For Tesla, Autonomous Driving Changes Everything

| About: Tesla Motors (TSLA)

Summary

The automotive industry today consists of a low margin hardware sales plus several very high margin recurring revenue streams: fuel, repair & maintenance, insurance and entertainment.

Tesla has already disrupted the first two of these.

Autonomous driving will disrupt the last three, first by greatly reducing collision repair.

Then by taking control of the driving, so drivers no longer need to be insured.

And then by turning the car into a media center, where they control the media.

Over the last 100 years, the automotive industry has managed to give away all of the profitable revenue streams associated with driving, keeping only the very low margin, very competitive business of building cars for themselves. Here are the examples:

  • Fuel: The oil industry is a $1.4 trillion industry, the huge oil companies are some of the biggest companies in the world, and are very profitable, especially in up markets.
  • Parts, repair and maintenance: These three categories make up over $300 billion in ongoing revenues.
  • Insurance: Auto insurance is a $200 billion annual market.
  • Entertainment: Today, the automotive entertainment industry is shared by tablets, mobile phones and radio, and is therefore very difficult to measure the size of the market that occurs inside the automobile.

How is Tesla (NASDAQ:TSLA) Disrupting These Industries?

With their announcement yesterday, Tesla is now in the process of disrupting every one of these industries, and they will almost certainly be followed by the likes of Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Fisker, Faraday Future, and others, to the point where today's household names of Exxon Mobil (NYSE:XOM), Allstate, and others may disappear. How are they doing it? Let's tackle them one-by-one:

Fuel

This one is relatively easy. A few years ago, I owned a Lincoln Navigator that garnered about 12 miles to the gallon. At today's fuel prices, that would cost me about $0.20 to drive a mile. Driving to a store 12 miles away and back was a $5 adventure. With a Tesla, one can get 3 miles per kWh, and with average prices for energy, the cost for that same 25 mile round trip to the store is $0.75, or a 85% reduction in ongoing costs. If the car lasts for 200,000 miles, the total savings is $34,000. Yes, you pay more for the battery, but assuming that the Tesla III has similar electricity mileage or better, the car is free, compared to my old Navigator, at least. If you were to compare the Tesla III to a comparable vehicle, say a BMW 3-series, the savings might be 1/2, but still a sizeable savings for a $35,000 car.

The net result: within two car generations, or 15 years, the gas companies disappear into tiny husks of what they are today, going the way of buggy whips.

Parts, Repair and Maintenance

Today, I take my cars to North Hills Automotive to get them fixed or maintained. They overcharge me, do more than is required, but the cars run well and my skills at tuning carburetors and replacing timing belts are a little dated. Others take their cars to the independent dealer networks, where they pay even more.

But what do Tesla owners do? Does an independent dealer fix the car? No, Tesla fixes the car. Most of the time, they come to you. If they can't fix it on the spot, they leave you with another Tesla while they fix yours. Nice touch. Another thing to consider is that with so many fewer moving parts, the amount spent on repair will be minimal. Consider this, when I was taking my tour of the Tesla factory, the guide pointed to a robot moving a pallet of motors and said, "Those motors are rated for one million miles, but they will probably last for three times that." Think of it: how many times do you need to rebuild an engine to get 3,000,000 miles out of it. And the Tesla does not have anything like the common automatic transmission that is in almost every other vehicle. In my long string of Fords, I expected to rebuild the transmission every 125,000 miles. That's a lot of maintenance!

With yesterday's announcement, they are going to further destroy this segment, buy reducing the number of collisions on the road.

Summary: Within two car cycles (15 years), this segment disappears down to a husk of what it is today, going the way of horse shoes and black smiths.

Auto Insurance

There are two ways that the insurance industry will be disrupted:

  • Safer Cars: First, the cars driven by computers will be safer, getting into far fewer accidents. As the artificial intelligence agents get smarter and smarter, the accidents will get fewer and fewer, and the damage done during each accident will be less and less.
  • Business Model: Today, the driver takes responsibility for his/her actions while driving, and carries insurance to cover damages. When the car is driven by a computer, the programmer will likely have to take responsibility for the actions. So the car will be insured by Tesla, who will update the programming with newer and smarter algorithms every so often. But slowly, the need for insurance will disappear as those who need to be insured also disappear.

In fact, KPMG, in a report entitled "Marketplace of Change: Automobile Insurance in the Era of Autonomous Vehicles" predicts that the number of accidents will reduce by 80% in the next 25 years, and that the auto industry will drop by 60%. This report was written over a year ago. My guess is they would accelerate the timing if they knew vehicles would be available now.

Entertainment

The entertainment industry is a little bit more tricky, but here are the things to consider:

  • Advertisers pay for eyeballs, especially on a screen.
  • There are big dollars spent also on subscriptions--think HBO and Netflix (NASDAQ:NFLX).
  • The passengers of autonomous vehicles are a captive audience. You can be certain they will be surrounded by screens, likely interactive. They will not have much else to do, since they won't be driving.
  • The auto company will own the access to these screens, and these eyeballs.

My bet is that this is where the big money is in the world with autonomous vehicles. What will we do on the ride to grandma's house? Sleep? Yes, sure, if it is a long trip. Watch movies? Yes, for sure, and HBO and Netflix and Amazon (NASDAQ:AMZN) Originals/Prime and everything else, also. Read magazines? Yes, interactive ones. Get some work done? Yes, for some of us. Youtube? Of course. My seven year old can't get enough of watching other people play Minecraft. Play video games? Yes, and likely interactive ones over the net.

The company who controls this will make lots of money. Lots and lots of money. This is why Apple, Google, and everyone else wants to make a car, or at least the software for the car. So they can control who has access to you, the consumer.

And Tesla just disrupted everyone's plans, but hitting the road first with an autonomous vehicle, and doing it with their own operating system. You can bet they will be the first ones to drop the driver controls--steering wheel, brake pedals, and the like. You can also be the traditional auto companies will resist this for as long as they can, so they can catch up and launch inferior versions.

Yes, Tesla is overpriced today. But Amazon was overpriced in 1996, also. Microsoft was overpriced in 1986. And just look at what happened. From where I stand, the same is inevitable for Tesla. They are disrupting over $2 trillion of industries that are not even their own--this is independent of the automotive industry.

Disclosure: I am/we are long TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.