TECHnalysis Research Blog

September 19, 2017
What is the Future of Upgrades?

By Bob O'Donnell

One of the most appealing aspects of many tech-based products is their ability to be improved after they’ve been purchased. Whether it’s adding new features, making existing functions work better, or even just fixing the inevitable bugs or other glitches that often occur in today’s advanced digital devices, the idea of upgrades is generally very appealing.

With some tech-based products, you can add new hardware—such as plugging a new graphics card into a desktop PC—to update a device. Most upgrades, however, are software-based. Given the software-centric nature of everything from modern cars to smart speakers to, of course, smartphones and other common computing devices, this is by far the most common type of enhancement that our digital gadgets receive.

The range of software upgrades made for devices varies tremendously—from very subtle tweaks that are essentially invisible to most users, through dramatic feature enhancements that enable capabilities that weren’t there before the upgrade. In most cases, however, you don’t see entire new hardware functions being made available through software upgrades. I’m starting to wonder, however, if that concept is going to change.

The event that triggered my thought process was Tesla’s recent decision to temporarily enhance the battery capacity, and therefore driving range, of their Tesla vehicles for owners in Florida who were trying to escape the impact of the recent Hurricane Irma. Now, Tesla has offered software-based hardware upgrades—not only to increase driving range but to turn on their autonomous driving features—for several years.

Nevertheless, it’s not widely known that several differently priced models of Tesla’s cars are identical from a hardware perspective, but differ only in the software loaded into the car. Want the S75 or the S60? There’s an $8,500 price and 41-mile range difference between the two, but the only actual change is nothing more than a software enablement of batteries that exist in both models. Similarly, the company’s AutoPilot feature is $2,500 on a new car, but can be enabled via an over-the-air software update on most other Tesla cars for $3,000 after the purchase.

In the case of the Florida customers, Tesla was clearly trying to do a good thing (though I’m sure many were frustrated that the feature was remotely taken away almost as quickly as it had been remotely enabled), but the practice of software-based hardware upgrades certainly raises some questions. On the one hand, it’s arguably nice to have the ability to “add” these hardware features after the fact (even with the post-purchase $500 fee above what it would have cost “built-in” to a new car), but there is something that doesn’t seem right about intentionally disabling capabilities that are already there.

Clearly, Tesla’s policies haven’t exactly held back enthusiasm for many of their cars, but I do wonder if we’re going to start seeing other companies take a similar approach on less expensive devices as a new way to drive profits.

In the semiconductor industry, the process of “binning”—in which chips of the same design are separated into different “bins” based on their performance and thermal characteristics, and then marketed as having different minimum performance requirements—has been going on for decades. In the case of chips, however, there isn’t a way to upgrade them—except perhaps with overclocking, where you try to run a chip faster than what its minimum stated frequency is—and there’s no guarantee it will work. The nature of the semiconductor manufacturing process simply creates these different thermal and frequency ranges, and vendors have intelligently figured out a way to create different models based on the variations that occur.

In other product categories, however, I wouldn’t be surprised if we start to see more of these software-based hardware upgrades. The benefits of building one hardware platform and then differentiating solely based on software can make economic sense for products that are made in very large quantities. The ability to source identical parts and develop manufacturing processes around a single design can translate into savings for some vendors, even if the component costs are a bit higher than they might otherwise be with a variety of different configurations or designs.

The truth is, it is notoriously challenging for tech hardware businesses to make much money. With few exceptions, the profit margin percentages for tech hardware is in the low single digits, and many companies actually lose money on hardware sales. Most hope to make it up via accessories or other services. As a result, there’s more willingness to experiment with business models, particularly as we see the lifespans for different generations of products continue to shrink.

Ironically, though, after years of charging for software upgrades, we’ve seen most companies start to offer their software upgrades for free. As a result, I think there’s more reticence for consumers and other end users to pay for traditional software-only upgrades. In the case of these software-enabled hardware upgrades, however, we could start to see the pendulum swing back the other way as virtually all of these upgrades have a price associated with them. In the case of Tesla cars, in fact, it’s a very large cost. Some have argued that this is because Tesla sees itself as more of a software company than a hardware one, but I think that’s a difficult concept for many to accept. Plus, for many traditional hardware companies who may want to try this model, the positioning could be even more difficult.

Despite these concerns, I have a feeling that the software-based hardware upgrade is an approach we’re going to see a number of companies try variations on for several years to come. There’s no question that it will continue to come with a reasonable share of controversies (and risks—if the software upgrades become publicly available via frustrated hackers), but I think it’s something we’re going to have to get used to—like it or not.

Here's a link to the column: https://techpinions.com/what-is-the-future-of-upgrades/51079

Bob O’Donnell is the president and chief analyst of TECHnalysis Research, LLC a market research firm that provides strategic consulting and market research services to the technology industry and professional financial community. You can follow him on Twitter @bobodtech.