How Will The Connected Car Change The Dynamic Between Automakers And Consumers?
Automakers can no longer be a point-of-sale relationship, it has to be constantly nurtured to develop a permanence, says Aria System's Brendan O’Brien.
Connected cars are expected to make up 75 percent of total car shipments worldwide in 2020, compared with just 13 percent in 2015, according to Gartner.
But unlike features added to cars like FM radio and air conditioning, the features and services associated with the Internet of Things will also pave the way for new ways carmakers and drivers will interact, notes Brendan O’Brien, chief innovation officer and co-founder of Aria Systems, a software company that provides cloud-based billing services for companies such as digital mapping platform HERE, ride-sharing provider Zipcar, Suburu.
In O’Brien’s view, much of the new opportunity for automakers in the age of the connected car will be “recurring revenue” because of the very nature of how these IoT features are consumed, measured and paid for. Some examples of those services and features include subscriptions to consumption-based recurring payment schemes for such things as ride sharing, location services, apps (from connected devices), telematics, wi-fi access, internet radio, among others.
GeoMarketing: Considering all the potential disruption of the auto industry from the connected car, how will the car companies derive revenue from these new IoT related services?
Brendan O’Brien: For the industry to fully capitalize on connected car services, they are going to have to do more than monetize in-car connected services. Connected services will be part of the deal, but cashing in is going to take a fundamental shift in how automakers think about selling cars. What is thought of as “loyalty” now—building and selling a car and hope that it’s good enough that the customer will probably buy another one from you in 5-7 years—has to evolve into building strong and lasting brand affinity.
Instead of building the car, they need to build the brand and the relationship with the customer. It can no longer be a point-of-sale relationship, it has to be constantly nurtured to develop a permanence. That is going to take a direct line of sight to the customer that cannot be maintained with the current dealer-driven sales structure.
Achieving this all-important brand affinity is going to be relatively easy for makers of luxury vehicles and work vehicles, where such affinity tends to already exist, but is going to be much harder for low-to-mid-market makers of passenger vehicles where they risk being commoditized – in these cases the consumer’s affinity and relationship are far more likely to reside with the provider of the service that puts them behind the wheel (think Zipcar, Enterprise CarShare, even Uber and Lyft) rather than the manufacturer of the vehicle itself.
Connected cars are hot, but it looks like industrial applications for connected vehicles could be just as—if not more—lucrative. Why are heavy vehicles and mobile telematics as much in the IoT fray as their passenger-wheel counterparts?
Usage-based monetization models and IoT integrations are already popping up in the heavy equipment industry with leaders like Caterpillar and John Deere using the technology in many different ways. There is currently a lot of unanswered demand for data that can be used to create efficiencies and increase profit margins with connected industrial vehicles. This will be a fast-growing sector, and we have yet to see its breadth. Industrial applications also tend to contribute to bottom line in a more immediate and direct way than consumer. And for industrial customers, the machines are already a sunk cost and the connected features just become a huge value-add that has an almost instantaneous positive impact to their bottom line, solely based on the productivity gains and loss prevention these connected services provide.
Explain how new services offered from companies like Trimble, Arsenault/Dossier, and others are fixing problems that have plagued heavy construction for years?
These companies are providing usage-based pricing models to get people to use the vehicle, as well as “add-on” services that dramatically increase productivity (e.g. automated fleet management and predictive maintenance alerts) and decrease loss (e.g. geo-fencing that eliminates overnight equipment theft). The add-on services are instantly attractive for their immediate bottom line impact per my response to the prior question, and the pay-per-use model is finding traction because it more naturally aligns with how these businesses measure their own success, which is the same reason so many enterprises have moved toward the use of cloud-based IT infrastructure (like Amazon Web Services) rather than building and hosting their own IT infrastructure. It can also reduce extremely high costs of entry and gives industrial users a whole lot more flexibility as they are never stuck with machinery sitting idle that they bought for project X that won’t be used for project Y and Z.
What are the likes of Ford, Audi and GM doing that they have never dreamed of before?
Just take a look at recent actions by OEMS like Audi, General Motors and Ford. Audi is currently offering two different types of “lifestyle access” programs including on-demand cars, and pooled usage. Ford just picked up San Francisco crowd-sourced-commuting company Chariot (which uses Ford vehicles), and they have also promised fully-autonomous vehicles by 2021.
The autonomous cars from Ford will only be offered (at least initially) as a commercial mobility service, and not for traditional purchase, pointing to a shift to usage-based, recurring revenue models. General Motors is also getting into the autonomous ridesharing fray, and they say they will be launching a fully autonomous vehicle with its partner Lyft in about five years. GM has also started its own car sharing service called Maven, in addition to its partnership with Lyft. Previously, automakers were content with a very hands-off fleet sales model where rental companies and then ridesharing and car sharing companies like Uber and Zipcar were sold vehicles at volume discounts or provided with special offers for exclusivity.
But it seems they see the writing on the wall when it comes to the changing tastes of millennial consumers—they are less likely to participate in traditional purchases and more likely to buy “experiences”. Automakers are not about to be left out. Though it is a massive culture-shocking change from measuring success to margin-at-sale to long-term annuity and recurring revenue from services, the opportunity is too large to take a pass.
