If you haven't noticed, it appears technology companies are feeling quite nostalgic these days. After making billions leading the 21st Century economy, big technology brands Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL) (NASDAQ:GOOG) are rumored to be looking into a product that defined the early 20th Century -- the automobile -- with varied levels of interest and secrecy.
Apple's taken the tact of extreme secrecy, and has held its car plans close to the vest. However, numerous sites have reported a "Project Titan," where hundreds of employees are working on an electronic car. The biggest rumor about Project Titan is Reuters' claim the car will be self-driving, although it's prudent to mention The Wall Street Journal reported the car will not have that functionality.
As far as Google goes, its work on its car project is an open book. Look no further than Google's YouTube for more information on this potentially high-risk/high-return project the company affectionately calls moon shots. And while Apple's self-driving car is a rumor on top of another -- albeit it slightly more confirmed -- rumor, Google's car is confirmed to be a fully autonomous car.
Spending lots of money to potentially make less
On the surface, it sounds hard-pressed to convince shareholders that technology companies would venture outside of their circle of competence. That's especially true when a company is planning to go into an industry with lower margins than its current business lines, and when the new business requires substantive investment. Even if Apple and Google are able to pursue a premium pricing strategy, it still appears shareholders would be better off with the companies sticking to technology.
For perspective, last fiscal year, Apple's operating profit margin was 28.7%, and Google's operating profit margin was 25.0%; luxury carmaker BMW reported an operating profit margin of 10%, while General Motors reported roughly a 1% operating profit margin. It seems crazy for Apple and Google to go into this industry; the automotive industry requires significant capital expenditures and skill for what appears to be a lower-margin industry.
An indirect profit play?
Perhaps there's an indirect reason for Apple's (rumored) and Google's interest -- to deepen a user's reliance on their respective ecosystems as these tech giants push to become more platform companies. And in the event the self-driving car does take off, these companies could perhaps benefit more indirectly. Business consultant McKinsey and Company estimates free time saved on driving would be worth $140 billion in digital revenue annually if half of that time was spent on web surfing and shopping.
In the end, the time saved could be more valuable to Apple and Google shareholders than the actual car itself as the $140 billion in digital revenue would be split between the carmaker, the hardware and software makers, and the web provider. If this manifests, the initial car purchase could be a low-margin sale -- low margin to Apple and Google, of course -- designed to increase digital revenue. Who would have thought our economy would get to a point where a car is considered a loss-leader, essentially a razor in the razor-and-blade model?
Perhaps Google and Apple should work on this instead
In the meantime, there's probably a less costly way for Apple and Google to boost its bottom line -- continue to reduce the friction in the mobile shopping experience. According to research from Monetate, although mobile accounted for 35% of e-commerce website traffic in 2014's fourth quarter, up from 18% two years prior, a small fraction of smartphone shoppers actually finish the purchasing process. The company found an anemic 0.92% of smartphone shoppers convert, while those numbers were 3.41% with a PC, and 2.86% with a tablet.
Apple's iOS fares better than Google's Android at converting, at 2.07% versus 1.21%, respectively. While much has been discussed about Apple Pay's in-store component, the service's best feature may be its in-app single-touch purchasing function that replaces your password with Touch ID. By making the purchase process easier, Apple's iOS becomes more valuable to developers and marketers looking to profit from impulse shoppers.
In the end, making the mobile purchasing process easier may not be as sexy as manufacturing a car, but it doesn't require huge capital expenditures and potentially lower-margin products either.