Why on earth is BMW doing this?

BMW has made a very controversial decision, but why?

Photo by Rodan Can on Unsplash

Warm slap to the face

BMW has just announced a subscription plan for seat warmers, at $18/month. Yes, you have to pay monthly to be able to warm your seats, things just got real. That, or paying an extra $416 to unlock the system on an unlimited basis.

The weird thing in all of this is that, when you buy the car, all the necessary components for heating the seats are already installed… but with a software block that won’t unlock unless you pay the subscription fee. Something’s off.

Why public companies do what they do

Let me tell you this: the concept is brilliant, but the execution is poor as hell. The reason why I say is brilliant is due to the fact that BMW is a public company. And why does that matter? Well, the reason is simple, the goal of a publicly traded company is not to make money. Yes, you read that correctly.

Hence, what is the goal of a public company?

It’s not about earning money. Is not about having fat margins. And, certainly, not about servicing their customers. Don’t get me wrong, all these things do matter, but they aren’t the true objective of a public company. The main purpose of publicly traded companies is servicing its shareholders. The moment a company goes public, the moment they are totally subject to shareholders’ desires and needs. Obviously, they aren’t telling you this, because it certainly isn’t an appealing message to society and customers, but is the goddamn truth.

Understanding this, what are the CEO’s and board’s objectives and bonuses depend on? Well, their true goal is to sustain value. That is, making sure that the stock price sustains its value and, hopefully, also grows in the long run. Investors don’t invest in companies for their vision and how they help society, they invest to make sure that their money grows over time… or at least as a hedge against inflation and other things that diminish our wealth.

Anyways, what does all this got to do with BMW’s drama?

The power of sustained value

Acknowledging that public companies owe their duties to shareholders, and understanding that shareholders’ true desire is sustained value, it is a lot easier to understand BMW’s move. The best way to offer sustained value to investors is not having fat profits and margins (they are also important of course, look at Apple), but the truly compelling factor is making yourself invaluable to customers, becoming absolutely crucial to their lives. To achieve this, the best way to do so is with recurrent revenue.

Compare Apple and Amazon, for instance. Apple has unmatched profits and absurd margins (best-in-the-game in both cases). Amazon, on the other hand, has a 4% margin and very unbalanced profits, due almost entirely to its cloud service, Amazon Web Services, and participation in third companies like Rivian. However, Apple plans to move to Amazon’s business model of recurrence — Tim Cook is literally obsessed with it — a company that offers services like Prime, Cloud-computing, recurrent buys on Amazon.com, etc. Similarly, Apple’s plans would be to make the iPhone a rental business model, possible extending this hardware-for-rent model to other products like the Mac or the iPad.

But why on earth would the company with the best profits and margins in the world change its extremely successful revenue model? Well, because Amazon’s business model — or Microsoft’s — is far more sustainable in the long run than Apple’s. Apple, albeit its brand, is far less crucial to the lives of people, especially if you compare it to a company that essentially sends you anything you need or the company that runs 90% of computer software licenses in the world (at least office licenses).

On the other hand, when the market values you for your capacity — or not — to beat your past year’s profits over and over again, there is a moment when that doesn’t happen— probably won’t beat them this year, be sure to check July 28th’s earnings report for Q2. When this moment comes, these companies tend to drop considerably in value (check Netflix for example). On the other hand, companies that have stable and predictable revenues, albeit being affected by decreases in profits or margins, aren’t just valued for that, but by their intrinsic value to customers.

However, it must be acknowledged that Monthly Recurrent Revenue (MRR) isn’t a surefire way to protect your company’s valuation, as companies with extremely good MRRs like Shopify or Spotify are taking a huge hit in the markets during this year. They have extremely attractive revenue models for investors but many other issues have to be taken into account (interest rates, geopolitics, margins, P/E, etc).

This just goes to prove that, although MRR is clearly the way to go, a lot more aspects are taken into consideration when evaluating a company’s value.

Nevertheless, a lot of companies are looking for ways to achieve sustained outcomes, and the best way to do so is by having recurrent revenue that is stable, predictable, and, above all, that provides a product or service that the customer is unwilling to let go off (i.e. same day delivery in the case of Amazon, or seamless software updates in the case of Microsoft, just to name a few examples). The stock market likes predictable outcomes, and having predictable revenue is as attractive as it gets.

In other words, the higher your Monthly Recurrent Revenue is, the sexier you are to investors because recurrent revenue equals stability, and stability equals sustained value.

BMW is doing things… half right

In conclusion, BMW is moving in the right direction… but looking like clowns in the meantime. Searching for predictable and stable revenues is a brilliant idea, but those recurrent revenues need to make sense, which is by no means the case. I don’t know whose idea was this, but there is no way to market this move as something that doesn’t make the company look like utter fools.

In fact, subscriptions aren’t new in the automotive industry, like Tesla’s Autopilot subscription. However, the logic behind is totally different. Tesla’s software needs maintenance and considerable effort from them, and also Autopilot is totally subdued to the legislation of the country you are driving in — laws in Europe are far more restrictive than in the US with regards to autonomous driving, for instance. For those reasons, it makes total sense to offer a service that can be paid or not depending on the context and interests of customers.

BMW’s case, on the other hand, is much harder to justify, as enabling those heat warmers isn’t something BMW needs to maintain or manage at all, it just works. Therefore, why put a software lock on a component whose hardware you are already offering in all cases?

We’ll see how the market prices in this bold move by BMW.

A final word

Although I use Medium as a way to express myself, I also consistently drop a newsletter every Sunday in which I try to simplify, in an objective and digested way, the main tech, crypto, and market news of the week, so that you can benefit from them and leverage that knowledge for your business. Feel free to subscribe:

You can also become a member of medium and open yourself to an absurd amount of curated, bespoke content tailored to your needs, through this link:

Related Posts