Businesses all agree. Recurring revenue is amazing.

The SAAS business model has proven itself as a source of security for future-proof revenues. Rather than needing to continuously land new customers, recurring monthly fees for access allow companies to pull continued revenues out of current customers. Its a far easier premise than landing a new sales.

Traditionally, these business require large capital investments to pay for the initial technology development. But once that’s covered, they can utilize the cash flows generated from to fund ongoing improvements in their products. They are also historically software based companies, or at a minimum venture capital backed businesses.

So, when Tesla recently pivoted its full self driving (FSD) from a high dollar fixed cost model for its to a more “palatable” monthly recurring fee model, it was a bit of a surprise. FSD is a “mostly software” product, so check that box. But this is a luxury automobile company selling an upgrade for something that can ONLY be used on their vehicles. But Elon can do anything, and has shown that when he puts his mind to something great results can be achieved.

So why the skepticism?

Tesla’s pivot turns a feature into a product. An up-sell into a service. A car into a platform. Its a gamble on the future of FSD, but one that de-couples its success or failure from the rest of the company.

Why will FSD fail when the vehicle has been a success?

Where Tesla is smarter than others is that rather than allowing customers to jump into it directly, they’ve introduced a $1,500 down payment to activate the service. This type of thinking prays on the sunk cost fallacy (ie. customers would have to walk away from their $1,500 if they decided to not continue the monthly service). The reality is, most customers will deactivate the service should they experience several months in a row where they are not seeing the benefit of the service vs. its cost.

This seems like a likely outcome.

If you watched the latest Tesla AI Day video, the companies own marketing materials showcase little customer benefit. The driver still has his hand on the steering wheel, and feet close to the pedals, and needs to keep constant attention on the road. While early adopters may have clamored to be the first to test and trial this gag, its likely that the next wave of customers won’t be so lenient.

By productizing a feature, Tesla has created a scenario where the economics truly drive the innovation. A product like Tesla’s FSD requires continuous improvement if the product is ever to achieve its stated goals (truly attention free machine driving). Continuous improvement requires ongoing, continuous investment. Should customers see value in the feature and continue subscribing, Tesla has guaranteed future revenues from which it can invest. However, should it be received with lackluster continued adoption it will not receive the necessary resources to continue its development.

Recent flashy announcements aside, it seems clear that this change in direction is a major bet by the company. The FSD future is uncertain, and Tesla is going all in, but it might be bluffing.