The Burgeoning Business of On-Demand Connected Services
Several megatrends are profoundly transforming the automotive space and impacting customer experience, revenue models, technologies, as well as product life cycles. Among those megatrends, the development of connected services and the emergence of features on demand tend to be overshadowed by electrification and assisted / autonomous driving in the news. Yet, their burgeoning impact is becoming significant.
These solutions are rooted in a thorough redesign of on- and off-board technologies as well as a rethinking of the industry’s business model. The software-defined vehicle (sensors and actuators, OTA updates, data streaming, abstracted compute, etc.), increasingly centralized software and hardware architectures, and the cloud are all making significant inroads. Likewise, McKinsey expects that 95% of new vehicles sold in 2030 will be connected.
In my September 2021 article titled “Maximizing Lifetime Customer Value with New Business Models,”, I took a first stab at assessing some of these software-enabled solutions, few of which were on the market then. OEMs have since deployed even more such functionalities across a series of use cases. Several players have also made bold business announcements, expecting these new solutions will boost their top line, profitability and well as create revenue recurrence.
Large Business Potential with a Better Revenue Model
Stellantis targets revenue of at least 20b€ from software-related activities by 2030. About two years ago, GMannounced they expected software-enabled services to reach $20-25b by 2030, including $6b from OnStar insurance services. Ford already has over 550,000 paying software and services subscribers generating hundreds of millions of dollars in revenue (at above-50% gross margin) and is targeting $20b by 2030. At Mercedes, software-based vehicle upgrades generated over $1b in revenue last year.
These new revenue streams are very different from existing ones. Of course, they are expected to deliver much higher gross margins. Just as importantly, a significant portion will rely on subscriptions (e.g., insurance, connectivity), generating recurring revenue vs. one-time sales as currently the case. Nevertheless, part of this new business will be based on a non-recurring, pay-per-use model (e.g., track-specific mode, destination services).
Since software-based solutions essentially result in fixed cost businesses, the key to success is the size of the installed base. This may explain in part why Tesla is boosting its vehicle sales at the expense of short-term profitability. This creates a fertile ground for future, highly profitably software and service revenue.
Another key success factor will be the take rate for these various new services. OEMs are betting that customers are willing to accept recurring payments on top of the upfront one for their vehicle. Recent experiences tend to show that this can be the case for incremental, new features rather than for features customers are used to getting upfront. BMW was highly criticized for its heated seat subscription — thought Tesla has been offering the same add-on for at least three years on Model 3 in the USA.
The List of Possible Functionalities is Almost Limitless
The creation of new features and services will only be limited by stakeholders’ creativity. Connectivity-based examples include in-vehicle WiFi hotspot, video and music streaming, gaming, in-car video conferencing, EV charging navigation with real time traffic information, fuel / kWh pricing information, car-as-a-wallet payment solution and usage-based insurance.
Hardware-based examples encompass assisted driving (ADAS) features, extra performance, chassis settings (e.g., for a race-track weekend), extra maneuverability (rear wheel steering) or the unlocking of battery capacity to name just a few.
For instance, at least three OEMs — Tesla, Mercedes and Polestar — offered or have offered power boost for a one-time fee (e.g., $2,000 for Tesla, $1,195 for Polestar) or a subscription (e.g., $60-90 per month for Mercedes).
ADAS is another strong candidate. Tesla offers its Full Self Driving solution for a one-time fee of $12,000 or charges $199 per month (on-demand) — I have personally paid a couple of times when driving from San Francisco to Los Angeles in order to make the long drive more pleasing. Likewise, Ford and GM offer their Blue Cruise and SuperCruise ADAS Level 2 solutions on demand, the former costing $800 a year or $75 a month.
In its article “How do consumers perceive in-car connectivity and digital services?”, McKinsey estimates that “by 2030, core connectivity use cases, such as gaming and over-the-air upgrades, among others, could deliver $250 billion to $400 billion in annual incremental value for players across the mobility ecosystem”.
How About Pure Data-Based Businesses?
There is an expectation (which I share) across the industry that vehicle and user data have significant value. It can be used directly by the OEM (and possibly by the supply base) to create new services and enhance customer experience. It can be also used by third parties to generate new value propositions.
However, monetizing this data has not been a smooth journey to date. Two prominent automotive-only data brokers can attest to that. Wejo and Otonomo, which went public in 2021, did not survive. Earlier this year, one was acquired at a deep discount and the other filed for bankruptcy.
Yet, some OEMs are betting on this business potential and bringing it in-house. A few months ago, Stellantis established Mobilisights, an independent business unit aimed at licensing customer data to various stakeholders. The OEM leverages its current fleet of 12 million connected vehicles which is expected to grow to 34 million by 2030.
Major Issues Have Yet to Be Addressed
Does the vehicle buyer own the data and / or get to grant access to it? Or is it the OEM, the dealer or yet other parties? To what extent is consumer privacy regulations such as GDPR in Europe or CCPA in California respected?
Mozilla, the foundation behind Firefox, recently issued a survey titled “*Privacy not included”. All 25 OEMs they assessed harvest more information than needed for operational purpose (incl. in-cabin, around-the-vehicle, and demographics data) and may sell such data. OEMs reportedly also fail to provide vehicle owners sufficient options to limit data sharing. The foundation goes as far as stating “cars are the worst product category they have ever reviewed for privacy”.
A second major question relates to the dealers. What role will they play in boosting recurring revenue once the OEM has a direct digital connection with vehicles and their owners? How will they benefit from it? Who among the OEM and the dealer will own the customer relationship?
The direct-to-consumer (DTC) retail model introduced by Tesla — since replicated by Rivian, Polestar, Lucid, and Xpeng — allows OEMs to control and keep 100% of this lucrative business. Incumbent OEMs are looking for ways to reap the same benefit but must deal with their existing dealer networks. For instance, Mercedes will share 13 percent of its subscription revenue with dealers in the USA provided they meet training requirements and hit subscription sales targets.
Another strategic issue relates to the role tech giants, aka GAFA, will play. Google (via Android Auto and even more Google Automotive Services), Apple (via Apple CarPlay) or Amazon (via Amazon Web Services) are increasing present in the automotive ecosystem. Their temptation to grab this market is understandable given its size and their expertise. Will OEMs let it happen? Will they have to means to protect their turf?
GM recently announced they will no longer offer Apple CarPlay or Android Auto in their vehicles starting in 2024 in an effort to better own the customer relationship and related data. Will their in-house solution compare favorably? Does GM have a backup plan in case the backlash is too significant? According to a recent survey by McKinsey, “almost half of car buyers would not purchase a vehicle that lacked Apple CarPlay or Android Auto”. For reference, the overwhelming majority of models on the market today are factory-fitted with these solutions — though not Tesla which built a tall fence and keeps it up. That is a tempting situation for incumbent OEMs!
Managing Director, Orsay Consulting
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