Apple's automotive headache: How can it make money off a car?

Apple would struggle to maintain profit margins by selling cars -- a one time purchase every five to 10 years. But there are a few ways around that conundrum.

(Image via CNET)

Apple's reported self-driving car faces some bumps in the road.

Reports from Reuters and the Wall Street Journal, citing various sources familiar with the project, said the technology giant's plans aim to expand from a automotive software offering to a full-fledged vehicle.

But there's a problem, at least for Apple. How does it preserve profit margins? While the Apple car could carry a premium, the profit margins would likely be lower. The way around that margin issue could look like this:

  • A subscription model. Or, in automotive terms, it's the rent-a-car deal.
  • The car as a big computer that will serve as a halo for Apple's ecosystem.
  • In-car entertainment and information that's easier to use than what's out there today.

On Saturday, I questioned whether or not a car would make sense for Apple to sell, considering the returns. Why? You buy a new car every five to ten years. Even if the Apple car was a hit in the first fiscal quarter of it being on the market, those individual cars aren't monetized over the long term.

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There are three reasons why it could work -- for both Apple and its customers:

Cars are a pain. Apple can fix that pain-point. Monetizing the car is tricky. They're a money drain. You buy a car for a flat-fee and you have to top it up with fuel, pay road tax, and have it checked over once every year. Who wants to deal with that? Nobody. They are a time, money, and resource drain. Apple could take those pain-points away from the customer by swallowing them whole. That may translate to a premium cost for the renter, but even break-even price of $200 a month could be doubled simply to save the customer long-term time and stress. It's a high-margin game Apple could play. Think AppleCare and Genius Bars for your car.

Apple can sustain long-term revenue. What fundamentally differentiates a cellphone contract from a car rental agreement? Little, if anything. Apple could sell a car each time for $20,000, but it would have to wait five to ten years for a customer that when the time comes may decide to go with another car maker. It's unpredictable and not a sustainable business model. By leasing a car directly to a customer instead for a monthly sum guarantees a stable stream of income over the period of that contract. It's cheaper month-to-month for the customer, and guarantees income for Apple. In this model, Apple would look more like a car leasing and loan outfit.

Automotive fragmentation is cut down to a minimum. By leasing that car to a customer, Apple keeps control of what's on the road. Apple could on a yearly or biennial basis refresh its entire line-up of vehicles so that consumers get the latest improvements. It reduces the number of legacy cars on the road while maintaining consistency across the board. It also keeps the product's marketing effort alive through set cycles. If there wasn't a new iPhone next year or for the year after, interest would quickly wane.

Selling cars for a one-time profit makes no sense to Apple, an increasingly high margin-driven company. Leasing them means Apple never lets go of the product, but can keep the product category under tight control.