Disclaimer: This article was written in the week of Tesla's introduction of the autopilot feature. It assumed that Tesla implemented 2-part pricing for that feature; $2,500 for the hardware and another $3,000 for software activation. This has been assumed by other Tesla customers too due to misleading information on Tesla's homepage. It turns out that Tesla did not take advantage of 2-part pricing this time. Thus, the article can be considered food for thought: what advantages 2-part pricing could have had and how the future of automotive pricing might still look like.
Recently Tesla introduced a beta version of an autopilot. I could spend hours watching YouTube videos of proud Tesla owners showing off their self-driving ModelS. While, Tesla is known for adding new features to their car, the autopilot is much more than a simple product innovation. It introduces a new pricing scheme to the automotive world and changes Tesla’s business model.
Ordering a ModelS with the autopilot feature costs $2,500 upfront. That seems like a fair price for getting an autopilot. Tesla owners would probably agree: >80% new Tesla owners have ordered that feature in Q2 and Q3 of 2015 (based on EV-analyst insider information). With Tesla selling about 13 000 cars in those 6 months it means at least 10,400 cars are driving around with the autopilot feature; in the US alone.
Data mining – high take rates on autopilot feature
The first mission of the autopilot hardware is to feed Tesla’s software engineers with driving data to improve their maps and feed their machine learning algorithms. Tesla is getting high quality data as it comes from cars they build themselves. Every move of the car and passanger can be tracked with sensors and camera. It allows for machine learning directly from human drivers.
How is that different from what Google is doing with their self-driving car project?
Google realized that building their own car would give them the type and quality of data needed to improve their autonomous features. What differentiates Tesla is that they are a car manufacturer and thus have a lot of cars on the streets driving daily. Cars somebody paid for! 10,400 Teslas would drive 1M miles in about 4 days. That is as much as all Google self-driving cars drove combined in 6 years.
Aftersales revenue – the software aspect
Not every owner has activated or will be activating the autopilot feature. It costs $3,000 to do so. While data generation doesn’t depend on that activation, the revenue does. However, once that feature starts working safely and reliably, I think it is safe to assume that close to all customers will activate it.
Lets assume 10,000 of those 10,400 Tesla owners who bought a ModelS with autopilot in the last 6 months will activate it sometime in the near future. That results in $104M in aftermarket sales for Tesla by selling software for Q2 and Q3 of 2015. This could project to $156M in 2015 (Autopilot was introduce beginning Q2 2015).
If Tesla hits its targets by selling 350,000 Model 3 in 2020, that number could grow to >$1B for software aftersales. Just as a comparison, last year Tesla stated an EBITDA of $11.44M.
And the potential doesn’t end here. Tesla could offer more paid services such as add-ons to the autopilot, multiple driving modes for the autopilot (from aggressive to chill), or even allow pillow to “record their own macros” like in excel.
Customer segmentation – attractive for younger generations
~35% of Tesla customers are younger than 45. Only ~8% of them belong to GenY. While GenY certainly has a lower willingness to pay for cars, they also have different preferences for technology and connectivity. With the shared economy rising, autopilot and self-driving features combines with a less expensive Model 3 have the potential to open the currently untapped GenY customer segment.
Tesla Motors is on its way to become one of the three largest software firms in Silicon Valley software. Yes, I said software. It is currently the only firm that uses software practices in the automotive market such as rapid and continues innovation, A/B testing and bringing minimum viable products to the market. As the company creates more barriers to entry and higher differentiation from traditional OEMs, they also undergo a transition from a low margin automotive business into becoming a high margin tech business (with sky-high valuations).
Stay charged everybody!
Sini Ninkovic analyzes the EV market and its customers since 2012. He helped bringing BMW's i3 and i8 to market and currently works as Product Planner for Lucid Motors.