Apple we are told, is working on cars, and there's enough smoke that some fire somewhere seems likely. Apple has enough cash (over $150bn) to do this, if it wants, and this prompts all sorts of investing questions, but I've been wondering how one should think about the market opportunity it might be able to secure, and how that fits into the other incursions of the tech industry into cars.
First, can Apple create new value in the industry in the way that it did in phones? With the iPhone, Apple created a new price segment and (with Android following) made the phone industry's revenue much bigger - the average price of a phone sold has more than doubled since 2007. But cars are, pretty obviously, more expensive than phones. Many people can find $400 for a better phone or, this year, a smart watch, if they're persuaded that they really want one, but rather fewer can find an extra $40,000 for a better car, or to replace their car every two years instead of every 4 or 8. If you're in the market for a $20,000 car, there is very little that anyone can do to a car that will put you in the market for a $60,000 car. Cars do not come out of discretionary spending.
That is, lots of people never thought they'd spend the extra to get an iPhone or one of its imitators, but they did, and it wasn't actually that much money. A billionaire and a teenager have the same phone. Conversely Jonny Ive could invent a car that flies and makes perfect espresso, but if it costs $60k or $80k then people driving second-hand Corollas aren't going to buy one.
In addition, Apple created a premium segment in phones, but there's already one in cars - Apple could take share of that, but it's ipso facto too late to create it.
So, it seems, at the very least, much harder to increase the overall size of the market than it was for phones. This isn't necessarily a problem. The major premium brands BMW, Lexus, Audi and Mercedes Benz sold 5.5m units in 2013, and had revenue of around $220bn. (The total market was around 65m cars, with a further 22m commercial vehicles). Taking a share of $220bn a year, even without changing the overall market size at all, would be just fine.
Meanwhile, there's certainly scope to change the product and take market share - indeed, we are now rethinking what a car is for the first time in generations. Electricity leads to different manufacturing economics, allowing (potentially) lower costs and lower maintenance costs. It also allows the car to be reconfigured, at least to some extent, though obviously less than a self-driving car with no manual controls at all. And the experience of driving the car itself about adding more and more software - one wonders what one would do with a dashboard if one started from zero as a software company? It seems that there might be quite a lot that could be done to reinvent the experience. And though we should assume Apple will retain a premium experience, we can make too many assumptions about the price - remember that the iPad was certain to cost $1000.
However, there are other reasons besides electricity for the reinvention of the car - the rise of on-demand and the possibility of self-driving cars. These do have the potential to change the size of the market, but by making it smaller, not bigger.
Both on-demand and self-driving cars would appear to drive a reduction in car ownership and certainly car use (which means slower replacement), to the extent that they become a major part of the urban landscape. That obviously means fewer car sales. They also change what cars get bought. If you don't own the car yourself, and don't even see it before it arrives, the brand and styling matter less than efficiency. That effect is probably strengthened if we move to a fleet model (as many taxi systems work) rather than owner-operators - a fleet manager will choose the vehicle based on metrics, not the fit and finish. That is, the car market would be both smaller and might look more like the corporate PC market. It might also start to bifurcate - people buying $15k and $30k cars substitute $20-25k on-demand vehicles, while the high-end is less affected. Or, high-end sales might be affected most, if those people are best able to afford going entirely on-demand. We don't know, but there are lots of moving parts and will be many unanticipated consequences. Who looked at the Model T Ford and predicted Wal-Mart?
On the other hand, self-driving cars might support both an on-demand model and an AirBnB model for cars - does your car drop you off at work and then roll off into the city to earn you some extra money driving other people around? Would people want to do that? Would that reduce the opportunity for 'dedicated' on-demand vehicles? Who knows. Of course, it's also possible that self-driving technology, said to be a decade away now, will remain a decade away indefinitely, as so many other AI projects have done.
In a sense, all of this is the unbundling of public transport. Instead of large vehicles aggregating passengers on fixed routes, you have many small vehicles, with many different ownerships, on almost infinite routes - packet switching instead of circuit switching, if you like.
The challenge for Apple and anyone trying to make premium cars in all of these questions is that they are matters of AI and routing and algorithms - they are matters for Google, not Apple. They shift the value away from the hardware to the cloud, and turn the car into a generic commodity - dumb wheels instead of dumb glass. Apple doesn't really do algorithms (though it does do privacy, which may become a lot more relevant). And meanwhile a shift to self-driving and on-demand is focused precisely on the urban 18-35s who are its best customers.
There's a counter-argument to all of this, of course, that the correct place for intelligence is in the device you hold in your hand, take everywhere with you and replace every two year, not the large piece of moving metal that you replace every 5 or 10 years. Cars are for car makers, and though Apple could make a nice one with all its design skills and capital, it could also make a nice retail bank, or chain of restaurants. This is especially the case without self-driving. On this view, the car should be dumb glass, with all the intelligence in the smartphone.
This of course is the real problem, which I talked about here - forecasting how the tech will evolve is often easier than how it will be used. Agatha Christie supposedly said that when she was young, she could not imagine being rich enough to have a car or poor enough to have no servants. The ways that both would change in the next half-century were totally opaque. Now we're reinventing the car again, but it's much easier to see what might be possible than what people would choose.