Meet the Software-Defined Business Model

Jordan Greene, Co-Founder, General Manager, VP, AEye, Inc [NASDAQ: LIDR]

Pay close attention to the passenger vehicle market, and you’ll notice a shift in what drives the mobility ecosystem. Software is now at the heart of transportation, and this emergence is dramatically altering the core automotive business model. The very way consumers think about vehicles and purchase them is changing.

Meet the Software-Defined Vehicle (SDV) business model.

As a result of advancements in software, AI and underlying automotive component technologies like lidar, the SDV model is lengthening the traditional time frame for car ownership by extending the value of cars after the sale. Thanks to over-the-air (OTA) updates, a car's performance can improve after being driven off a lot. Like a smartphone receiving new applications or a new operating system update, the automotive industry is responding to consumer expectations that vehicles will require regular software updates to enable new features. When a device is connected to the internet, people expect software support for it, and the emergence of connected cars has made passenger vehicles no exception.

As OTA updates become the “norm” in automotive, consumers can access value-added features without purchasing a new vehicle outright.

For the automakers (OEMs), this unlocks new service-based business models and high-margin software as a service (SaaS) revenue. This is comparable to selling a cell phone bundled with a service contract, where a consumer pays the service provider and the manufacturer over the contract term. Additional software services provide incremental and high-margin revenue streams, leading to a consumer-friendly model with lower upfront costs that build brand loyalty.

“Virtually every automaker has embraced the SDV business model, planning diverse offerings like pay-as-you-go autonomous driving features and subscription-based heated seats.”

This shift to software-defined offerings turns the traditional automotive business model on its head and puts software development at the forefront of the industry. Virtually every automaker has embraced the SDV business model, planning diverse offerings like pay-as-you-go autonomous driving features and subscription-based heated seats. And with Morgan Stanley analysts suggesting that Tesla could make more money from software subscriptions than hardware, the industry is prioritizing coding talent with their new hires.

The SDV economy is a cash cow, but only if the underlying tech meets certain conditions: smart, simple and solid state. Smart and simple go hand-in-hand. Although redundancy is key, for OTA, the SDV platform needs to consolidate and centralize compute to a shadow architecture. 

For reliability, reducing the number of mechanical parts inside a vehicle increases its lifespan and minimizes the complexity of publishing and installing a new OTA update. The average new vehicle features more than 100 million lines of code, so engineers will take every chance to reduce potential integration issues that can derail a major update.

As an upshot of the emerging SDV economy, lidar has taken center stage. As a core enabler of autonomous features, especially in-demand high-speed safety features like highway autopilot, manufacturers have all but said they prefer vendors offering software-defined lidar. A software-definable lidar architecture like AEye’s can be optimized for any driving condition or use case and is designed to seamlessly enhance any current or future ADAS or autonomous feature. This set-up allows OEMs to install AEye lidar across a vehicle fleet to enhance basic ADAS (L1-L2) functionality, like automatic emergency braking (AEB), while building out the dataset and refining the algorithms needed to continuously improve upon or introduce advanced autonomous (L3-L5) features and functionality across all vehicle models OTA, dramatically reducing time-to-market for new features.

Today’s largest technology companies are software-based. Even Apple became a trillion-dollar company by complementing its hardware with subscription services. Automotive companies figure to become next in line for the software-defined business model revolution, utilizing software-based services to add safety features, increase vehicle performance and generate massive amounts of new revenue in the process.