Tesla is selling a car with an "upgradable" battery. Only it's not upgradable in the take-it-to-the-dealer-and-they'll-swap-out-some-hardware sense. Instead, you give Tesla thousands of dollars to "unlock" hardware that's already included in your car with an over-the-air software update. The Model S 70 includes a 70kWh battery pack that's good for around 240 miles of range. For $3,000 more, there's a Model S 75 with a 75kWh battery pack that gives an additional 19 miles of range from the extra 5kWh of energy storage. But both models use the exact same battery for logistics and manufacturing purposes.
At first blush, it feels weird. The notion of artificially locking you out of a piece of hardware that you own is, to say the least, odd. But I think that in pushing the boundaries of how it sells its cars and the options on them, Tesla is showing us the future of how the auto industry is going to work.
Tesla is showing us the future of how the auto industry is going to work
It's far from the first time that a consumer product has been software-upgradable after purchase for a fee — and believe it or not, it's not the first time it's happened with a car. When Volvo gave XC90 owners the option to add CarPlay to its cars after purchase, it charged $300 for it. For more than a year, Tesla has allowed customers to unlock its Autopilot semi-autonomous driving feature for $3,000.
But the Tesla battery upgrade is a little different. With the Model S 70, a piece of hardware is included on the car but is "locked" by the software until a fee — effectively a ransom — is paid. This is new, and it's bound to be controversial. It stretches our understanding of what "ownership" is. Why isn't a physical object that we've paid for operating at its peak potential by default, out of the box?
In reality, it's not quite as strange as it sounds. It's already possible to "unlock" additional horsepower in many cars and trucks by going to a specialty performance shop and having the vehicle's ECU updated. Imagine buying a car and getting an email (or a pop-up on the infotainment screen) saying you could gain an additional 100 horsepower by paying $5,000, only you're getting the additional horsepower from a manufacturer rather than a third-party upgrade shop.
But what makes people uneasy about the new Tesla purchase model is that it's shifting the conversation from hardware to the functionality that the hardware provides. Instead of buying the 75kWh Model S hardware, what you're really doing is paying for the ability to drive a certain number of miles.
you're paying for the ability to drive a certain number of miles
The auto industry isn't the first to see a dramatic change in purchasing models. Take software, for instance. It used to be that if you wanted to use Adobe Photoshop or Microsoft Office, you'd buy a license to use it in perpetuity. Not anymore: now you license it for a month at a time, via the software-as-a-service model. Spotify users don't buy music, they buy the ability to listen to it on demand. That shift in how we buy software turned the market upside down — and now, a similar level of disruption could be coming to cars. What it means to "own" a car could fundamentally change, as manufacturers give us more and more hardware that is intentionally locked out of its full potential unless we’re willing to pay more.
The pricing for this kind of thing can be uncomfortable. In all likelihood, buyers of the 75kWh car are effectively subsidizing 70kWh buyers because Tesla expects a certain mix of sales to achieve the margin it's looking for. Since the hardware in both models is identical, Tesla could simply drop the 70kWh model and sell the 75kWh battery alone — likely for less than a $3,000 surcharge — and make the exact same revenue and profit. Buyers who were going to buy the 75kWh battery anyway pay a little less, but buyers who don't need that extra range pay a little more. And, as an added bonus, you're getting the most out of the physical hardware you've purchased.
it's the tip of the "in-car purchase" iceberg
But instead, here we are: the tip of the "in-car purchase" iceberg. There will be more of this, you can count on it. Car companies and pundits alike are trying to figure out what the future of automobile ownership will look like. Will people still buy cars when they can simply have an Uber (or Faraday Future) subscription and ride autonomous pods everywhere? Or will folks still want to have a space that's just their own? It's likely that all these will have a place at the table — but as cars turn into rolling computers with LTE modems, in-car purchases are going to be tough temptations for automakers to resist.