Tesla And The Coming Automotive App Economy

Aug.14.14 | About: Tesla Motors (TSLA)


Car AppStores are coming in 2015 and apps are already an advertising point for some vehicles.

Apps are not only a potential revenue source, they are a differentiator that will allow car customization on a level we have not seen to date.

Tesla is poised to lead the way given that all Tesla vehicles from 2012 onwards are fully updateable now.

Consequently the Tesla Model S is currently a 'smartphone' in a sea of 'feature phones'.

At SXSW this year, I attended the Connected Car Pavilion sponsored by Waggener Edstrom Communications (WE). Auto manufacturers that sponsored the event included Volvo, Hyundai, and Jeep, and presumably because it would be ridiculous to omit the most connected car in the world at the moment, WE asked if a local Tesla (NASDAQ:TSLA) Model S owner would volunteer their car. Being Austin, there were no shortage of responses, and WE allowed one in the tent.

Before I arrived, I assumed the other manufacturers would be showing some advanced prototypes to show where things were going, and indeed in Volvo's case, they attempted to show some of their coming Connected Vehicle Cloud service. Part of it was a canned demo locating a parking space in a town in Sweden, but unfortunately for Volvo, the mobile service at SXSW is under heavy load, and using an entirely web based system under those conditions certainly didn't show it in a good light. The advantage of having a cloud based system is that Volvo can add something on their side and all cars will immediately get it. The disadvantage is, if the web goes away, your system is severely degraded, if it works at all.

Seeing Hyundai there, I had hoped to see a preview of some of the Open Automotive Alliance work, but alas, the car they brought had the current generation system running. The staff there tried to make an excuse that it takes at least three years to design a car, so the system I was looking at was really state of the art 3 years ago. As a Tesla Model S owner, though, this argument doesn't hold much water with me. My car is technically a 2012 and even older than the car that was displayed, but my system runs rings around what Hyundai was showing. You might argue that it is unfair to compare a base $70k car to a Hyundai, but the reality is, it has more to do with the amount of dollars the OEM is willing to allocate into an infotainment system and their vision for what it should do. I can configure a 2015 Hyundai Equus Ultimate right now on the Hyundai website and get the MSRP to $69,700, but even with Blue Link, the system still doesn't approach what Tesla has in my 2012 model.

Why is this? With economies of scale, it seems to me that all of the major OEMs should be able to get the component parts for an infotainment system down to a much cheaper level than Tesla. My opinion is that for many years car manufacturers let their design skills for infotainment wither away and die, while at the same time the number crunchers allocated smaller and smaller amounts of money for what was seen as "just a radio" that could be marked up 400-500% to end consumers. My impression is that car companies would much rather outsource this job to a major supplier like Visteon (NYSE:VC) (also a sponsor of the WE event), and indeed Visteon has an entire group that not only creates the electronics, but the entire interior for OEMs.

This is not to say if Visteon or Delphi (NYSE:DLPH) aren't capable of something better, but they really aren't given the opportunity. This has parallels with cable company DVRs. I once knew someone who designed the user interface for a major cable company DVR that many of you may have had in your home. The UI was terrible and I asked why this was. It wasn't because the team didn't know better or have exposure to what Tivo was delivering. The simple fact is, the cable company allocated something like $1.30 per box for OS/UI. That's it. For $1.30, you get what you pay for, and no wonder my dad who is in his 70s couldn't figure out how to use it, and we dumped it for another Tivo the first opportunity we got. Just as the cable company DVR is the lens through which most of their customers view their service, so is the infotainment system of a car. It can make or break your experience. Early Fisker owners liked the car, but struggled with infotainment. Some Ford owners even went as far as to sue Ford over some of the MyFord Touch flaws.

