Next: Free Cars!

What can be made free? A better question is what can't be? My friend Shai Agassi, who until recently ran technology at SAP, got a load of press this week about his new venture, which aims to create the largest electric car company in the world. Details won't be announced until December, but the basic concept is that you'll pay for the electricity, not the car. Think razors and blades, or companies giving away free cellphones to lock you into a monthly contract of minutes.

He's got a blog, cheekily called The Long Tailpipe, and here's one mind-blowing fact from his most recent post on the effect of current oil prices:

The cost of the average used car in Europe is now cheaper than the cost of gasoline to drive it for a year.

That's why "free" cars make sense: because the purchase price is now a small fraction of their lifetime costs. Shai's company is taking a bigger view of the business they're in--rather than selling cars, they're selling personal transportation, and charging a rate proportional to use. When fuel seemed nearly free compared to price of the car, companies sold cars. Now cars seem nearly free compared to the cost of the fuel. Thus an opportunity for a car company that thinks different.

(Picture taken by me on a tour Shai and I took earlier this year of the Sacramento Municipal Utility District electricity control center, part of our ongoing effort to understand the economics of electricity better.)

Comments

[Barry Ritholtz]

Very few people consider COO (cost of ownership) on many major ourchases.

I've always wondered why Apple never emphasized COO more -- Windows are still cheaper to buy, but are much more expensive to own . . .

[ArthurGlen]

I haven't a clue what this guy is claiming - Agassi's scheme has nothing to do with free cars or free anything. It attempts to have EV makers sell battery-less cars and for Agassi to lease them to the EV owners. These batteries will be swapppable at Agassi's stations. Note that cars are being bought (that's not free) and Agassi's battery leasing company will actually have to charge the EV owner more to lease the batteries than he would have had to pay using a 5 or 6 year car loan that included the batteries. The scheme is a total con - I wouldn't enter into such an
economically absurd lease arrangement because it makes no sense - all-electrics are still not economically practical, no matter who you pay for what. Batteries are simply still too expensive to provide all of a car's power. Plug-in car is the only sensible technology - it takes advantage of the fact that people can easily take care of most of their everyday driving chores using only a relatively small battery pack, yet contains a small gas motor to recharge the battery pack, allowing for extended trips. GM's VOLT and BYD's F6 plug-in are briliant ideas. Agassi simply doesn't understand the issues involved for electric propulsion. Or he's trying to pull a fast one. I can't tell if he's a con man or simply just a pretty stupid person trying to be a hero.

[Brian Chirls]

These guys directly reference mobile phones as a model, but those restrictive contracts have only serve to drive up prices, hinder innovation and generally frustrate everybody.

More on this in a full blog post. (Sorry, trackback doesn't seem to be working.)

[david cushman]

Interesting notion: that you might get a car free as part of your contract for using miles and fuel (in a text and calls mobile/cell phone model).
I don't really regard my phone as free though. I do the calculation of how many months I've signed up for and assign that value to the "free" handset.
Perhaps more interesting to consider what the "shit" is in "the sheep who shit grass"?
Best dc. (ps, might blog about this later, thanks for the inspiration).

[Yoav]

A little Off topic: Shai Agassi's entry on wikipedia is missing a picture (no rights-free picture available ). Will you contribute your own?

[A Kuiper]

I think Shai hit the nail right on.
In Europe, Roadpricing is imminent. Now the gasoline price already is about three or more times the fuel cost in the USA, because of heavy duties. Compond that with large taxation costs of yearly ownership of the car - and in most countries a surcharge on the cost of the car (a kind of sales-tax on vehicles; in Holland this is 30%, in other countries this can be 50%). So most costs are static and hidden, paid upfront or yearly without rflecting actual use. Only gasoline is a variable cost.
The future: Taxes will be variabilised so car drivers will pay per kilometer. Now some highways are toll roads - example, the French Péage. But in Germany and other countries trucks have to pay for actual use on all highways. Consumers will have that 'fate' within tens years, all over Europe, is my prediction. The state registers the km actually travelled and the type, is it on (sub)urban roads or on highways, and the state will charge a toll amount on this actual usage-base.
So what is the scale of these variable costs then? The new variable taxes will outweigh the costs of gasoline (about 1.5: 1 to 2:1) depending on the country, the type of car and the type of road.
This makes Shai's argument more compelling. When the costs are made variable from state regulation, it will be even more an incentive to just bundle the cost in a charge per km. The cost of the 'iron' (the car itself) fades to the background. It becomes compelling to do the excercise to have a small monthly fee and even 'rent' the car for a an all-in price per km.

If that is charged in the fuel, that could be a model; charge it in a contract from a supplier is just another business model of the same fluidisation that can take place 'in the long tail'.

[fasdf]

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[mathew johnson]

How about if each year you had to renew your tabs, get an emissions check, AND get an odometer reading - the license tab cost could then include miles driven that year (along with the other factors - age/cost of vehicle, etc.)

Good idea???

[Krishna Rao]

I don't get it... how exactly does he plan to sell electricity? After all I can plug my car to any electric point, right? How is he going
to earn money?

[ink miami tattoo]

Very few people consider COO (cost of ownership) on many major ourchases.

I've always wondered why Apple never emphasized COO more -- Windows are still cheaper to buy, but are much more expensive to own

[Michael A. Banks]

Proof of concept: certain low-priced printers that consume high-priced ink very rapidly. Ditto, King C. Gillette's razor and blades.
--Mike

[Mr.Park]

I think longtail's law is very proper
but, Many Owner-longtail's company- is doesn't earn much money
why?

[Jorge]

Hey Chris,
is "Kindle" the kind of technology necessary for a whole new long tail in publishing?
Is paper finally gone?
Jorge

[Firmalar]

I think longtail's law is very proper

[Paul Pedrazzi]

I love what Shai is trying to do and can't wait to get my hands on an electric car, but for the life of me I can't follow the math. Maybe its an EU thing.

My car cost $40k. It gets 20 miles to a gallon. At $3 per gallon, that's $0.15 a mile to operate. Assuming 10,000 miles a year, the cost is a whopping $1,500 for fuel. At that rate, it would take over 26 years to overtake the cost of my car.

I don't think we are quite at the razor blade model yet. As anecdotal proof look to the fact that no one I know would ever think their car costs more to run than they paid for it. It's absurd unless you buy a 5 year old Kia. Maybe that is the market.

[Al Rothman]

It is no coincidence that Agassi will try to market his electric car in Israel, at an expected cost of $27k. Israel taxes automobiles starting at 100%, but will only tax Agassi's vehicle at ten percent. In any normal country, you can buy a hybrid for $27k, that needs no additional infrastructure of battery exchange stations. But due to taxes, a hybrid in Israel costs $43k. So the entire marketing scheme depends on the fact that the car has a tax advantage ONLY in Israel. It will provide jobs in its country of manufacture, France, and only stupid Israelis, pressured by Israel's perverse tax structure, will buy them. The whole idea is one big scam, that depends on the ridiculous taxes Israel charges the automotive industry.

[petty]

"Now cars seem nearly free compared to the cost of the fuel. Thus an opportunity for a car company that thinks different."

Hhhhmmm... that could lead to a problem for car manufacturers, isn't it?

[kabin]

thanks...
Kabin
Konteyner