Automakers seek new revenue streams from wireless services, upgrades

The dashboard, once the place where drivers checked their speed or changed the radio station, is fast becoming the car's most valuable real estate, as automakers seek to generate new revenue through wirelessly delivered services, features and upgrades.

The upgrades can include everything from in-dash apps up to software for electronic control units to reprogram a car's functionality and driving characteristics.

Tesla is leading the way, with downloadable extras such as Premium Connectivity for $9.99 (about 9 euros) a month or Acceleration Boost to Model 3 owners for a one-time charge of $2,000. And some current Teslas are upgradeable to the Full Self-Driving Capability function -- when and if that appears -- at a planned price of $7,000.

German premium brands are also expanding their digital upgrade offerings. Audi plans to sell e-tron owners an enhanced exterior digital lighting system through the Audi Connect portal. BMW's top package in its Connected Drive online store, at 279 euros, includes over-the-air map updates and online speech processing.

Downloadable options at Mercedes-Benz include Track Pace for AMG owners (for 297 euros), which lets them record lap times and visualize their racing performance on a head-up display.

Because the market is so wide open now, "the profits can be significantly higher from a margin perspective than you would find anywhere else in the industry," said Brian Rhodes, associate manager for connected car at IHS Markit.

More post-sale profits
The need to find additional revenue is growing more urgent as global automotive production flattens and new regulations and ownership habits threaten the traditional business model.

"Porsche once said it would rather sell the same car 1,000 times rather than 1,000 cars," Andrew Poliak, chief technology officer for Panasonic Automotive in North America, said at the 2020 Consumer Electronics Show in Las Vegas. "Ride shares and micro-mobility are going to reduce sales of standard cars, so automakers need to find a way to monetize those vehicles post-sale."

New legislation has given European automakers a healthy nudge, especially a requirement that all cars must have the ability to make automatic emergency calls. "ECall is the main driver for us for getting the car connected, as it has been for every other automaker," said Luigi Ksawery Luca, director of mobility and connected car at Toyota Europe.

"Now that it's connected, we see many opportunities."

Toyota is targeting both "profit and improvement" in its connected services, Luca said. For example, it is conducting a trial in which vehicle data is used to detect defects and ultimately help improve quality control. And while Toyota already offers simple usage-based insurance in Italy, that data could also be used to offer a more sophisticated system that rewards careful drivers, he said.

But to fully realize the potential of over-the-air upgrades, Toyota must revamp its electronic architecture, Luca said. "Tesla planned its cars from the beginning with this purpose. For us, so far, it is an add-on. The car was not conceived in this way," Luca said, adding that it was now a "priority" to introduce a new architecture.

Another key to tapping this revenue is the 5G network, which will allow more information to be transmitted more quickly. The research firm Gartner said that by 2023 automotive applications will represent 53 percent of internet of things [IoT] data transmitted over 5G, as cars connect to cloud servers and their environment.

BMW says it will be the first automaker to offer a car with 5G capability when it unveils the iNext electric SUV in 2021, but others are pushing forward as well. "It will enhance the experience we already offer the customer," said James Mallinson, BMW's head of vehicle connectivity.
10 times faster than 4G

The ability to send more data at speeds around 10 times faster than 4G will enable a range of benefits, Mallinson said, including high-definition map updates, movie streaming for passengers and so-called V2X communication that lets the car broadcast its location to enhance safety.

Infotainment specialist Harman won the contract to supply technology for the iNext's 5G connectivity. Harman says it is building on technology from its parent company, Samsung, to position itself as the go-to company for automakers looking to deliver features wirelessly.

"The revenue model is shifting from a one-time sale to continuous revenue post-sale," said Vishnu Sundaram, head of telematics at Harman. "Having seamless connectivity will be pivotal for those revenue streams."

Harman says that a series of deals will make it the leading company in 5G telematics by 2022. It also offers cloud-based services via its Ignite online platform that automakers can incorporate in new models. Among the offerings is a post-sale software upgrade that will unlock existing capabilities within a car's speaker system.