By contrast, Tesla appears to have seen everything that was coming and just did it right. Shockingly right. The day the first Model S shipped in 2012 is the day the other car manufacturers saw just how far behind they were in the infotainment space--at least 5 years behind if not a bit more by my reckoning. I can envision hastily called meetings at OEMs with shoe banging asking why they didn't have a comparable offering. I can also see suppliers emailing PowerPoints around explaining they had proposed similar systems in the past but were shot down for being "too expensive" or "too far outside the mainstream." No one is saying that now and everyone is scrambling, but Tesla's approach may cause some issues. I'll just list a few reasons why catching up may be difficult:

1) Direct Access to the Customer

I used to own a BlackBerry 8820. BlackBerry (NASDAQ:BBRY) had firmware out for it, but AT&T (NYSE:T) wouldn't allow it to be installed. As the owner of the device, this infuriated me. But AT&T was the gatekeeper and I had to live with it. Fortunately Apple (NASDAQ:AAPL) came along and wrested control of the user experience away from the carriers and back with the handset makers where it belongs. Car dealers traditionally have been the gatekeepers for access to end customers. When Prius had a recall earlier this year that required 713k vehicles in North America to return to the dealers for a software update, dealers benefited. In addition to receiving payment from Toyota for each vehicle upgraded, no doubt they talked more than a few owners into oil changes, new tires, and a variety of other fixes while they were there. By contrast, Tesla can update all vehicles remotely with a touch of a button and has pushed both new features and safety updates as part of those remote upgrades. Dealers are not going to be happy with being disintermediated and allowing direct access to their customers, but manufacturers are going to need direct access to customers to get the most bang for the buck out of future infotainment systems.

2) Conservative Lawyers

Many cars have disclaimer screens that you have to press while starting the infotainment system reminding you that it is unsafe to use the system while driving. They could then leave your use of the system to your personal responsibility; however, many OEMs use technical means to go much further. For instance, my previous car was a Lexus. While the car is moving, it is not possible to set the navigation destination. (If you have Lexus Enform, you can now do this using a human via Destination Assist, but you still can't type it in yourself.) What always bugged me about this is even if I had a passenger, and the car knew I had a passenger because of the air bag sensor, the passenger still couldn't set the destination. Tesla's feature set brings even more legal issues with it because in addition to infotainment features like navigation, the firmware itself can directly affect the operation of the vehicle. This means useful new features like "creep" and "hill assist" can arrive automatically, but features can also be taken away (temporarily in the case of automatic lowering at highway speed for cars with air suspension), and core components of the car like steering and braking can be modified. This type of capability will no doubt give some lawyers heartburn, and I predict some companies will not be able to deploy features they would like due to internal legal pressure.

Where We Are Now

I started an overview of the current systems available today from the OEMs, but it is too long for inclusion here. Judging from most rental cars I get, probably the less said, the better. I'm not sure all companies are going in the right direction, either. Take SAP and BMW Bring you the Connected Car. First, if I'm thinking of a company that brings state of the art UI design, SAP is not it. Second, it is clear from this video that SAP's view of a "connected car" is how to more efficiently send you offers. Does this make my life more "enjoyable", as the narrator states? Absolutely not.

All cars at the moment are essentially 'feature phones' with the Tesla Model S being the only 'smartphone' out there at the moment. Tesla is now is where Apple iPhone was at v1--there were apps, but there wasn't an AppStore, and the only apps you could get were from Apple. That changed for Apple in 2008 and few would buy a phone or tablet today that couldn't install apps. Tesla aims to make the same change in early 2015.

Where We Are Going

Tesla will certainly not be the only car company with apps, and car companies today are even advertising some already like Pandora. Systems like Ford SYNC AppLink even support limited updating for some older vehicles. But Tesla's capabilities go far beyond other cars at the moment and perhaps the best way to explain it is by segmenting the capabilities into classes:

