Let’s examine current and emerging business models of connected cars, while evaluating the value of car data and content to automotive and other industries and to drivers and passengers...
This is my second column on connected cars, and it is focused on the following topics:
There are basically two business models for connected cars—value created by cost savings and/or value created from revenue potential. Cost savings has been the most valuable to auto OEMs via regular remote diagnostics to fix and improve various electronics systems. The owners of the connected cars are also seeing cost savings from remote diagnostics.
Over-the-air (OTA) software updates are now emerging as another large cost saving potential. This is due the growth of automotive software with increasing complexity, which requires some type of bug fixing during the lifetime of the software.
Revenue potentials have been more limited in the past but are now seeing a larger variety of opportunities across the auto industry and other industries. These opportunities are due to better connection technologies, more connected cars and better distribution channels to a larger variety of customers.
Revenue opportunities are also growing from content consumption in the car by drivers and passengers due to better connection technologies, better user interfaces and increased content sources and variety. An example is the growth of streaming music, which is making an impact in the connected car.
Connected Car Value Perspectives
The next table is an overview of the value of various connected car data coming from the car and content going to the car. The information is an update of tables I used while at IHS Markit. If you need more information on connected cars, multiple IHS Markit reports are detailed and comprehensive.
The left column of the table shows what type of information has value. The middle column list estimated values for the data users or providers. The right column shows the value for the driver and/or car owner. In the table cost saving items are marked in red and revenue opportunities are marked in blue color.
The value of connected cars has large ranges based on how much the car is used and large individual variations. The estimates are for yearly value per car using each feature with a few exceptions.
Core Telematics Value
Core telematics include the most common telematics services and the five segments listed at the top of the table. Remote diagnostics remains valuable to the OEM with an estimated lifetime cost savings in the $100-$200 range. The value is primarily from lowering the OEMs warranty cost. Most auto OEMs’ warranty costs are in the 2% to 3% range of yearly revenue with occasional spikes when large recall issues happen (source: Warranty Week).
Car owners may do better with maintenance cost savings in the $50 range per year if they follow the recommendations from remote diagnostics service. The car owner may also see a higher resale value in the 10% range with proof of following the recommendations from monthly remote diagnostics data.
Automatic Collision Notification (ACN) or eCall can be the most valuable connected car feature of all as it can be a life-saving service due to a faster reaction from first responders. Such potential life-saving events is the reason why eCall is now required in all new vehicles sold in Europe.
Stolen vehicle tracking has large potential value—up to the value of the car when a stolen car is recovered. An insurance discount may also be available with a stolen vehicle tracking service—especially for luxury vehicles. The company offering stolen vehicle tracking service gets a yearly subscription revenue—in the range of $20-$50 per year as part of a telematics service.
Remote control functions, such as remote start or door unlock, are mostly convenience value to the driver. Remote control functions are included in telematics services and account for a portion of the total yearly telematics service fee. Remote control function revenue value is estimated at $10-$20 per year.
Many of the telematics systems have added data plans that can be used in the car via a Wi-Fi network. OnStar was a pioneer in adding Wi-Fi capabilities in 2015. By 2017 all GM vehicles sold included LTE-based communication with on-board Wi-Fi local network. The advantage of such a network versus a smartphone data plan is the better reception when signal strength is low as the connected car has better antenna. Mobile Wi-Fi devices without data plans can also be connected in the car. The telematics data plan subscription revenue potential is in the $50-$150 per car per year.
OTA has two segments—software updates for bug fixes and functional software improvements. The cost savings estimate for each OTA software updates is $50-$100 compared to using a dealer. The auto OEMs are also likely to do many more software updates when the OTA updates are available. The driver or car owner will appreciate the convenience and time savings of OTA software updates.
The long-term benefit of OTA is functional software updates, which will increase the capabilities of the electronics systems. Even if only a portion of drivers/owners will pay for such capability enhancements, it will become a major opportunity for OEMs and their software partners. Tesla has been the pioneer and has shown the value and opportunity of this business model. The value of functional software will have a large range as it depends on what new functions become available. Hence the estimated revenue potential is $50-$3,000 per car per functional update. The advantage to the car owner or driver is a better car with a longer useful life and higher resale value.
