#12 - Supermodel vs. A Piece of Hardware

Tesla is not just selling hardware. The short sellers and Tesla haters keep forgetting that.
The Tesla software is what makes the car. The whole driving experience is enhanced not only through automation but simplification. Tesla does that better than any other carmaker. And they do it with a continuously update-able operating system that is the only one of its kind in the auto universe. It is unique. Investors fund things that are unique because that is what defines competitive advantage.
They also fund things that are scalable, difficult to replicate and serve multi-billion dollar markets.

Tesla’s competitors are very good at producing hardware. They don’t actually “make” cars anymore -they first design and then they sub-contract assembly of beautifully designed hardware. They do this well but the products are all in the same category: hardware. With differences highlighted in marketing and advertising campaigns, the world’s largest automakers trade market share amongst one another at a variety of levels or “entry points” for consumers to spend their money.

Tesla competes in that market but not in any of the categories the automakers have established. A Tesla is cheaper than the high-horsepower luxury cars and super cars it beats on the track, while at the same time they can cost the same or less than the luxury sedans and SUVs they are compared to. But a Tesla comes with the advantage of costing far less to operate and maintain. I know, nobody buys a $100k Car to Save on Gas, but it turns out that money adds up over the lifetime of ownership, and it does make a difference.

But in terms of competition, Tesla has developed what every auto company now needs: software.

The Battery Electric Vehicles (BEVs) being sold by everyone other than Tesla are still electrically powered hardware. Sure, they may have a couple of cool looking screens but they all still have myriad buttons, switches and levers that are delivered in a fixed configuration for each model year of the car. A Tesla has virtually no buttons. It is all controlled by what has been accurately described as a giant iPad. And because of that, the regular Tesla upgrades I get as an owner are constant improvements not unlike the operating software changes we see on our phones every once in a while.

In order to compete with Tesla, the traditional automakers all need to build software. The new software just happens to be designed for electric cars because BEVs are the newest thing in cars. But in the case of a Tesla, that software is used to continuously improve both the creature comforts and features inside the car as well as the efficiency and range of batteries themselves.

With connectivity, these new software-driven cars (ie: Teslas) are being continuously improved. There’s better visual layout of the dash and the giant iPad-like screen. New features are added, others are simplified. There’s also a little humour with Easter eggs and inside jokes like volume/fan “buttons” that go to 11. All of this is done to refine and constantly improve the driving experience. And the important thing is that every Tesla on the road is being improved and upgraded, not just the last one off the assembly line. Every Tesla on the road gets these improvements via an over the air software update. Just the way another ubiquitous piece of software, your cell phone, gets updated once in a while.

Now, we all still buy new phone hardware on a continuous cycle – about every two years. But those are accessory-sized hardware purchases that are often subsidized by the monthly fee we are committing to. Buying an automobile for $75k or over $100k is a bigger decision made far less often. And in that purchase wouldn’t you want some future-proofing –a guarantee you will get at least most of the improvements made to the car in the years you own it?

#9 - Google Just Made a Huge Move Into the Insurance Business (And Nobody Noticed)

As driverless cars, or Autonomous Vehicles (“AVs”) get closer to becoming a reality on our highways and city streets, questions arise about the ethical programming of these cars. Specifically, how will an AV be programmed to respond in a situation in which it knows an accident is unavoidable?

Will a driverless car be programmed to protect the driver under any and all circumstances and minimize damage or harm to the vehicle and its passengers? Or will it be required to include the welfare of the other cars, pedestrians, property and even pets it senses are in harm’s way as a result of the impending, unavoidable accident? The question is a thorny one when at first, the roads are populated with both human driven cars as well as Autonomous Vehicles. But it will very quickly become academic. Once the entire road system is replete with AVs, they can all be programmed to fend for themselves and/or even communicate with one another to eliminate accidents. But to get there, the public must gain confidence in AVs and truly believe they are fail-safe. Besides, will my insurance cover me if the computer freezes or goes haywire?

In a well crafted bid to instill public confidence in Autonomous Vehicles, and cut through the patchwork of regulation that is different across various states in the USA, Google (arguably the leader in Autonomous Vehicles) and Volvo (another leader in the field) recently announced their intention to accept the liability for any accident that is the result of a flaw in the design of the AV or one of its components.

