As soon as we drive our new car out of the showroom, the vehicle’s value starts diminishing. However, that does not happen for software running on our smartphone. Like the car, the software does not wear out. Moreover, over-the-air software updates keep improving the value of the software. Furthermore, downloading each app keeps increasing the utility of our smartphone. Instead of keep suffering from the erosion of utility, the perceived value of our smartphone keeps enhancing. This is the power of software. What about we adopt this software business model for automobiles?
Instead of improving mechanical components, let’s delegate roles of them to the software. Furthermore, we keep adding software-centric features, like the way smartphone leader Apple has been doing. And it does not stop once the car leaves the factory. Instead, it continues for a never-ending period. Can forerunner leverage this software business model for automobiles to change the global four trillion-dollar automobile industry’s competitive landscape? This is the question many game-changers are not only contemplating, but some have also started to roll out. How far it can transform the competition space is bewildering many of us. The unfolding possibility is also fueling speculation and creating a stock market bubble. Some are terming it a humble beginning of a long journey of the uprising.
Software powers monopolistic market power accumulation through economies of scale, scope, and externality
Due to the zero cost of copying, the software offers a high scale advantage. By leveraging this value, Microsoft emerged as the global monopoly in the PC software market. Furthermore, the scope of downloading apps, often provided by the 3rd party, creates an externality effect forming the demand side scale advantage. In fact, the iPhone gains significant traction out of Apple’s app store. The combination of these two vital features opens a price-setting monopolization opportunity. Moreover, by offering core software assets as part of the automobile’s operating system, significant economies of scope effect could be leveraged as well. How far it’s feasible for turning automobiles into smartphone-like products for monopolizing the global automobile industry, like the way Apple has done with the iPhone, is overwhelming indeed.
Envisioned future—opening software business model for automobiles
The journey begins with changing the mechanical engine and fuel tank with battery, motors and power electronics. Most of the 2000+ moving mechanical parts are made redundant. In addition to traffic-aware cruise controls, designers will delegate many roles of driving to the software. It begins with lane centering, self-parking, automatic lane changes to semi-autonomous navigation on limited-access freeways. The list goes on with the ability to summon the car from a garage or parking spot. Over time, the target is to delegate the whole driving role to the software.
Freeing from driving, passengers will have an abundance of time to concentrate on additional tasks. This will open the opportunity of adding many other software-intensive features to the car. Hence, future automobiles will be gadgets like the iPhone. Therefore, the software business model of automobiles opens a new era of the automobile industry. This is an era of software base value creation, and perhaps monopolization, indeed.
Lesson from Apple’s iPhone success to assess the power of game-changing software business model of automobiles
Apple turned the business of mobile phone handsets from designing, making and selling hardware into packaging software in the shell of hardware. Apple kept releasing over-the-air software updates of iOS for keeping our iPhone state-of-the-art. Furthermore, the downloading of each app keeps adding additional value to this wonderful gadget.
However, within one year of the iPhone release in 2007, the iPhone’s sale came down to virtually zero. Why could not Apple keep increasing the iPhone’s perceived value by offering additional software updates and making more apps available for the download? Apple had to release the better version for arresting the erosion of the sale. The subsequent better versions also faced the rapid drop of sale after the initial spike. Since then, Apple has been releasing successive better versions of the physical device to keep sustaining the market position of this mighty software-intensive Steve’s magical innovation. Hence, software updates and apps are not enough.
In addition to benefiting from the positive externality effects like 3rd party apps and the up-gradation of cellular data networks, the iPhone was facing competition in the form of replication, imitation, and innovation. In addition to a strong patent barrier, Apple fiercely kept using over-the-air software updates and 3rd party app supply to counter the drifting of willingness to pay. Nevertheless, Apple was forced to keep releasing successive better versions. Unfolding advanced features included improved battery, enhanced cameras, larger screen size, and most importantly, a more aesthetically pleasing look. Moreover, used iPhone started trading at a fraction of the price users paid for, although they ran the latest version of iOS and Apps.
Likely future of software business model of automobiles
There is no denial that automobiles will be having an increasing role of software in the connected world. Over-the-air software updates will keep increasing the value of the software. Therefore, as far as software updates are concerned, the car will remain state-of-the-art. Moreover, apps downloading options will also keep improving software-centric features. However, unlike typical software applications, many of those newly downloaded apps will also demand required hardware features, which could be not be offloaded over-the-air.
Among many other hardware features, the battery pack is the critical one. On the one hand, the battery pack will be aging with each cycle of charging and discharging. Moreover, increasingly better versions of battery at lower cost will start surfacing in the market. Hence, customers will be asking for a change. Furthermore, designers will keep updating the aesthetic aspect of the physical shape of the cars’ outer surface and interior. Subsequently, the perceived value of the older model will keep decreasing. Hence, incremental physical design advancement could not be compensated with over-the-air software updates, let alone endlessly retaining the value. Moreover, instead of retaining the value, the used version will be sold at a deep discount like used iPhones.
People change cars like iPhone for hardware updates
Most of the people change the car for the purpose of look, touch, and feel. Hence, the competition will be taking advantage of this physical aspect of the car. In the absence of a patent barrier, which will be preventing the competition to keep also releasing better versions? How will we counter it with an over-the-air software update? Does it mean that even the forerunner with the magical power of software like the iPhone will be forced to keep releasing better versions of the physical car? Hence, is it fair to say that future software-intensive cars will retain the value due to software updates is an unsubstantiated proposition?
Autonomous driving software– release first, fix the bug latter does not work
Let’s now look into the autonomous driving module. Unlike other software applications, the half-backed product will not be allowed to release. Let’s release first, fix the bug latter with an over-the-air-update strategy will not work. The strategy which worked for Apple or Microsoft will rather work highly in against the automakers. Let’s assume that if Microsoft were penalized $1 for each blue screen death of Windows or crash of Microsoft office, Microsoft could have been history long before.
Unlike other software applications, an autonomous driving module cannot pursue the strategy to keep fixing bugs after rolling out. Moreover, over-the-air software updates for fixing or updating an autonomous module will also demand changing the expensive sensing and computing systems. In certain cases, a couple of accidents may lead to parking the whole fleet and facing lawsuits. Let’s do not overlook the lesson from two accidents faced by Boeing 737 Max, presumably due to software errors.
Furthermore, autonomous driving software is showing oscillation after reaching a disengagement frequency of five over 1000 km driving. On the other hand, there is a weakness in the science of the underlying deep learning technology.
Likely unfolding future of software business model for automobiles
Despite the increasing role of software in automobiles, software update or apps download alone will not retain the cars’ market value. In addition to rapidly changing core technology battery, the emergence of aesthetically pleasant designs will keep demanding the release of successive better versions. Moreover, the safety issue of the autonomous module does not allow the release of a half-baked version. Furthermore, forerunner cannot prevent other automakers from responding to the competition in the absence of a patent barrier. Despite the large scale, scope, and externality advantages, the software will unlikely make the forerunner winner by monopolizing the market. As opposed to establishing an inimitable winning edge, the software runs the risk of being a commodity.
Due to technology superiority in battery or fuel cell, patent portfolio, uncertainty in the autonomous module, and scale advantage, incumbent automobile makers—who appears to be silent—will likely take over the forerunner’s lead, which will likely create a new lesson for disruptive innovation.