Will drivers pay?
Still, it's unclear which connected options customers will actually buy -- and if they do, if they will continue to do so year after year.

A big red flag for the post-sale revenue model came last year when BMW said customers with its latest OS7 operating system would be charged for Apple CarPlay, which lets drivers with Apple phones migrate apps and features into the dashboard screen, after a one-year trial period. CarPlay, like Android Auto, is usually offered as a free feature.

But after a backlash from customers in the United States and UK, BMW relented and made it free again.

That seems to indicate that some operations of the dash screen are off-limits, including add-ons such as Car Play and Amazon's Alexa voice assistant, said Luca of Toyota. "I think the functionality itself is going to be a commodity, it's very difficult to [charge for it]," he said.

The ability to get customers to pay to unlock an embedded feature at a later date could be manufacturer dependent, experts said. "I'm very skeptical you can charge extra to unlock features in the car. Maybe Tesla can do it, but I'm not sure others can," said Ted Cannis, Ford's global director of electrification.

Volvo CEO Hakan Samuelsson goes even further, saying that the whole business model of selling upgrades after the sale is flawed. "You should not do that to try to capture revenue directly. You should do it to offer an even better customer experience," he said. "Then, the car will be more attractive, and a bit later you will make money from that."

Automakers should not believe that 5G is a magic key to unlock subscription models, especially given its extra cost, analysts said. "Selling 5G for the sake of 5G will not work, because the customer will not pay more," said Pedro Pacheco, senior research director at Gartner. "You need the functionalities on board."

Sharing costs
Automakers, however, may need to charge simply to pay for the increased spending on connectivity, said Poliak of Panasonic. But an innovative revenue-sharing model is emerging that could defray some of those costs.

Harman is working with a major European automaker to supply 5G-ready modules across a range of models that can be activated by the customer the moment 5G networks become widespread, estimated to be around 2023 in Europe. Harman offers the module at a discount in return for revenue-sharing with the automaker when an owner decides that a new application is worth upgrading to 5G.

"Even if only 30 percent of your existing customers activate it, it's still paying off," Mike Peters, head of connected car at Harman, said.

The model is also being explored by the chipmaker Qualcomm. "We reduce the cost of the chip, then if across the life of the chip the owner is downloading multiple applications, then we're getting a piece of that pie every time," said Jeff Dumrauf, Qualcomm director of engineering. He cited facial recognition to improve car security and access to the car's cameras for real-time video monitoring as two 5G-dependent upgrades that customers could pay extra for.

But the "killer app" of over-the-air upgrades is expected to be autonomous or semi-autonomous functions, such as Tesla's Smart Summon feature that lets owners use an app to have the car drive itself to their location. A new BMW upgrade improves adaptive cruise control to accelerate "more dynamically" once a traffic jam has cleared.

In some cases, the technology is ahead of legislation, which has led automakers to bake in features that can be unlocked later. That includes Tesla's Full Self-Driving Capability, Audi's Level 3 features in the A8 and Lexus's first automated-capable car, launched this autumn, which will need to be activated at a later date via an over-the-air update.

Automakers need to be cautious, said Pete Kelly, managing director of LMC Automotive, because if such driver assistance systems are activated without regulations and approvals fully in place "It could be a legal quagmire."

Tesla may hold an advantage in this area, because its most high-profile (and lucrative) updates are largely in the U.S., where automakers can self-certify many safety features. It also doesn't have to worry about sharing revenue with dealers, because it doesn't have any. (Volkswagen has said it would give dealers a bonus "if they advised" on upgrades or services ordered on its new We Connect platform).

Even so, Tesla remains the automaker all others want to emulate on leveraging connectivity. "Tesla is able to incorporate the entire learnings of the vehicle fleet, so its cars get better as they age," Kelly said. "There is a very compelling case for everybody to do this. In fact, not doing it would put them at a significant disadvantage."