Class 1 - Media and App Projection Most cars will arrive with the media system in place and that's how it will be for the life of the car. You might have a few apps in place and the dealer might be able to flash an update to you when your car is in for service. To mitigate this situation, App Projection systems like Apple CarPlay and Google's Open Automotive Alliance is a 'safe' way to provide more features from your phone without having to have the infotainment system be buried 'too deep' into the car.
Class 2 - User Interface This capability include UI modification like changing the radio buttons, applying a skin, or adding new core tabs. Additional items in this class include web browsing, augmented reality, and native device support for third-party hardware like MobilEye, radar detectors, and sound systems.
Class 3 - Remote Access Remote access class include remote vehicle monitoring and functions like unlocking or locking the doors, honking the horn, flashing the lights, or closing the sunroof.
Class 4 - Driving Characteristics and Access to Core Systems Changes to core systems include adjustments to regenerative braking, hill assist, ride height, creep, and events that respect vehicle sleep (reducing battery loss while parked). Additional items include features like automatically raising the windows and closing the sunroof if rain is detected or additional security measures such as requiring a code to start the car in addition to the fob.
Class 5 - Car Sharing Native support for car sharing services like ZipCar and car2go.
Class 6 - Driving and Safety Changes to driving and safety systems could include modifying acceleration characteristics, traction control, and limiting top end speed (perhaps for teen drivers).
Click to enlarge

Since receiving my Tesla Model S in Oct 2012, I have received over the air updates directly from Tesla for all classes of update except for Class 5. By contrast, very few other cars have the ability to be remotely updated by the manufacturer, and most updates require a visit to the dealer if they can be updated at all.

Apps We Will See

Tesla's firmware team has been incredibly busy not only fixing issues with the current car but adding support for new hardware and additional markets (which requires not only language support but support for grid peculiarities and regulatory requirements). That means some features have been slow to arrive for existing customers. What a vibrant AppStore allows is the market to fill the holes that Tesla doesn't have time or resources to address, and that should lead to happier owners. What types of apps are we likely to see? Some are obvious, but if the iPhone AppStore has taught us anything, the apps will be varied, many, and some will be amazing. The app I want is geofenced radio stations. If I drive around Houston, I want to see my favorite stations there. But if I drive to Austin, the stations that show up in my favorites should automatically change to my Austin favorites. The car knows I'm in a geography I've been to before, but currently I have to manually find the station I like again. A minor annoyance, to be sure, but something that could easily be fixed with an app. Below is a small taste of what else we might see.

App Projection If Tesla only supports one system, my guess it will be Google's. But I don't see a reason why Tesla won't have downloadable support for both Apple CarPlay and the Open Automotive Alliance. If they do, it will be another positive for Tesla since it would be extremely annoying to have your phone not be supported because your car uses the other system. (Windows Phone users, don't worry, the Bluetooth connection will still work for you.)
Music Apps I've heard car companies advertising "Pandora-ready" in their car. But why should you be limited to the service the car company made a deal with? Tesla comes with TuneIn and Slacker, but I should be able to add Pandora, iHeartRadio, or my favorite podcast catcher. I'd also like Shazam or SoundHound to be able to tag music I hear when RDS is unavailable.
Third Party Devices I have seen aftermarket MobilEye installations in Tesla vehicles, but unfortunately, it doesn't work with the screen. It should be possible to certify these third-party devices, add drivers, and have them seamlessly integrate into the screens as if they were native hardware. High performance aftermarket sound systems such as those from Reus have to mount volume controls for some parts of the system separately from the parts the screen controls. "Snap in radio replacement" apps should eventually be possible. Additional items could include remote access for cameras, both for your home security system and car mounted dash cams, a front parking cam, and rear facing seats cams for kid monitoring. Third-party parking sensors would also be nice for early customers that took delivery before Tesla had them available as an option. Aftermarket sensor installation isn't bad, but it isn't nearly as good as Tesla's implementation.
Data Access / Reporting The Tesla logs a wealth of data about the car, but it makes very little of that information available to owners despite some really cool maintenance screens currently hidden in a password protected area. Third-party reporting apps could facilitate exporting (perhaps via Wi-Fi or USB) some of that data or at the very least allow nicer graphs showing history, watts per mile, battery temp, and other desired data without giving away Tesla trade secrets. We'll see what Tesla ultimately decides to expose. For me, I'd like to see an app that reads the TPMS system and tells you the status of each tire. Currently if a tire is low, it just tells you that a tire is low, but not which one.
Valet Mode Valet mode should limit acceleration, limit top speed, and alert you via text if the car goes more than a half mile from your location.
Helper Apps At TMC Connect, I asked Steve Jurvetson (who incidentally owns the first Model S off the line) if he could have any app in his car, what would it be, and he responded with a version of a helper app that could access his calendar, knew where he was and how long it would take to get there, and could help take care of various scenarios that pop up. Others have asked for apps that could read texts and allow you to respond via voice without having to take your hands off the wheel, although some will argue this could still lead to distracted driving and might be disallowed depending on what NTHSA decides in this area.
Achievements I agree with Matthew Inman of The Oatmeal, we will probably see achievement systems appear. In addition to individual achievements, perhaps someone will come up with a way to use the car's Wi-Fi capability to create an opt-in ad-hoc network between two cars allowing owners to introduce themselves virtually or exchange stats (miles on the odometer, lowest watts per mile, state of origin, etc.) allowing their owners to play global 'king of the hill' type games.
Fun There have already been some fun and creative Tesla screens built using the native web browsing functionality from clocks to the "Peacemaker" (see the screenshot below). But once the SDK arrives, we could completely reskin the car for the holiday or your favorite movie or sports team. How much would you pay for that? Sure, no doubt we'll see our share of flatulence apps as well, but the first time you see a T-Rex chasing your car in the backup camera with the roar coming out of the speakers and the thump of the feet in the subs, you'll buy it just to scare the carpoolers.

