- Microsoft will collaborate with automaker Volvo in promoting the use of Microsoft's virtual reality glasses, HoloLens, for visualization purposes in car showrooms, and also in driverless cars.
- Volvo is pretty ahead in advanced car technology and it appears as if Microsoft has picked a good partner.
- What is Microsoft's game plan here?
Microsoft (NASDAQ:MSFT) and Volvo (OTC:VOLVY) have announced that the two companies will collaborate to use Microsoft’s sci-fi glasses, HoloLens headsets, in Volvo showrooms to help them visualize their cars of choice in real-life situations. Although Microsoft has yet to launch HoloLens (a developer version of the device will cost $3,000 and is slated for launching during the first quarter of 2016), it has indicated that it has designed the device for purposes other than just entertainment.
Using HoloLens, Volvo customers will be able to configure cars in three dimensions and gain deeper insights. Microsoft might therefore succeed in broadening the use for HoloLens, and help it tap deeper in the augmented and virtual reality market that is projected to generate combined revenues of $150 billion by 2020.
It’s also possible that Microsoft wants to collaborate with Volvo to make its own driverless car a la Apple (NASDAQ:AAPL) and Alphabet Inc-C (NASDAQ:GOOG). Volvo appears to be a good partner for Microsoft given the company’s recent advances in driverless technology. Volvo has been working on autonomous features including IntelliSafe Auto Pilot, an interface that allows drivers to activate or deactivate self-driving mode through special paddles on the vehicle’s steering wheel. The new features will be available in 100 XC90 model cars that Volvo plans to launch in Sweden in 2017.
Volvo also recently demonstrated Concept 26 during the 2015 LA Auto Show. The concept is a way of transitioning from driving to fully autonomous mode by making the steering wheel retract, seats to recline, and a large display to emerge from the dashboard thus allowing the driver to relax and allow the car to take control.
Volvo’s Concept 26
There has been a lot of buzz lately about driverless car technology. Apple has stepped up its efforts in its driverless car project, aka Project Titan. Apple recently toured BMW’s Leipzig factory to learn how the German automaker manufactures the i3 electric car. It’s possible that Microsoft now wants into the action too. But Microsoft is late into the game considering that many tech companies with an interest in the technology are at least five years ahead. By collaborating with Volvo, however, Microsoft can make up for lost time.
But the problem with Microsoft taking that route is that fully autonomous cars on our roads might not become a reality until 7-8 years from now, perhaps later than that. And it might take a few more years before they can become fully commercialized, which is something that is easy to discern looking at the development curve for electric vehicles.
Microsoft, however, might have something else in mind.
Selling semi and fully autonomous driving software
Although Microsoft has demonstrated that it’s capable of making decent hardware (think of the Surface tablet and Xbox gaming consoles), unlike Apple, Microsoft at its core is a software company. So what would be better than making autonomous and semi-autonomous technology software to sell to companies that will actually manufacture driverless cars a la Mobileye (NYSE:MBLY)? In fact this might be what Microsoft implied when it talked about using the enormous amount of data generated from connected cars to create new services.
Mobileye is an Israel-based company that makes the software stack needed to power complex semi-autonomous and fully-autonomous driving technology. Mobileye also sells ADAS, or Advanced Driver Assisted Systems, chips to driverless car makers.
ADAS systems have a ready market as evidenced by Mobileye’s robust top line growth. The company reported revenue of $52.8 million during the last quarter, good for 57% Y/Y growth. While that level of revenue might not be able to move the needle or a giant like Microsoft, the market could get a lot bigger if recent developments are any indication. 10 of the largest U.S. automakers, representing 57% of small vehicle sales, earlier in the year pledged to make collision-avoidance systems standard in all their upcoming models. The ADAS market is one that Microsoft can take advantage of without having to wait for driverless cars to hit our roads.
Microsoft can monetize its driverless car efforts in any number of ways, though selling the software that powers driverless and semi-autonomous cars seems best aligned with the company’s core strength as a software company. If Microsoft is able to get a proper foothold into this market, not only would it create a new revenue source for itself, but its shares would likely receive a higher valuation judging by Mobileye’s rich P/S ratio of 58.5, despite the company not being profitable.
It would, however, take Microsoft maybe 3-5 years before it has a product ready for the market due to the length of time needed to collect and collate vast amounts of data required for driverless technology.