Telematics Strategies Mature as Business Model Realities Sink In
Article from Issue 10 of Telematics Update Magazine (2/19/2002)
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By: Aldo Morri, Sr. Consultant, The Strategis Group
OEMs are now under some pressure to demonstrate that they haven't been spinning their wheels on telematics. They must show that they can equip vehicles with telematics both profitably and in a way that enhances the driver experience. Fortunately, supply-side and demand-side drivers continue to suggest that robust forecasts for telematics growth remain justified.
Automakers are likely to continue to struggle to find profitable safety-based telematics business models, however, even as hardware costs decline. Meanwhile, automakers are increasingly motivated by the strategic possibilities of telematics such as customer relationship management (CRM) and vehicle relationship management (VRM) applications, but OEMs will find many speed bumps along this road as well.
At the same time, voice calling has already emerged as a profitable application in the vehicle. The next logical step is for automakers and wireless operators to work together to improve the quality and the level of integration of voice into mass-market vehicles so that we the industry can move telematics to the next level.
The Growth of the Telematics Market:
The Strategis Group remains sanguine about the near- and long-term growth projections for the automotive telematics industry. In our 2000 report U.S. Telematics Marketplace, we projected that:
U.S. telematics adoption rates will reach about 49% of U.S. new car sales by 2005.
Approximately 85% of new U.S. vehicles sold by 2005 will offer telematics as a factory or dealer-installed option
Nearly 17 million telematics subscribers will be on the road in the U.S. by 2005, assuming 75% re-subscription rates.
Telematics equipment revenues will total about $2.5 billion annually by 2005, while telematics service revenue will increase to $2.8 billion per year by the same time (not including non emergency-related wireless phone airtime, or application use fees).
The Strategis Group forecasts include assumptions that auto OEMs will present consumers with simple and less expensive plans that reduce basic service fees to about $16 per month by 2005. We also tether our forecasts to the assumption that telematics hardware suppliers will be able to get prices down to an average of about $300 per system by 2005.
There is good reason for optimism on both of these fronts. Airtime and hardware costs keep decreasing, while safety-related services draw from a robust base of consumer demand. The Strategis Group's consumer research has repeatedly signaled significant interest in safety-related telematics services, especially "emergency roadside assistance."
Skeptics of the depth of consumer demand can point to some fairly disturbing anecdotal evidence regarding OnStar's experiences. GM's competitors claim that only two-thirds of OnStar-equipped vehicles are ever activated despite the fact that the service is free for one year (OnStar will not corroborate this information). Meanwhile, the same sources claim that OnStar resubscription rates are hovering below 50%, well below the 90% that is commonly cited as needed for telematics service providers to be profitable.
The Strategis Group has used a 75% resubscription assumption for its 2000 forecasts, and ATX Technologies reports as much as 92% resubscription rates for their services, depending on the car model. Nonetheless, taken at face value, the competitor claims about OnStar do raise some doubts about telematics demand. Consumers may be willing to accept safety-related telematics equipment in their vehicles, so long as they are not asked to pay for it.
If the rumors regarding the OnStar experience are true, automakers and their TSPs must ask themselves some critical questions:
Does the OnStar experience indicate that latent demand for safety-related applications is not as robust as originally thought, and that safety-related equipment costs will remain recoverable only in high-priced, luxury automobiles?
Might the OnStar difficulties stem from a lack of dealer enthusiasm to sell telematics?
Is there a better mix of services, driver interface and technologies that would be more exciting or useful to consumers?
Automotive OEMs Broadening Their Outlook Automakers have widely considered the merits of telematics on the premise that recurring subscriptions for services could be enabled by an embedded hardware platform in the vehicle. The obstacle has been -- and remains -- that the cost of the hardware is usually unrecoverable in the price of the car. Daimler Chrysler has calculated that customer breakeven for a set of services such as those delivered by OnStar is achievable only after a customer has subscribed for 40 months. The 40-month breakeven, furthermore, assumes no erosion in the margin structure.
