Why Self-Driving Cars Could Offer Unparalleled Market Gains

Self-driving cars – they’ve hogged a large portion of the news cycle lately. 

Indeed, earlier this week, Gov. Gavin Newsom made headlines when he vetoed a bill that would have banned autonomous vehicles (AVs) from operating in the state of California. Then, just yesterday, Waymo started offering driverless rides to some folks in Austin, Texas. And that came after the firm made even more waves last week, when a car in its San Francisco fleet got confused, halting Kamala Harris’ campaign motorcade on Nob Hill.

Plus, many folks – myself included – are eagerly awaiting the launch of Tesla’s Robotaxi just a week from today, on Thursday, Oct. 10.

But at this point… some of you may be asking… so what? 

So what if some cities are rolling out access to driverless cars? As we’ve mentioned before, the long-running joke has been that autonomous vehicles are ‘five years away from being five years away.’ Maybe the incident with Vice President Harris’ motorcade solidified that thinking for you.

But in our view, blunders like that are just par for the course – bumps along the road of progress. In fact, we’re more confident than ever that autonomous cars offer a trillion-dollar economic opportunity. 

Let me explain. 

We believe that three core pillars underpin a massive opportunity within the ‘Age of AVs’:

1. Autonomous Passenger Vehicles: The sale of autonomous vehicles to consumers like you and me. 
2. Robotaxis: The creation of robotaxi services that operate like autonomous Uber or Lyft rides. 
3. Autonomous Logistics: The deployment of autonomous trucks, buses, etc. to automate the world’s logistics networks. 

Each has the potential to become a multi-hundred-billion-dollar business. 

Let’s start with autonomous passenger vehicles. 

Reimagining the Auto Market

We think that, thanks to the Age of AVs, the way people buy cars will soon fundamentally change. 

Today, we go to a dealership, take a few models for a test drive, make our purchase, and that’s that. 

But autonomous vehicles are just as much software as they are hardware. (And if you missed our recent issue that delved into the underlying tech behind AVs, you can check it out here!) That’s why we think buying a self-driving vehicle will involve its initial purchase as well as recurring fees for access to the software that enables the car to drive.

In other words, when autonomous vehicles enter the passenger car market – which we think could start happening in earnest in 2025/26 – it’s likely to create an entirely new revenue stream for automakers: AV software-as-a-service. 

That’s a huge deal. After all, the big problem for automakers is that they operate at notoriously low margins. General Motors, Ford, Stellantis – those firms typically cap out at 20% gross margins, limiting their overall profitability potential. 

Software firms, however, tend to operate at 80% gross margins. 

To that end, we believe that once AVs enter the market, automakers’ typical business model will center around selling a car once at ~20% gross margins, then raking in recurring software revenues at ~80% gross margins for the next 10 years or so (as Americans typically own a car for about 10 years).

Let’s walk through an example to see how this value creation adds up.