Inflation Tesla-style: Elon Musk unveils record price hike for unfinished self-driving software

August 22, 2022, 1:26 PM UTC

Elon Musk is jacking up the price of Tesla’s unfinished autonomous vehicle software yet again, an added feature that itself is starting to approach the cost of a typical small hatchback. 

Full Self-Driving (FSD) isn’t just your everyday standard option.

None other than Musk himself believes the stock’s long-term value depends on his massive bet Tesla can be the first to develop and scale robotaxis solely through software upgrades made possible by artificial intelligence. 

For that reason, Musk uses a clever mix of psychology and social media to market the feature among its many fans in an attempt to create the impression it is much more popular and more powerful than it may in fact be.

For all customers that have not purchased its prior to Sept. 5, Musk said price will rise by $3,000 to $15,000—his largest hike to date after previous incremental hikes of $1,000 and later $2,000 in the past few years.

The new cost is roughly equivalent to the advertised starting price for a 1.4L Chevrolet Spark with manual transmission and an average transaction price including all features for any subcompact car of $23,220, according to industry data from the Kelley Blue Book.

This time he is aligning the price hike with the wide rollout of his FSD Beta version 10.69.2, which he touted on Sunday as a “big step forward” towards an eventual date in the future when his cars are expected to drive unsupervised.

“The current price will be honored for orders made before Sept. 5, but delivered later,” posted Musk on Sunday.

The hike may be a signal the build constitutes fulfilling his vague pledge this month to shareholders for a “widespread deployment of FSD beta” this year in North America. A wide-scale release may unlock up to $1 billion in deferred software revenue, according to Tesla’s latest 10-Q filing.

Demand declining

The announcement, which comes days before investors may take profits on bullish bets placed ahead of Thursday’s three-for-one stock split, is the latest sign of inflation making Tesla less affordable for the broader public. This comes despite his intention to sell 20 million cars annually, or twice as many as industry leader Toyota, by the end of the decade. 

Previous customers that didn’t purchase the feature with their car are encouraged to buy it now as Tesla has long maintained all cars leaving the factory gate come equipped with a computer powerful enough to operate the software. 

“You can upgrade your existing car to FSD in 2 mins via the Tesla app,” Musk added.

Musk has argued that the price hikes are justified as the utility of an autonomous vehicle can be four or five times higher than a conventional one. That’s because he claims Teslas will be able to earn passive income for owners by ferrying other passengers around, while other cars without his technology will sit around collecting dust in parking spaces for hours on end.

All things being equal, a price hike is bullish for the stock as it means higher margins. But profit from software sales may drop on an absolute basis if fewer customers decide to buy it. 

Survey data from Tesla analyst Troy Teslike estimated the take rate fell to 14% in North America in the first quarter of this year. This represents an almost continuous decline from a peak of 50%-plus in the third quarter of 2019, when the feature still only cost $6,000.

Gamifying the user experience

Normally customers only pay in full for a good when it’s delivered, although an increasing number are now used to getting a product even before that thanks to the emergence of buy-now-pay-later services.

FSD works the other way around. Even though it isn’t ready and may not be for the rest of this year, Tesla customers for years now have been paying full price for it as if it were. 

The psychology of FSD beta turns standard practice not just for the auto industry but indeed for any business on its head. 

Musk employs delayed gratification to great effect, with customers eagerly looking forward to each new improvement that comes with a software upgrade for a product they already bought—stretching out the purchase experience as owners scour release notes for each change like an Easter egg hunt. 

The user experience is also gamified through safety scores. Certain beta testers proudly post to social media when they are among the first to receive an over-the-air upgrade, eliciting envious responses from others still waiting to receive theirs once their safety score is high enough. 

This enthusiasm is all the more remarkable considering the software is not self-driving and drivers are still liable in a crash. Tesla owners must constantly be prepared to intervene at a moment’s notice and seize control should the vehicle suddenly veer from course. 

By comparison, rivals argue that the true customer value of self-driving cars can only be unlocked once supervision is no longer required. The only ones capable of that right now are robotaxis like Cruise and Waymo which are not for purchase and still often limited to favorable driving conditions, as liability rests with the company. 

‘Dangerous and irresponsible’

The method however is coming under fire just as his senior director of AI left the company.

The U.S. National Highway Traffic Safety under the Biden administration has departed from its laissez-faire approach to regulating the technology and recently issued a warning to Tesla that its FSD feature is on probation. 

“NHTSA must use its safety recall authority to order that the FSD technology be removed in every Tesla,” urged veteran consumer safety advocate Ralph Nader earlier this month, calling Musk’s planned widespread rollout “one of the most dangerous and irresponsible actions by a car company in decades.”

YouTube later took down videos posted by two social media influencers that involved potentially putting real children in danger as part of a bizarre attempt to prove the system is so advanced it can recognize the difference between kids crossing a street and dummies.

FSD beta isn’t the only part of Tesla business that is currently soaring in price. The brand’s average new car price in the case of an actual transaction (i.e. irrespective of the advertised price that can be materially different) surged 20% in July.

According to the Kelley Blue Book, a new Tesla typically changed hands at $69,255 last month compared with $57,479 in the previous year.

With the industry average gaining only 12% by comparison, it has now vaulted past traditional German premium carmakers Audi, BMW and Mercedes-Benz—once the benchmark in innovation and quality—when it comes to the price customers are willing to pay.

Add in the new FSD price tag and you’re looking paying at close to $85,000 for your average Tesla.

When it will actually be able to drive on its own without human intervention as a crutch is, however, anyone’s guess.

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