting segment for the company. This reporting segment includes GFiber, Calico, CapitalG, Verily, Wing, and other smaller initiatives. I believe that Waymo is by far the largest expense segment of “Other Bets,” as Google significantly scaled back its GFiber initiative in 2016. The Other Bets segment brought in $365 million in the second quarter of this year and lost $1.1 billion in operating income. Worth noting is that the revenues in Other Bets are primarily driven by the sale of healthcare-related services through Verily and internet services through GFiber. In other words, Waymo’s revenues aren’t worth mentioning. And Waymo has burnt through billions in cash. (It’s worth noting that Waymo had raised $5.5 billion through the summer of 2021.) Let’s compare this to Tesla. It just announced last week that it recognized $326 million in revenue from full self-driving (FSD) software in its third quarter. Annualized, that’s at least $1.3 billion. While we don’t know what costs are attributed to FSD research and development, we do know that Tesla is very profitable, generating $2.21 billion in net income and $2.74 billion in free cash flow in the same quarter. The lack of profitability is not Waymo’s biggest issue, though… Waymo’s second problem is that its self-driving system doesn’t scale efficiently or cheaply. Waymo is currently operational only in geofenced areas in Los Angeles, San Francisco (where it launched in 2009), and Phoenix. To launch in a new geofenced area, Waymo has to drive every street and collect data on those streets down to centimeter-level resolution. Extensive testing is needed with heavy involvement from Waymo staff, including safety drivers behind the steering wheels. Because of this, rollouts to new geofenced areas in new cities are slow and expensive. Compare this to Telsa’s latest FSD. It is working on all of its vehicles in every state, in every city, with remarkable performance. No street needs to be mapped in advance. Tesla safety drivers don’t need to be deployed in advance of turning FSD on. It just works, and every new Tesla that drives on any road is collecting self-driving data for every other Tesla out there – data that is used to improve overall FSD performance on every single Tesla, every single week. Tesla’s neural network-based FSD software is like a hive mind. Everything learned in the real world from nearly 7 million Teslas in the field is fed back to Tesla’s Dojo supercomputer for training. And with each new version of the improved neural network, the latest software version gets pushed out into the field to upgrade each of those Teslas. A single lesson learned from an extremely rare situation on the roads becomes common knowledge to every Tesla. Waymo has fewer than 1,000 cars. It simply doesn’t have the scale to collect enough data for unstructured autonomous driving, hence the time-consuming and arduous mapping and geofencing. These two reasons are why Waymo raised $5.6 billion. It needs the money to move faster. | Recommended Link | | | | CHAOS WARNING Market Wizard Larry Benedict predicted the 2020 crash. The 2022 crash. And delivered $95 million to his hedge fund clients in 2008. Now he believes that just two days after the election, a rare event is going to trigger a chaos period that's only happened four other times in the past forty years. On Wednesday, October 30th at 8 p.m. ET, he's revealing how to prepare, and potentially even prosper. | | | -- | Worry at Waymo It will be very expensive and time-consuming to scale Waymo due to its technology architecture and lack of real-world data. It’s not capable of unstructured autonomous driving like Tesla’s FSD. And it desperately wants to dominate the autonomous driving operating system (OS) market in the automotive industry, just like it did in the mobile phone industry with Android OS. This is a massive raise for Waymo. For context, it is more than all previous funding rounds combined. The last public valuation from an institutional round was back in 2020 at $30 billion. Since then, some secondary sales have happened at a $50 billion valuation. So it would be a reasonable assumption that this last round happened above that. If I had to guess, I’d say between $60–70 billion. These numbers might seem impressive. $5.6 billion at a $60-70 billion valuation. They might give us the impression that things are going really well for Waymo. But my gut tells me they’re not. Alphabet isn’t throwing down the gauntlet from a position of strength... Alphabet is in panic mode. It’s trying to signal to the market with the largess of its investment that it’s all good. It’s doubling down. In fact, Alphabet has committed to spend as much as $5 billion every year on Waymo in an effort to catch up with Tesla. I’d bet just about anything that Alphabet was the majority of the Series C round. Pretending That Tesla FSD Doesn’t Exist The media rarely writes about this. They often fail, intentionally, to mention Tesla’s FSD at all. It’s true that Waymo is the largest autonomous ride-hailing service in the U.S. right now. It provides around 100,000 paid weekly trips in its geofenced locations. Waymo also likes to boast of its 25 million autonomous miles driven to date, with its fleet of fewer than 1,000 Waymo vehicles. And yet, as we learned in Thursday’s The Bleeding Edge – The Advent of Autonomy, Tesla vehicles have already driven more than 2 billion miles in full self-driving mode. And that’s on top of 9 billion miles driven on Autopilot. 
