The Double-Edge Sword of the Software-Defined Vehicle

One of the hottest topics in the automotive industry in recent years has been the software-defined vehicle. The emergence of new electronic architectures and wireless connectivity since the launch of the Tesla Model S in 2012 has enabled manufacturers to take this to a new level. Automakers sense opportunities for recurring subscription revenue and after-sale feature upgrades. Although the financial markets may love this, it’s not clear that customers will always find it an appealing value proposition. 

One of the keys to the success of Tesla has been its use of over-the-air (OTA) software updates to fix bugs and add features over time. The company’s entire advanced driver assist system (ADAS) strategy relies on this. Until the launch of AutoPilot in 2015, if a customer wanted ADAS, they would have to get the option when the vehicle was first purchased. Tesla started building hardware into every car and letting customers pay for the software at purchase or at any time after, including if someone bought the vehicle used. 

Originally, the Model S was offered with a choice of 40 kWh, 60 kWh, or 85 kWh batteries. With little demand for the 40 kWh unit, Tesla instead shipped 60 kWh units to customers who ordered the small one and software locked capacity to 40 kWh. Customers could then opt to pay for the upgrade later if they wanted the extra range. This is a great solution and a great value proposition for customers. However, retroactively degrading a product is not a good value or customer experience. For several years, Tesla disabled access to purchase enhanced AutoPilot or Full Self-Driving when someone bought a used vehicle and required them to repurchase if they wanted that feature. 

Recently, someone purchased a used Model S originally built with a 60 kWh battery that was replaced under warranty. The replacement battery was a 90 kWh unit. The third owner of the vehicle, now with a longer range, paid to upgrade the media control unit. After this upgrade, which occurred several years after the 90 kWh battery replacement, Tesla pushed an OTA update to the car that suddenly locked the battery back to 60 kWh, instantly removing 1/3 of the range. 

Tesla claimed this change should have occurred with the battery replacement and that the customer could restore the capacity for a $4,500 charge. While Tesla is technically correct, this is a bad customer experience and since the customer bought the car assuming it would have the range of a 90 kWh battery, they have likely already paid a premium. The fact that Tesla failed to make the configuration change years earlier is their problem, not the customer’s. 

Charging subscriptions for access to features already built into the vehicle is also likely to be problematic for customers. BMW recently began offering certain features like heated seats and steering wheels on a subscription basis in several markets. While building the necessary hardware into every vehicle reduces manufacturing complexity and cost, it does still add to the bill of materials. Thus subscriptions must be priced based on expected customer take rates to ensure profitability. BMW has priced heated seats at $18/month and the wheel at $8. 

Being able to select features on an a la carte basis at any time during ownership can certainly be appealing to customers. But unless automakers are also prepared to lower the upfront purchase price of the vehicle to offset the perpetual subscription fees, they may find themselves with dissatisfied customers and adoption rates so low, the whole effort may not prove worthwhile.