The new worst kept secret in tech is that Apple is working on a car. It’s probably pretty much impossible to launch an effort as big as a new car, and keep it all a secret. The news and rumors have people asking, “Why would Apple make a car in the first place?”
For that matter, why is Tesla making a car? They’re certainly not making any money off it. Google is sinking serious energy into their car project as well. If this is a highly competitive market, with so many ways to fail, why are all these companies blowing R&D dollars to get into it?
The answer, in a nutshell: it’s not about the car.
If the future of cars were the same as today, meaning combustion engines, and gears and levers and stick shifts, I do not believe Apple would make a car. It’s not a particularly high margin business, it’s incredibly competitive, and there are numerous legal and governmental hurdles to surpass.
Jean-Louis Gassée broke down many of the logistical challenges Apple will face in order to launch a fledgling car business. He notes, for example, that Apple is a much larger company, with higher profits and margins than Toyota, which is the current worldwide market leader. It seems an awful lot of work to go through just to at best build a business that’s smaller than their current phone business. (Apple has enough buying power, incidentally, that it could buy Toyota at its current market cap – roughly $200B – with cash. A smaller boutique company like BMW would be a cinch for Apple to acquire. If the car itself were the endgame, that would be a much simpler route to the finish line than launching a massive internal skunkworks project.)
Ultimately, Apple might not need Toyota or BMW, because they don’t necessarily need their expertise. That might seem counterintuitive, at first. Let car industry veteran Bob Lutz explain why he thinks so:
When it comes to actually making cars there is no reason to assume that Apple, with no experience, will suddenly do a better job than General Motors, Ford, Volkswagen, Toyota, or Hyundai. So I think this is going to be a gigantic money pit …
Bob Lutz is right, but only within the confines of his lack of imagination. Sure, if Apple had to build a combustion engine car, as we currently think about them, with a bajillion parts and so on, obviously they’re not going to do anything better than GM, Ford, Toyota and so on. The thing is, Apple is not going to build that kind of car. They’re going to build a car powered by a battery, or fuel cell, with far fewer moving parts. It’s going to have less of a focus on performance and optimization and more focus on customer experience. It’s going to be a different beast.
Google’s car effort will give you the answer to the question of why tech companies are getting into the car business: the endgame isn’t gears and levers, it’s autonomous cars powered by software.
Google and Apple are the companies best suited to tackle the software problem. Microsoft might be in with a chance here, and has announced a deal with Volvo to develop autonomous cars. Tesla’s cars already have autonomous capabilities, though their track record as a software company is more unproven. I’d go out on a limb and say that those companies are quite possibly the only ones who could realistically pull off a mass-market autonomous vehicle, at least within the next several years. Current car makers have less software experience, and this is why I think Bob Lutz’s comments are shortsighted.
When you think about the car as software, instead of hardware, this is when it quickly becomes clear why these companies are angling for a place. Toyota can keep cranking out hardware at its paltry 2% margin, but the software companies perhaps see an opportunity to license software at higher margins (in Apple’s case, they may well follow their own ethos of controlling the whole widget, but that remains to be seen). So, the public will probably focus on the hardware, as they do with iPhones and the like, but the software is what has value.
That’s not all, though. There’s something else that happens when cars become autonomous. Think about driving, today. What are you not doing when you’re driving?
- Watching movies and TV
- Chatting, Facebooking, Instagramming (unless you don’t care about safety)
- Playing video games
This, I believe, is where Apple and Google see the real opportunity. If people no longer have to drive, they become more like urban commuters, except in their own semi-private space. Which is to say, they have free time, and they are essentially held captive for the duration of their journey. Or, to look at it in a more basic way: you are sitting in a semi-private moving room with its own screen.
Imagine you’ve told the car’s computer to drive you from Boston to New York with a stop at a Chipotle near Hartford for some lunch. It knows you have 4-5 hours of idle time. So why not recommend a movie? Why not send in that burrito order automatically (and charge you for it with ApplePay) ten minutes before arriving so it’s ready when you arrive? If the car knows you have a conference call scheduled along the way, it can remind you 20 minutes ahead and recommend a stop for a bathroom break now. If you have some time to kill, or are in unfamiliar territory on vacation, how about telling the car to take you on the most scenic route, let you know when there are good spots to take photos and automatically recommend a restaurant people have rated highly along the way? (Or if delivery drones become a reality, maybe that Chipotle burrito order can be delivered straight to a scenic rest stop on the side of the road, so you can enjoy a piping hot picnic lunch with a view.)
Traveling by car therefore becomes a very different experience. You, as the rider, are a captive consumer the whole time, with little to do but keep giving Apple your money. Instead of driving, you’re video chatting with Mom, working on your novel, browsing for new clothes, videoconferencing with colleagues, binge-watching the last season of Game of Thrones, or playing games against your friends. Once live TV is worked into Apple’s ecosystem, you can watch the beginning of the Superbowl even though you’re late on the way to your friend’s Superbowl party. Started a movie in the car but arrive home before the movie ends? No problem, pick up where you left off on the TV in your living room.
Apple, having positioned itself as a distributor of all that media, would stand to receive micropayments for any or all of those interactions. So even if they only make a few percent margin on the cars themselves, ancillary services will quickly compound those margins into something significant, and allow them to have more control of consumers’ total entertainment consumption time, regardless of location, further locking them into their product ecosystem.
So, maybe someday, you’ll be sitting in the front seat of your Apple car, driving. Only, you won’t be driving the car, you’ll be driving in a racing game on your iPad, while the car drives itself, and Apple collects profits all along the way.