Cybersecurity protection for connected cars are quickly becoming required. In late June 2020 the United Nations adopted two new regulations on automotive cybersecurity, named WP.29. The regulations are expected to be finalized and published in early 2021 and apply to 54 countries, including European countries, Japan, S. Korea. Although the United States and China are not included, both are likely to leverage the information and knowledge included in the WP.29 regulation.
Cybersecurity protection software and services are growing quickly with a revenue potential of $10-$20 per year to the cybersecurity providers. The driver benefit is a safer car and personal data protection.
Cyber-attack prevention has the most value to auto OEMs. Each cyber-attack is likely to cost hundreds of millions of dollars to an OEM due to software updates, mitigation costs and reputation impact. Successful cybersecurity attacks would likely prevent the use of their car for hundreds of thousands of car owners—at least temporarily.
Car Content Value
Content going to the car is primarily a revenue opportunity. For simplicity only two segments are listed— cloud information and entertainment. Cloud information consist of a large variety of content that are useful to the driver or passengers such as social media, news and related information. As connectivity bandwidth is growing more types of content is expected to be consumed. Video content is used in cars, but only by passengers or while the car is parked. Revenue from cloud service usage has a large range and is estimated at $10-$50 per user per year.
Entertainment is currently mostly music, which is now moving to streaming format such as Spotify and Pandora. Streaming music uses two business models: ad-based and paid subscription. Typical revenue for each ad-based user is $20-$25 per year. The typical subscription fee is $50-$60 per year. The ad-based version is free to users, is dominant with around 90% of total users. The subscription portion is likely to increase in the next five years.
SiriusXM, which acquired Pandora in 2018, has a significant revenue from its satellite radio business, which is primarily used in vehicles. The coverage is mostly in the U.S, with some revenue in Canada. SiriusXM yearly revenue per satellite subscriber was around $165 in 2019.
Car & Driver Data
There are multiple categories of car and/or driver data that are valuable to a variety of industries. Usage-based insurance (UBI) is the best-known category. UBI is a type of automobile insurance that uses real-time or stored information about a driver’s actual driving ability and habits to assess actuarial risk. UBI provides many benefits, but probably its most important feature is that, it often creates better drivers. UBI offers substantial premium discounts and other rewards to customers who improve their driving skills.
Many of the auto OEMs and car data aggregators provide the UBI data to the insurance industry. The typical fee for UBI data is $10-$15 per driver per year. For the insurance company this is a good deal as their cost savings are $25-$40 versus collecting such data via their own devices and systems.
Navigation and location-based services (LBS) consist of multiple categories. Turn-by-turn navigation via the telematics system remains popular despite the growth of smartphone navigation apps and other navigation systems. Navigation destination downloads are also popular. Parking information including identifying and reserving parking spots are growing and are included in this category. Gas prices by location is also included but is mostly via smartphone apps. The estimated revenue potential per user per year range from $20 to $50 depending on usage frequency and how many categories are used.
Car speed and location has been used for compiling traffic information for over a decade. In the early days of traffic information, the suppliers had agreements with fleet operators to get their core traffic flow data. The smartphone modified this structure as free traffic apps in exchange for the driver’s speed and location became the norm. This was a small cost saving to the traffic information supplier. The traffic information app users are happy with free traffic data and time savings potential.
Location tracking information is also valuable to generate e-commerce from the driver or passengers. This segment is expanding and has an estimated service use value of $10-$30 per user per year. These e-commerce activities often provide discount offers to the driver/passenger with an estimated cost savings of $10-$50 per year. This segment is overlapping with the marketplace category discussed next.
Marketplace segment is a new telematics service category where users can order products directly via the telematics system. Merchants sign up as partners and can then promote their product to the users. There is no subscription fee to participate. Promotions and coupons are part of the system. The auto OEM or TSP gets a commission based on the drivers’ purchases. The value to the OEM or TSP varies greatly from driver to driver with an estimated average of $20-$40. The integration with the telematics system lowers distraction issues with e-commerce use in the car compared to smartphone use.
The next column will also look at connected cars and will focus on two issues—perspectives on the size of the connected car market potential and the impact of autonomous vehicles.