Tesla Peacemaker Package from TeslaTuner.com

Source: TeslaTuner.com

Click to enlarge

For a larger list, see the Tesla Motor Club forum's firmware wishlist.

Revenue Implications

By the end of 2014, there will be roughly 60k Tesla Model S on the road that will be capable of downloading apps once the Tesla AppStore opens. By the end of 2015, that number should at least double to 120k. In a world where people spend thousands of dollars modifying their cars, apps will be yet another way owners can differentiate their rides and customize them to their tastes. While most apps will probably be low cost, I wouldn't be surprised if we see some apps in the $100-300 range. Certainly there will be no shortage of people writing them given the Tesla install base.

One thing automotive AppStores will need, and certainly Tesla's incarnation will be no exception, is extreme curation, and we can assume that Tesla's review model will be much closer to Apple than Google. Why? Because unlike mobile phones, there are significant safety implications to some apps. Not only is NHTSA looking hard at distracted driving (correctly so), apps that have the capability of changing displays or actually changing driving features will need to be checked against a hefty checklist of guidelines often on a country or regional basis. Think of this as Apple App Review on steroids. I've had apps crash on my mobile phone that caused my entire phone to reboot. While you can reboot both your primary and secondary screens on a Tesla while driving with no issue (other than not being able to see your speedometer until the screen returns), it isn't something you'd want happening with any regularity.

Tesla will pay for this by taking a cut of the apps. Apple has a good model here, so I suspect Tesla will take a similar 30% cost of the app and use that money to pay for full time curators. I have well over 100 apps on my phone, but assuming each Tesla owner downloads 5 apps the first year at an average price of $10, that is approximately $6M in revenue in 2015 of which Tesla gets $1.8M. That is enough to pay for 8 or 9 curators with salary and burden. I wouldn't be surprised if Tesla operated this as a revenue neutral area like service, at least initially, but makes decent money on it later as the volume of vehicles out there increases. In Q2 2014 Tesla reported their vehicle margin was 26.9% on a GAAP basis, and it is clear that apps will only increase vehicle margin. Owners will be buying apps for the entire time they own the vehicle (Americans on average tend to keep new vehicles for almost 6 years), and similar to Apple, Tesla could allow transfer of apps from vehicle to vehicle creating a new form of 'lock-in.'

One thing is certain, automotive app prices will be higher than on phones, and this is a new source of automotive revenue that most models currently omit entirely. (Some models factor in telematics, but that has more to do with monthly services provided than the apps themselves.) Tesla is uniquely positioned to lead in this area given that all cars since 2012 have shipped with the ability to be updated, have dedicated 3G and Wi-Fi connections, and have acres of screen real estate to exploit.

What app would you want on your car that you don't have today?

Disclosure: The author is long TSLA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.