"Platform Economics in the Consumer Car Space"

From Driverless Car Market Watch:

How will autonomous car technology generate profits? Among the many different business models – from self-driving mobility services to models centered on data, advertising or entertainment – platform-oriented business models are currently receiving much attention, not the least because Waymo seems to be leaning towards them.

The term “platform” can be understood in different ways: In the automotive context it is usually understood as a car platform where many different models share the same technology under the hood which reduces development costs and allows economies of scale. In a more general, wider interpretation platform business models aim to build a unique competitive position through a complex technology or service which is combined with an ecosystem of users and partners. Ideally the platform exhibits network effects: the larger the ecosystem, the more attractive it becomes to its users and partners and the harder it becomes for competitors to challenge the position.

Waymo’s integrated hard- and software platform
When Waymo’s CEO John Krafcik talks about Waymo’s strategy he emphasizes the integrated hard- and software platform which Waymo is building. Currently this platform is embodied in the ugly white box  on top of Waymo’s self-driving Chrysler Pacificas which are occasionally driving around Phoenix. Most of the self-driving hard- and software in the box has been engineered by Waymo/Google: Not just the software, also a novel 360 degree spinning Lidar (with better performance than the Velodyne Lidar, costs reduced by almost an order of magnitude); radar sensors (with better short range detection of stationary objects); the computing platform (developed from scratch in collaboration with Intel); cameras, microphones. Ideally, this box, Waymo’s “better driver”, could be integrated easily into other car models. However, this will always require more work than just adding the box because some sensors will still need to be mounted on the car; more importantly, the car must be ready for self-driving (e.g. redundant safety components) and must be able to communicate with the box by reporting its physical conditions to the box and accepting driving instructions from it.

Can there be much doubt that such a universal driving module would be a highly profitable product? There are many application scenarios (vehicles for commercial use: taxis, buses, trucks, logistics) where self-driving modules would be economically viable for the customer even if priced at very high margins. Startups and established companies should see much opportunity for quickly bringing self-driving vehicles of many kinds onto the market. The technology provider could realize economies of scale while still keeping the total cost for the customer significantly below the alternatives (i.e. where self-driving technology is self-developed or sourced from a variety of vendors).

Platform economics in the consumer car space
Unfortunately, this calculation does not apply to the consumer car space: Consumers are not willing to pay a significant premium for self-driving car technology because they value their own time differently than commercial users of self-driving car technology. In addition, the equation changes for auto makers selling large volumes of vehicles: with a century of experience in managing and cutting costs auto makers will look for every way they can find to slash the price of the self-driving car technology and bring margins down. The larger the sales volume, the higher is the incentive to find other, more cost-effective solutions. Even if they initially agree to source the universal self-driving hard- and software modules, they will work hard to reduce their dependency on it. And they will find many ways to scale back the size of the external self-driving car module: they will want sensors to be integrated into the car – rather than to come with the self-driving platform – and they will want to source them independently. They will clamor to structure and compartmentalize the interface between the self-driving module and their vehicles and they will fight to standardize and take over some of those functions, so that they get control over them. There will be fights over access to the data, over controlling the interface with the user. And it will be hard for the universal self-driving module provider to beat all of those demands back because the OEMs have experience and market knowledge and their car models have special use cases in various segments that the self-driving module provider is not familiar with, does not own and therefore can not easily implement independently. If the provider of the SDC technology platform can not impose lasting, full control over the whole extent of the self-driving platform (prohibiting partial sourcing of components, keeping all modifications to the platform under their own control (even those developed in the context of a particular customer relationship) etc., avoiding any replacement of functionality by the OEM) his power position and margins are likely to deteriorate significantly over time. In the other extreme, the OEM risks losing their established central position in the market to a newcomer who now controls the ‘heart’ of the vehicles. The middle ground is a slippery slope characterized by an uneasy, highly unstable and competitive relationship between both partners where each continually tries to boost their power position to the detriment of the other.

Thus Waymo’s apparent lack of success at finding partners in the auto industry does not come as a big surprise. Why should companies that are used to investing billions for  designing a new car model  succumb to a company that has invested not much more than a billion dollars (approximately 1.1 bio $ between 2009 and 2015) into self-driving car technology? Shouldn’t they just follow the same path, jump-start their own efforts and ensure that they reduce the gap?

Self-driving software can’t establish a lasting competitive advantage
For anyone who examines the technology and its potential there can be little doubt that many actors will eventually master self-driving car technology. There are many commercial players who have every incentive and sufficient resources to solve the problem. This includes General Motors which has spent 581 million dollars to acquire Cruise Automation and is making a concerted effort to reach manufacturing readiness on the first self-driving car model. There are big European OEMs which are determined to solve the self-driving equation but there are also countries which regard the technology as vital to their economic and military interests. There are investors who understand the economic potential of the technology. Furthermore, although the self-driving car problem is exceptionally hard, it has a ceiling; it will not keep increasing and becoming more and more difficult. Over time, algorithms, simulation environments, tools test data collection and test case generation, hard- and software will become more refined and more easily available. Thus it is very unlikely that a provider of self-driving car technology will be able to establish a lasting advantage over the competition just on the basis of the technology. On the contrary: the time will come where the technology will be mastered by many and be commoditized. The time will come where self-driving car technology will be seen as a natural part of every vehicle, where cars will no longer be differentiated on the basis of their self-driving car technology and where customers will no longer care very much what kind of self-driving car technology is inside. Because safety requirements will be very stringent, vendors of self-driving car technology will have a hard time making the case that their technology is significantly better than the competing products.

Platform models with network effects?...

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