Photo: Find My Electric

In the next decade, the automotive industry will undergo a dramatic change, going from 97% of fueled cars to 100% electric and machine-driven. This shift opens a window for automakers to realize tech-like margins, Loup Ventures says. To be successful, analysts say, the industry needs to properly design high-margin software, which Tesla has already done and which has given it an edge in the years to come.

In a recent analysis, the firm looked at one aspect of the auto software stack, over-the-air (OTA) upgrades, and found that Tesla is several years ahead of traditional cars.

When buying a traditional car, it’s expected that the vehicle’s characteristics will remain  unchanged for its entire lifespan. However, OTA updates allow for continuous updates and improvements to the vehicle's characteristics and functions, Loup Ventures emphasizes. In fact, the car gets better over time.

Tesla was the first company to use OTA updates on its vehicles in 2012. While legacy automakers have since started adding some OTA update capabilities, their progress has been slow.

Source: Loup Ventures

To date, OTA updates from most car manufacturers only improve maps, Apple CarPlay, and Bluetooth compatibility, which do not add material value to the car. On the other hand, Tesla's OTA updates improve infotainment systems as well as range, autonomous features, braking/acceleration features, and safety systems.

For OTA updates to be of value, important features must be built into the vehicle that are controlled by software. By incorporating electrification, connectivity, and autonomy into its vehicles from the outset, Tesla can use OTA updates to improve those systems, and add value to its vehicles already on the road, Loup Ventures writes.

"For example, over the past two years, the company has delivered OTA updates for battery range increases, power and acceleration upgrades, improved braking ability, Premium Connectivity, and most recently, the beta version of FSD."

Tesla launched FSD Beta in October for a select group of early testers. The company admits that FSD is not ready for prime time. However, the features and maneuvers that FSD offers stand apart from what other car companies have to offer with their Advanced Driver Assistance Systems (ADAS).

"Tesla reports deferred revenue from ‘access to our Supercharger network, internet connectivity and Full Self Driving (“FSD”) features and over-the-air software updates.’ In its 2019 10K filing, the company said it expected to recognize $751m in deferred revenue in CY 2020. Through the Sep-20 quarter, Tesla had recognized $ 223m, with a total deferred revenue balance of $1.73B. Assuming the company achieves its goal, it would imply recognizing $528m in deferred revenue in the Dec-20 quarter."

Source: Loup Ventures

"We estimate Tesla will recognize $1.1B in deferred software revenue in 2021, increasing to $1.5B in 2022, and representing material high-margin revenue for Tesla that should loosely mirror operating income contributions. To put this into perspective, GM's operating income in 2019 was $5.4B and Ford's was $574m. In other words, Tesla's deferred revenue next year can account for about 20% of GM's operating income today and 200% of Ford's."

Loup Ventures estimates that both vehicle deliveries and recognized revenues will grow 40% annually. The overall balance of deferred revenue will grow mainly depending on the implementation of FSD. They estimate ASP for FSD in 2020 will be $8,500 with an attach rate of 35%. But as FSD approaches full autonomy, and users find it more valuable, the firm believes the attach rate and price will rise.

"Putting it together, we model for a 37.5% attach rate and $10,000 ASP in 2021, moving to 40% and $11,000 in 2022."

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