Cashing in on connected cars

It feels like there is a barely a day that passes without seeing a reference to a car manufacturer who is anticipating ballooning revenues from connected services over the next decade.  In a number of cases, this includes setting up a new business unit to offer these services.  This is not a new development as GM launched OnStar in 1996, and Ford followed on with an internal project called Consumer Connect in 2000.

I was working on the Ford project a year or so earlier when a colleague stepped into my office and told me that there was this new invention called ‘Bluetooth’.  The first consumer Bluetooth device was launched in 1999, and the first connected mobile phone followed in 2001.  Although it was not the first smartphone, the iPhone with the supporting App Store came along a few years later in 2007.  These developments are all relevant to the connected car opportunities as they all moved the focus for the functionality from the car itself to the driver’s phone.  As we keep on being reminded by the car-sharing advocates, the typical car is only used 4% of the time, whereas most people have their phone with them throughout their waking hours.  This includes the occasions when they are using another car in the household or a rental car, rather than their regular car.  Sad as it may be, many of us (myself included) manage our lives through our phones, and we already have our favourite apps installed on our phones for navigation, paying parking fees and tolls, streaming content, picking restaurants and many of the other tasks that are considered as potential connected car services.

The primary concern of the consumer is not therefore whether their new car has a great satnav system or some proprietary app that allows them to pay for parking, but whether it has good connectivity for their existing phone, and an effective interface that allows them to mirror the screen and control the phone through voice or steering wheel controls.  Providing this interface is therefore critical in new product design, and we can see this in the relentless penetration of Apple CarPlay and Android Auto into the standard feature list of cars of all brands, and ever larger displays that allow screen mirroring.  The late great Sergio Marchionne described this as the industry spending billions to host other people’s parties.

There are clearly some connected functionalities that should not be delivered through the driver’s smartphone – over-the-air updates of vehicle software, 5G vehicle to vehicle or vehicle to infrastructure communications for traffic management and accident avoidance are examples where you do not want to depend on the customer’s smartphone being in the car and switched on.  However, these are not obvious sources of additional revenue for the manufacturer, even if they may influence the customer choice of car and model when making the initial purchase.

New revenue streams depend on having something which is specific to the vehicle rather than the driver, or which is so compellingly attractive that the driver will choose to use that service rather than a third party offering.  Selling over-the-air options is an obvious possibility when so many aspects of a car’s functionality and performance are software controlled, but in some cases this implies building hardware into cars as standard that cannot be accessed unless it is unlocked by a software update.  This in turn depends on a fairly complex trade-off between the feature cost, possible reductions in that cost through higher purchase volume and simplified manufacturing, added flexibility in the vehicle supply chain, and finally the selling price and take-up rate on the feature.  There are also options in how the features are offered – a once and forever payment, a payment covering only the driver’s period of ownership, or a weekly or monthly fee?  There are clearly some business opportunities here, but progress is slow, and even where they are available (as was the case with my Tesla) there needs to be proactive marketing and promotion to encourage sales.  Will this be handled by the new digital services business unit, or the dealer, or shared, as proposed by VW?

Competing head-on with third party app developers and dedicated e-commerce businesses to make an OEM mobility app the product of choice for consumers, regardless of whether they are in that OEM’s car or another brand, or using public transport, is more challenging in my view.  Can this ever be a core competence for an OEM?  Apple focus on only a few product areas for their own apps, instead creating a platform for third parties that in itself becomes part of the offer – iPhone + App Store.  Might this be the way forward, that OEMs allow controlled access to third party apps that can access some of the car features in a way that is not possible within the restricted access of CarPlay or Android Auto?  Could 15% or 20% commission on these sales generate a better return than trying to maintain a closed system?

As cars tend more and more towards being software platforms rather than purely mechanical devices, the opportunities for digital services will undoubtedly grow.  These new connected services business units will have to pick the areas where there is a genuine car-specific opportunity, and as the pace of development in services is much faster than OEMs are used to, will not only have to operate on this faster life cycle, but find a way to get their colleagues in the rest of the business to keep up.