What can businesses do now to develop their connected vehicle go-to-market strategies?
Mainly, they have to prepare for that massive culture change. Automakers, their dealer networks, the wholesale model—it is built on and relies on long-standing traditions and agreements. Today’s customers are used to self-service, to doing their own research and making purchases on their own terms. To these consumers, the dealership model is archaic, painful, and unnecessary.
While upscale and boutique, Tesla is proving that the current dealership model could virtually be a thing of the past if the industry can break down its own bureaucracy. Tesla is the model, and ignoring this model will be done at the peril of mainstream OEMs.
Although it won’t disappear entirely, the current dealer-centric model is a dead man walking. It will and should be more like, say, an Apple Store, where the purchase is made online, the transaction handoff, value-adds, and continuing service happens in the store, and tech upgrades happen over the air.
The dealership becomes part of the relationship, not the entire relationship. There is also a major technical infrastructure aspect of this for OEMS—they have relied entirely on a one-time sales revenue model for the last 110 years. They just don’t have the back-office capability to handle selling, billing, and provisioning products and services outside the dealer network and with a recurring revenue and customer lifetime value model. If this is to scale, they need to prepare their billing and accounting systems and practices today, not after the next launch or acquisition. Internal evangelism for this shift needs to start in the finance office. Recognizing growth and revenue is going to change—margin models cannot be counted on for much longer.
The CFO has to be on board. The best path to getting this new thinking socialized for many OEMs is more likely to be their in-house financing divisions (if they have them), as concepts like “annuity-based returns” (where profit is realized over time rather than at initial point of sale) is far less likely to feel “foreign”. Many of the explorations at OEMs of non-traditional “transportation as a service” ideas are originating from these finance divisions for that very reason.
You cite four main business offerings for what you call “IoT on Wheels” which includes cars and other vehicles. Can you give us some examples of companies that have successfully adopted these models and what they are doing right?
Let me break it down by offering:
- For transportation as a service – Audi and BMW are doing a great job building and capitalizing on brand loyalty and the exclusivity of their brands with their white-glove on-demand car services. They took the functionality of Zipcar and turned it into a luxury service that perfectly matches their luxury brands by leveraging the pre-existing brand affinity that is typical of many luxury buyers. Ford is also on board with FordPass, which is the first automaker-produced app that can provide services even to drivers who don’t own a vehicle from that brand. The app can help find parking, lock and unlock the car—all great—but what it really does is help build brand affinity without the customer even having to get into one of their cars.
- For post-sale/lease secondary services – While OEMs are all making several forays into services like roadside assistance (e.g. GM’s OnStar), on-board entertainment and navigation, etc., the companies with the most traction and in better market position tend to be after-market providers. Verizon HUM is a great example that leverages the sophistication of the comprehensive data streams provided by modern, ubiquitous OBD ports, and like the many services provided natively by smartphones from Apple and Google, these services go where the consumer goes and are vehicle-agnostic.
- For Usage Based Insurance and Taxation – Metromile is a great example of millennial-focused UBI, and Progressive has provided an attractive way for telematics data to directly reduce premiums for safe drivers. Oregon’s OreGo pilot program is determining how effective usage-based-taxation, again derived from telematics data, can more equitably distribute the road-use taxation load in an era of electric and hybrid vehicles. Oregon is finding a way to replace income can no longer be counted on coming from taxes applied at the gas pump.
- For secondary data stream monetization – We’re still in the “wild west” to some degree here, where OEMs who are suddenly the beneficiaries of “direct line of sight” data about the users of the vehicles are figuring out how those streams can be analysed and utilized for secondary direct and indirect monetization. But, we’re getting there. Whether used for influencing broad-market decisions like determining which vehicle features should be developed and highlighted in upcoming models, or for targeted individualized offers to consumers for new vehicles that better serve their personal driving habits, or for downstream sale to third parties like insurance companies, there is a sense that there is great value here, even if the exact application of that value isn’t predetermined by the OEMs up front.
You’ve said the challenges currently facing connected vehicles have little to do with the technology itself. What are the main hurdles standing before companies seeking to capitalize on a connected vehicle business?
The answer depends if we are talking about OEMs or aftermarket providers. OEMs face myriad challenges, stemming from their lack of infrastructure to deal with recurring revenue and usage-based models that need to be employed to monetize connected car services.
They have always operated on one-time sales models and they just don’t have the back-office capability to handle selling, billing, and provisioning products and services outside the dealer network. Not to mention that the structure and culture of the dealer networks just does not jibe with how connected services and vehicles are provisioned.
Not to mention the inherent complexity of manufacturing a car—development cycles are long and the lifecycle is even longer. Tech becomes outdated before a car even hits the sales floor. This is where margin accounting comes into play and becomes a problem—though recurring revenue can be derived from services and sales-alternative models like car sharing and shared leasing—automakers still focus on margin at point of sale. Continuing to do this will hinder innovation.
Non-OEMs, the aftermarket, does not face any of these hurdles, and their barriers to entry are typically pretty low. They can still leverage vehicle systems (using OBDII) to provide connected services, and they are not tethered to margin-based accounting. Not to mention that they are far less burdened by regulation, that while beneficial to consumers, constrains OEMs in ways that don’t apply to the aftermarket.