The business model dilemma has forced OEMs to take a broader look at the strategic benefits of telematics:
Sales Benefit - Scant evidence to date suggests that telematics is a determining factor in today's vehicle purchasing decisions, but most consumers have had no introduction to telematics. The Strategis Group's 2000 survey found, for instance, that only 8% of consumers are "very familiar" with telematics. It is likely that the shape and content of telematics systems will affect buying behavior as consumers become more aware of telematics, pressuring automakers to find the correct combination of technologies, interfaces and services that will be competitive.
Customer Relationship Management - Increasingly, the automotive industry is recognizing that telematics could improve the OEM relationship with customers. Automakers can use telematics to keep in touch with customers continuously rather than only every four years when customers are in the market for a new car. Insights into peoples' driving and consumption habits could enable more effective marketing of cars as well as other services, such as insurance. OEMs can also enhance the customer experience by making improvements both in vehicles already on the road as well as those in production and planning.
The problem is that implementing advanced telematics platforms will require that OEMs make an enormous investment in infrastructure. OEMs are also traditionally reluctant to embrace too much technology too quickly because product flaws turn into expensive warranty work and can significantly tarnish brand image.
Wireless Operators: In the Driver's Seat?
Wireless operators that have been preoccupied with more pressing growth-related issues are now focusing attention on the automobile. They will bring significant strengths to the telematics market. Wireless operators know how to operate an on-going service business, unlike automakers. Wireless operators know how to manage monthly billing provisioning, for instance -- a deceptively complicated and costly matter -- and operators know how to staff and operate call centers.
Embedded vehicle systems will always have advantages relative to cell/PCS phones or PDAs in providing services such as automatic crash notification. Embedded systems guarantee, unlike cell phones, that the system is always powered on whenever the car is on, and an embedded system can never be lost or left behind.
But consumers want more than safety, especially the so-called "X & Y Generations" that are highly comfortable with ubiquitous connectivity. Most services that consumers will want will be available on portable devices, and most consumers will probably not want to pay twice to have services delivered via an embedded system in the car when they already have those services on their cell phones.
Converging Technologies
Operators and OEMs are learning that both of their interests are best served by working together. Wireless operators should focus on providing great wireless services while auto companies focus on making great cars.
Mass market telematics appears at best a cost neutral incremental business for auto OEMs, while wireless operators are already providing wireless services in the car very profitably. That said, the experience and utility of voice services could be greatly enhanced by fully integrating cell/PCS phones into the automobile (a simple hands-free kit does not represent true hands-free service).
A convergence of new technologies can enable the marriage of both automaker and wireless operator interests. Bluetooth eliminates the need for docking stations, for which there is no industry standard, and avoids the hardware installation and stocking complexities that docking stations would create. Bluetooth also solves problems associated with automobiles lasting longer than cell phones by enabling the wireless user to upgrade a phone with freedom from the limitations imposed by an embedded phone. Bluetooth even eliminates safety hazards associated with phones hurling out of docking stations in an accident. Users can just keep the phones in their pockets if they desire.
Speech recognition systems, though still expensive and probably an iteration or two less than mature, will further enhance the safety and desirability of voice-services in the car by mitigating -- although clearly not eliminating -- driver distraction. And, as Fujitsu Electronics -- a maker of cell phones for NTT DoCoMo's I-mode service -- points out, speech recognition also makes the use of the phone in the car more fun. Lastly, over the next one to two years, wireless operators will have ubiquitously implemented location technology into their networks, making embedded location technology redundant.
Conclusion: A Giant Step Forward with Voice
All of this evidence points to a case for a return to basics. Let's review some of these assumptions:
Telematics platforms must be compatible with all of the devices that people use to manage their lives.
Driver distraction is an increasingly heated topic that will not go away.
Mass market penetration will require simple, easy-to-use, but compellingly useful services. The goal, as OnStar's Robert Egdorf said in Detroit this past May, is to enhance the driving experience, not complicate it."
Drivers love talking in their automobiles -- Never has an industry spent so much time and energy finding a "killer ap" when it has been staring us in the face the whole time.
The comforting notion that there is "always someone to help," is one of the most powerful aspects that telematics can bring to the driving experience. High-quality, integrated hands-free voice in the automobile can enhance that feeling. The next step for OEMs and wireless operators is to work together to improve the calling experience, while attaching relevant services that are enabled by the voice interface, such as concierge services.
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