Apple's been making a lot of noise lately with rumors, confirmed and not, of investing in or even acquiring automakers McLaren and LIT Motors. This news is huge, especially when Apple laid off several dozen Project Titan staff only a couple weeks ago. As the race to the first commercially available self-driving car heats up, these rumors point to Apple possibly rehashing tactics from its smartphone playbook.

As of this writing, McLaren has confirmed there are no investment talks, but that doesn't leave an acquisition off the table. The British supercar producer would fit right in with Apple's approach to making high-end electronic goods, almost bordering on luxury. For those not familiar with Lit, they're a small startup working on two-wheeled cars for urban environments that literally can't be tipped over. Lit doesn't have a huge market share, but they're peculiarity might be just the thing Apple wants to include in Project Titan.

If Apple buys McLaren, Lit, or any other existing automaker, it'll be a big step toward entering the market. The capacity to make cars is incredibly capital intensive, so it would be wise to skip the pain of ramping up manufacturing and drop some cash from its enormous overseas reserves on a company with this capacity already in place. For context, McLaren could cost a billion or two, while Apple has $200 billion stashed away in Ireland; this purchase would be a mere drop in the bucket. Apple has a habit of tightly integrating and controlling the supply chain for its flagship products, on both the hardware and software sides. These reports of automaker shopping suggest Apple is aiming to replicate this approach to self-driving vehicles.

However, this may not be the most lucrative move for Apple. Their previous successes have been predicated on establishing a one- to two-year-long sales cycle with their signature products (iPhone, MacBook, etc.), rolling out updated models at WWDC like clockwork. As everyone moves to upgrade to the hottest new smartphone, Apple just rakes in the dough. Cars, however, are a much larger investment and inherently have a much longer sales cycle. That means thinner margins for a company like Google or Apple to handle if they take an integrated approach here.

Regardless, self-driving cars are going to be an incredibly huge market. BCG suggests it'll reach $42 billion within ten years. What'll certainly make up the lion's share of this value will be the software platform that occupies the former drivers' commute times with video, music, productivity, and so much more. Currently, all the fanfare has been focused on putting wheels on asphalt, with nary a peep about building a platform or an externalized network of developers. Perhaps it's in the works, perhaps not. The first player or two to roll out an autonomous vehicle with a corresponding platform that actually works will dominate the space and carve out a new monopoly, just like was done with smartphones. The old supply chain will fade from glory; a solid developers' platform will define the automotive industry for the next 50 years.

Apple's acquisition rumors imply that Apple is chasing vertical integration once more, this time for a much more capital-intensive industry. Self-driving cars will be incredibly lucrative, but the profitability might not be as high as Apple is typically comfortable with.

A combined approach, one that incorporates hardware and software, might be a good move in the short term to establish market dominance, but a wise company should consider jettisoning the manufacturing arm and keep the IP, much like Google did with Motorola.

Another hurdle any self-driving car company will need to overcome is reaching the critical mass needed for onboarding developers. McLaren has plans to double its output in 2016, but that only raises the output to 4,000 cars. LIT Motors is still taking pre-orders, so their production capacity is certainly well below the threshold needed. For comparison, the iPhone sold 1.3 million units in 2007 and the Apple Watch sold 12 million units in 2015. Buying both McLaren and LIT would be a fine start with trendy, niche vehicles, but these moves won't inspire confidence in developers to jump onboard the new development platform. (It doesn't look like Apple hasn't even trademarked iCar yet.)

Tesla is leading the self-driving pack with the commercial release of Autopilot, Uber has autonomous wheels on the road in Pittsburgh and San Francisco, and Google patented automatically pulling over for the police. The federal government even issued some guidance for self-driving car makers, which President Obama clarified in an op-ed in the Pittsburgh Post-Gazette. Apple needs to take forward strides in the market quickly if it wants to seize advantage. While it focuses on the hardware side, it would well behoove the tech giant to also roll out a software platform soon if it has any hopes for domination. Owning the operating system and software for the iPhone set up the App Store for its massive success. CarOS needs to be next on Apple's frontier.

Published on: Sep 25, 2016