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Automakers Maneuver for Airtime Dollars

If U.S. automakers have their way, wireless operators and their airtime revenues may soon be taken for a spin. But in the race for telematics customers, teams may outperform those who go it alone.

by sue marek
July/August 2001

In a high-stakes race to “own” motorists and supply their airtime needs, carriers and automakers are jockeying for the inside track.

The recent passage of a law in New York that restricts drivers from holding a cellular phone to their ear has ignited me-too legislation in at least 35 other states and fueled automakers’ hopes. With voice recognition or hands-free attachments on offer, car companies might just edge out carriers as the face of in-vehicle wireless services.

At stake is control of a huge chunk of airtime revenue that currently goes to wireless carriers when vehicle-borne subscribers make wireless calls en route through their busy days. Analysts are split on just how big that revenue stream is, just as they differ on whether telematics operators will get the checkered flag or the two parties will team up to win.

“There’s got to be some kind of partnership or sharing,” says Rachel MacAulay, senior analyst with Princeton, N.J.-based research firm the Kelsey Group. Bringing together the core competencies of both the original equipment manufacturer and the carrier makes more sense than going it alone, she says.

Not everyone agrees. Forrester Research Inc., in its June 2001 report on telematics, predicts that as consumers increase their wireless usage in vehicles, carriers will face the rising power of telematics companies and will likely be relegated to the role of wholesale airtime provider. While that still means an abundance of airtime revenue for the carrier, it also signals that the critical customer relationship will shift to the telematics companies–a scenario that causes most wireless carriers to cringe.

The stakes are enormous. Forrester Research says that 63 percent of U.S. cellular subscribers use their phone while driving. International Data Corp. estimates that 69 percent of all wireless calls are made while in the car. The Kelsey Group projects that 50 percent to 80 percent of the total minutes on all U.S. wireless networks are used while in the car. That equates to about 250 million to 440 million minutes per week and translates into potentially billions of dollars in airtime charges.

OnStar Stakes its Claim

Automakers, understandably, are stepping up their telematics efforts. In the late ’90s OEMs such as General Motors and Ford aggressively launched their telematics initiatives and predicted big growth by the end of 2000. But customers seemed slow to warm to the service, causing car makers to scale down their projections and refocus their offerings to attract more subscribers.

Currently, General Motors has the most aggressive telematics initiative. As of April, OnStar–GM’s mobile communications division–had more than 1.3 million subscribers. (It projects 4 million subscribers by 2003.) GM offers OnStar service in 80 percent of its vehicles and car buyers receive the service free for one year. After the first year, customers must pay to keep the OnStar service by purchasing one of two packages. For $199 per year, those wanting safety and security receive a package that includes automatic notification of airbag deployment, stolen vehicle tracking, remote diagnostics and roadside assistance. For $399 per year, the customer receives the premium package, which includes all the safety and security features plus routing, location assistance and concierge services.

Industry insiders are uncertain how many GM car owners actually agree to pay for the OnStar service once their free service expires. Though OnStar spokesperson Geri Lama declined to give those figures, MacAulay says the company is reporting 70 percent to 80 percent of customers are paying to re-up. She says that while many observers believe those numbers are “inflated,” they could be based on the conversion rate of the premium package, available only in luxury cars purchased by “people who can afford to pay for it,” not the total customer base.

In any case, OnStar is intent upon growing its telematics business. According to Lama, the company is adding more features, including a Personal Calling hands-free voice service that lets subscribers make calls from their car using a voice-activated system. In addition, in July OnStar purchased text-to-speech software from Boston-based startup SpeechWorks, which will help the company translate text-based e-mail, news and other information into speech. This service will become part of OnStar’s Virtual Advisor, an automated concierge service.

OnStar’s services operate over the Verizon Wireless network and Lama says the company envisions itself as a wireless reseller and a service provider intent upon fostering a relationship with the customer. “We own that relationship in a marketing sense,” Lama says.

Analysts at Dain Rauscher Wessels also view OnStar as a wireless reseller. In their April telematics report, analysts Jonathan Lawrence and Mitchell Leung credit General Motors and OnStar for developing the telematics resale model but also warn that wireless resale models historically have been unsustainable and economically unattractive. To validate this, the report notes that the airtime rates that OnStar charges customers for its Personal Calling service are higher than the rates a consumer can get by using a voice-activated Verizon Wireless phone, rendering the Personal Calling service less attractive.

Who Owns Whom?

Some industry experts believe automakers should stick to their core competencies and try to reap the benefits of offering telematics systems without actually trying to own the customer. According to the Dain Rauscher Wessels report, it’s unlikely the automakers will assert much control over the customer because they don’t own the wireless network–thus making it difficult to compete with wireless carriers on airtime rates.

MacAulay predicts that it will take another year or two for the ideal telematics business plan to develop, particularly one that bundles a telematics device with a portable phone and lets the customer pay one bill for both services.
Some in the telematics camp doubt that ownership will be an issue with consumers, unless it’s a matter of security and safety. “I don’t think that people, from a productivity and entertainment view, want to be owned by a company,” says Mike Orr, CEO of MobileAria Inc., a Mountain View, Calif.-based telematics company. “But if I lock myself out of the car or my airbags go off, I want to talk to a live person who works for the company that makes the car.”

Like MacAulay, Orr sees partnerships developing between wireless carriers and telematics companies and believes there will be consolidation among the different players in the next year or so. MobileAria, which is part owned by component maker Delphi and personal digital assistant maker Palm Inc., has developed a platform that uses handheld Palm PDAs to link motorists to the Internet, e-mail and other in-vehicle information services.

Unlike OnStar, which is marketing its service primarily as a safety and security feature for consumers, MobileAria is targeting the business professional and marketing its service as a productivity tool that can be purchased after-market and is portable so the customer can use it while in the car, but also remove the device and take it with them. The company plans to launch services later this year and hopes to link with a wireless carrier with the same market focus and coverage in key locations– perhaps Nextel Communications Inc., with its enterprise focus.

MacAulay says that MobileAria’s after-market offering with a removable device is intriguing, because it eliminates the need for two devices. And since Delphi is part owner, she says that could open some doors for MobileAria. “They are a Tier 1 supplier.”

Partners Make A Difference

Though carriers, with their millions of subscribers, have an initial advantage with potential telematics customers, they risk losing their leverage and becoming a dumb pipe. That’s incentive to partner with content providers, telematics equipment makers and platform providers to add intelligence to the network and differentiate their services.

In the back of telematics executives’ mind is the disquieting trend toward legislative restrictions on handset use by drivers and the possibility that could extend to all in-car communications. For now, that’s being overcome by the enormous potential market of drivers interested in being safe and in touch throughout their day. The race–with billions of dollars waiting at the finish line–is on.