One could easily surmise that Google’s move to insure its own vehicles is a mere marketing gimmick designed to quickly instill public confidence in its AV creations. But it is more likely something much, much bigger than that…

This is a very significant development, and is effectively Google providing auto insurance for their own AVs. Moreover, it has the potential to expand beyond just Google offering to provide liability insurance to those who request it, to a situation where Google could require every AV sold to be insured by its designer – ie: Google. If so, this could become an extremely valuable new business. Google has already demonstrated that its AVs on the road have a far lower accident record than humans – zero, in fact when the fault of the 11 accidents is factored in as entirely on the other (human) driver.

By those statistics, the AVs will be the best vehicles on the road to insure – the lowest accident rates, zero driver error and a completely auditable log of every event, timeline and sensor on the car. And with that deceptively altruistic commitment, the P&C insurance companies will have lost one of the largest segments of their business. Google, in fact, has already indicated its desire to enter the car insurance business. And once we are getting our AV car insurance from Google, how long will it be before we are getting house, health, disability and life insurance from the same source?

One could easily surmise that Google’s move to insure its own vehicles is a mere marketing gimmick designed to quickly instill public confidence in its AV creations. But it is more likely something much, much bigger than that. Google’s willingness to accept full liability for accidents involving its driverless cars is, in fact, a Trojan Horse into the multi-trillion dollar insurance industry.  Berkshire Hathaway, Allianz, and AIG be warned.

#8 - The Ethics of Driverless Cars – Who Lives and Who Dies?

With the introduction and growth of Driverless Cars (or Autonomous Vehicles “AVs“) a pressing ethical question has arisen over how to program these cars in situations that will clearly result in an unavoidable collision. Faced with the choice of saving the “driver” (or the occupants of the vehicle) by plowing into a group of pedestrians, or sacrificing the occupants for the greater good, should the AV be programmed to save as many lives as possible?


A study by Azim Shariff of the Culture and Morality Lab at the University of Oregon with the help of additional researchers from France and MIT, tested the public’s attitudes toward these kinds of decisions. That study asked respondents to choose what they thought should be programmed to happen where they were the occupant of the AV in question as well as from the perspective of the pedestrians (or some other innocent party such as a school bus or another vehicle containing children). Reponses were mixed with a certain percentage at least saying they would choose the option that favoured the greater good. But the real answer becomes clear if we look at the issue from a broader perspective – set all AVs to protect the owner/driver. In an unavoidable collision between two AVs, both will respond to protect themselves.


With human drivers we can assume they would naturally default to protecting themselves, and their motor reactions in a split-second decision would reflect that – swerve to avoid accident; protect the driver. Once the majority of vehicles on the road are AVs, the basic programming default in all of them should be to protect the driver. That way even the vehicle about to be hit will respond, if it can, to protect its driver. Superseding that baseline programming with lines of code that instruct an AV to make proactive choices about who lives and dies introduces far too many thorny and complicated decisions. Moreover, what makes us so certain the computer will have enough data to make the right proactive decision to “kill or injure the fewest (or oldest) people” in any scenario. What if that school bus potentially carrying 20 children is empty?


The only reasonable solution is to program every AV to protect its occupants so that (eventually) all the cars on the road have that at their core.


And as we march toward more AVs on our roads one thing is becoming clear, “…driverless cars will be far better at avoiding collisions than humans.” So says a report from the Conference Board of Canada. That report predicts an 80% reduction in traffic fatalities once we achieve an era when driverless cars become the majority of vehicles on the road.


Source: CBC News – Edmonton (http://www.cbc.ca/news/canada/edmonton/computers-could-decide-who-“lives-and-dies-in-a-driverless-car-crash-1.3297177)


To get to that point, however, we need ever more data to train the computers that will eventually control driverless cars completely. Where Google's Waymo division was the foremost source of data in this respect, Tesla has taken over the lead simply by collecting more data from more data-points. Those data-points are every Tesla Model S, X and now Model 3 on the road. That broad spread of data-points that are collecting information about real world driving increases by 10's of thousands (and soon 100's of thousands) each year as Tesla puts more cars on the road. And as the cars proliferate around the globe, Tesla's real world data from driverless cars also grows in a wider variety of places and circumstances. Google's approach has been to collect data from their own cars, typically in controlled circumstances, but solely from the limited number of cars they have on the road. Tesla on the other hand, is building a data set from an increasing number of cars because each car they sell becomes a stream of data for analysis.


The solution to the Ethics of Driverless Cars, ultimately, is data to support the right answer not humans debating how they should be programmed. And Tesla has the most valuable data set that continues to become more valuable with every car that rolls off the assembly line.