Do Tesla's Security Problems Pose Risks?

Do Tesla's Security Problems Pose Risks?

Today's vehicles are marvels of modern technical innovation. Tesla , for example, has an interface in its cars that allows them to be controlled remotely by a mobile device. But as with any technology, this system has its flaws. George Reese, the director of cloud management for Dell recently wrote an article for O'Reilly about how the Model S has a security flaw that leaves it exposed to hackers.

Weak security
According to Tesla, its interface for Android and iOS devices is capable of "monitoring and controlling" a Model S remotely . Reese's article points out that the authentication method of Tesla's system can be accessed via the web and expires only every three months. That extended period of time means hackers could ultimately exploit it.

Building advanced technology, however, is how Tesla is able to compete with incumbent car manufacturers. It's the company's strategic weapon. Being able to effectively fix problems like this is important to Tesla's operations. Any major security breach could adversely affect Tesla's business, and the company is betting big on the Model S sedan.

Right now, things are looking up for Tesla. The company doubled its year-over-year revenue to $413 million in 2012 . Its capital expenditures were $239.2 million in 2012, mostly attributed to readying the Model S for market . Tesla's total loss from operations was $394 million in 2012, and total losses were $396 million for the year . Yet, automotive sales were up 159% in 2012, to $385 million from 2011's $140 million sales number.

What's Dell got to do with it?
It's striking for Reese, an executive for Dell, to publicly point out this Tesla vulnerability. He could have privately informed Tesla of the problem, but instead he published an article with his name on it. It's no coincidence that Dell, a company with declining revenues, is now marketing itself as a service-based tech company in the vein of IBM as computer sales drop.

Dell's revenue fell 8% last year to $56 billion , and profits were off 32% as they slipped from $3.4 billion in 2011 to $2.3 billion in 2012 . Dell did credit cloud computing for the company's ability to increase margins in services over last year as it tries to become more service-based as opposed to focusing on the low-margin computer hardware business. That shift is a factor in why the company wants to go private in a share buyout that is reported to be for $13.75 a share . Hardware, it seems, may not be in Dell's long-term future.

The pivot
What Dell might do is similar to what IBM once did: It sold off its venerable computer hardware business to Lenovo in 2005 . IBM had to do that in order to continue to grow revenues, building up better margins in the process.

IBM did see a bit of a revenue drop last year, a 2.25% slip to $104 billion . Still, operational cash control was quite good, since the company was able to get profits to tick up 4.7% to $16.6 billion in 2012 from 2011's $15.8 billion income number . And even when a company like IBM sees a slight revenue slip, it doesn't start taking digs at Tesla.

Putting it all together
Tesla is and will continue to be a technology company. Its ability to navigate a risky environment of security issues is something that Dell and IBM are very familiar with. What will be interesting to see is if Tesla someday exits the consumer "hardware" business like IBM has and Dell will likely do. To see the allure of such a shift, look at the margins: Dell's product gross margin in its last fiscal year was 18%, versus the 33.8% margin for software and services, for a total of 21.4% across the entire company . IBM, in comparison, recorded a 51.8% gross margin for 2012 with a whopping 90.6% in its software business.

What would Tesla look like as a company that doesn't actually make cars? Well, the company already has 504 patents -- or patents that have been applied for -- many of them for battery-related engineering . Tesla already licenses technology and sells powertrain components to other car companies, making $27 million in 2012 revenue for what it calls "development services" for Daimler AG and Toyota . The company could come to the conclusion that its ability to engineer automotive battery technology could be worth more than manufacturing cars. In the end, while the software portion of Tesla's technology can have glaring and scary security holes, building cars might be the even tougher business.

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Daniel Cawrey has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of International Business Machines and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published