Source: Tesla 2 billion miles compared to 25 million. Waymo’s vehicles have driven a mere 1.25% of the miles that Teslas have in autonomous mode. If we’ve learned anything in the last two years about artificial intelligence (AI), it’s that massive amounts of high-quality data are the most critical input for improving the performance of a neural network. We work with the technology ourselves here at Brownstone Research. We’ve seen the difference from our own experience, and it’s even more true for autonomous driving technology. Tesla may not be generating revenue from a commercialized, autonomous ride-hailing service… yet. Its revenues from autonomous driving are simply coming from licensing revenues, either through a one-time license fee to use FSD or through convenient monthly subscription fees. But that will change next year. Turned On Next year, Tesla will “turn on” its ride-hailing application. It will work in a very similar way to Uber or Lyft in Texas, California, and probably a couple of other states, starting in 2025. Tesla owners who have FSD installed will be able to opt-in their cars to the network so that they can be “hailed” by others looking for a ride. The cars will go out and earn money for the owners, when they would otherwise be parked in a garage or on a city curb somewhere. And here’s the kicker… When Tesla turns on its ride-hailing service in a state, it won’t be in some small, geofenced area. It will be for the entire state. No special mapping is required. The service will be turned on like a light switch – something that is impossible for Waymo to do. Imagine that… Next year, we will be walking down a sidewalk to pick up a coffee, and a passenger-less Tesla parked on the curb will just magically turn on. The Tesla will exit its parking spot and drive to some destination a few minutes away. It will pull up right to the feet of a ready-to-ride passenger, who summoned the car from his mobile app. And that’s just the beginning…. When Tesla gets to scaled production with the Cybercab in 2026, the entire market will be transformed. Tesla will have the ability to manufacture 2 million Cybercabs a year… And they’ll hit the market at a very cheap price point of $25,000. 
Source: Tesla Waymo is in trouble. Alphabet is the dominant operation system for smartphones globally, which feeds its advertising business model. Yet it ceded more than 50% of the U.S. market share to Apple for smartphones because it was late. It doesn’t want to have the same thing happen in the automotive market. Just Another Consumer Device… on Wheels “Smart cars” are a great source for data collection. The average U.S. driver spends about 100 minutes a day in a car. And in the world of autonomous vehicles where drivers no longer have to drive, a car is just another consumer device, like a PC or phone. Passengers can be served up advertisements, and their media consumption while riding can be surveilled and monetized. This is worth hundreds of billions of dollars in advertising revenue over time. Alphabet wants to dominate that. Advertising revenue is Alphabet’s bread and butter, its meat and potatoes. In Waymo’s funding press release, it also stated that it would use the funds to “continue advancing the Waymo Driver – our AI-powered autonomous driving system – to support a variety of business applications over time.” This is a reference to the same product strategy Alphabet uses for smartphones. Alphabet uses contract manufacturers to produce Google smartphones to seed the market and act as reference designs for other manufacturers. Then other manufacturers take the Android OS and reference designs license – free in exchange for allowing Google to collect data and surveil users. We explored this previously in The Bleeding Edge – Tesla’s Biggest Competitor. I explained how Alphabet is solving for advertising with its autonomous cars, but it’s not solving for autonomy. Here’s a bit of what I wrote for added context: Alphabet/Waymo is developing an autonomous operating system for cars that it eventually hopes to license to car manufacturers and robotaxi operators. Part of those future licensing agreements will be the right to both monitor and collect data on the passengers who ride in those cars using Alphabet/Waymo’s software. Naturally, Alphabet wants as many cars as possible to use its software so that it can capture as much data as possible about consumers. That’s how it will monetize its investment in self-driving software: by selling access to that data to advertisers. In other words, Alphabet will make Waymo’s technology available to other auto manufacturers that compete with Tesla, delivery vehicles, and even semi-trucks for the same purpose. But it must move very quickly. The reality is that time is very short for Alphabet and Waymo. Tesla has almost 7 million vehicles in the field that can be turned on for ride-hailing services, with 35,000 more hitting the roads every week. And by the time the Cybercab puts its rubber to the road in less than 24 months, all bets are off. Tesla will be dominating the market with autonomous ride-hailing services. Regards, Jeff | 
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