Chasing New Auto Revenue — Monetizing the Connected Vehicle Features and Data
Automotive industry is under unprecedented sea-change. The overwhelming Connected, Autonomous, Shared and Electronic (CASE) Vehicles trends are overthrowing the traditional business models. For any OEMs, suppliers, service providers, it is an existential threat to find and shift to the new business revenue streams.
Most auto OEMs investing heavily on the CASE have not found the compensating revenue to offset the investment. Connected Vehicles (CV) still have not directly proved its profitability even the CV features are must-have for customers to purchase a vehicle. Autonomous Vehicles (AV)are still in experimental phase. The players are still to develop the business revenue and model as focusing on the contained environment for B-to-B use like RoboTaxi. Electric Vehicles (EV) will probably remain significantly less profitable than traditional Internal-Combustion cars as a result of high battery costs, lower after-sales revenues, continuing uncertainty about battery re-use and remarketing, and the significant investment required for the charging infrastructure. Per McKinsey June 2020 report, EVs have up to 60% lower aftersales revenues.
For OEMs, profit still mainly comes from the traditional Internal Combustion (IC) segment. EV will probably remain significantly less profitable even it, as a whole segment, breaks even in the next few years. However, annual percentage of new EV is anticipated to grow from less than 3% in 2020 globally, to 50% by 2030 to 2040 pending various announcements and forecasts. So the existing auto revenue as we know may face long term decline.
So where is the new auto revenue?
After looking at Tesla’s AutoPilot model, the consensus is that the new auto revenue should come from ADAS and CV features and data built on software. If so, what are the challenges and how much will be the software-based new auto revenue per vehicle?
Four Challenges for Generating New Auto Revenue from Features and Data:
Regulation Pressure:
All major markets’ governments are putting auto transformation under the microscopes, tightening up their regulation measures. Certainly the regulations influence the competition, customer base, infrastructure build-up and business cases for and profitability of the auto industry.
— A rearview video system is a safety technology that helps prevent back-over crashes and protect our most vulnerable people — children and seniors. As of May 2018, NHTSA requires this lifesaving technology on all new vehicles.
— In EU, Emergency Call (eCall) feature is mandatory. eCall automatically dials Europe’s single emergency number 112 in the event of a serious road accident and communicates the vehicle’s location to the emergency services.
More intelligent vehicle features, especially those related to safety and security, have the potential to be mandated by regulators for consumer protection. Those safety and security features happen to be the features that consumers are willing to pay for.
— Europe’s General Data Protection Regulation (GDPR), enforced in May 2018, primarily gives individuals control over their personal data. Three years later, per Otonomo-SBD Feb 2020 survey, 75% population is interested in seeing the data, 50% likes to see the data somehow periodically.
— Starting with model year 2022, Massachusetts’ Right to Repair Law requires the manufacturers of motor vehicles sold in Massachusetts to open up the maintenance and repair data to the vehicle owners and independent repair shops. Open Data means profit sharing.
It is positive development for governments to step in to protect the consumer rights, safety and privacy, especially after the fiascos of recent data breach or abuse cases. But auto industry is getting more restricted regulation environment on feature and data monetization. Likely all regulations will more in alignment with the most stringent ones, further restrict the monetization topline.
Feature Commontization:
From long-term perspectives, OEMs democratize the technologies to benefit the customer and remain competitive. Many new features are introduced to the high-end vehicles first, then gradually populated to the volume vehicles as the standard features.
SBD Automotive predicts that by 2026 Collision Avoidance (CA), Lane Departure Warning (LDW) and Automatic Headlamp Dipping (AHD) will be the three ADAS technologies with the highest penetration in the US market. All grow from 60–70% range in 2019 to 80–88% range in 2026.
If any OEMs bulk the norm, or slow to roll out the new technologies, or take away some perceived FREE features, the customers usually revoke strongly and send the complains all over social medias.
In 2020, Tesla Model S and Model X owners who updated with the latest $2500 infortainment upgrade lost the ability to connect to any AM, FM and SiriusXM radio stations. Tesla customers complained. In the end, Tesla asked $500 to restore standard radio functions as after-sale purchase.
Feature commonization means the loss of monetization opportunity. However, further commonization will continue to benefit the customers. OEMs have to develop the robust technology and cost reduction plan to remain competitive.
Customer Consent Management:
Tremendous of data are generated every mile, every day: driver profile, driving destination, driving behavior, radio listening pattern, traffic condition, vehicle diagnostic, system usage, part deterioration, in-car shopping details, online search history. Much more data has been captured by OEMs, system suppliers, service providers, etc. OEM doesn’t have all the data.
Customer owns the data, not OEM, not suppliers, not providers.
Consumers are most worried about how data will be used or shared. This comes down to transparency and trust. Consumers need to understand how their data is being used, shared and controlled through consent management.
Per 2019 SBD global survey, over 72% of Customers are comfortable to share the anonymized data to exchange for friction-less experience, financial incentives or something else. Especially young generations are open for the “trade off”.
The customers expect the OEM to respect their privacy concern (like their departure and destination), and are willing to share the anonymized data with limited personal info (like real-time traffic info, part diagnostics data) to benefit the general public or other individual.
Consent management is very important in respect to GDPR and customer trust. Certain incentives are in place that help the driver consent to data sharing. At same time, consent management is a sensitive, complex and prolonged process across the systems, lifecycles and ecosystems. If no sufficient consent received, some use cases are not valid for data monetization.
The challenges to OEM are to explain clearly to the customer, and manage the use cases under the customer consent. OEM not only needs to manage the data in the data center or in the cloud, but also needs to manage the data supply chain to make sure other suppliers and providers to be in compliance with the regulation and consent without overwhelming the customers.
Subscription Fatigue:
Driven by the Wall Street valuation, more businesses have been shifting to the subscription model which provides the repeated revenue to the companies. Many subscriptions bubbled up in people’s life: the memberships of Amazon Prime, Costco, or the entertainment/communication subscriptions of Netflix video, AT&T service, iPhone rental, or the freemium services (Free initially, then $ for upgraded services) like Google Gmail etc.
Conducted online by The Harris Poll on behalf of Zuora’s Subscribed Institute, 2021 Subscription Economy Index survey showed “78% of international adults currently have subscription services (significantly higher than 71% in 2018)”.
In the automotive industry, subscription model is also becoming the darling of new Connected, Autonomous, Shared and Electronic Vehicles. GM’s On-Star subscription has the first mover advantage. In US, GM’s various subscription plans charge from $15 to $45 per month. BMW ConnectedDrive in four packages cost from €69 to €279 a year.
However, the customer is overwhelmed with the various subscriptions every month. To alleviate the pain points for the customers, there are various creative solutions: bundled similar services, consolidated billing, etc.
Further more, the customer is questioning the value of those bundled services, and the associated fixed expenses every months. The Harris-Zuora survey also showed “Consumers want to pay for what they use. Nearly three-quarters of international adults (72%) would prefer the ability to pay for what they use, rather than just a flat fee”.
Studies showed that customer is willing to pay for safety and security features like emergency calls, locate my car. The customer is also willing to pay for cost-cutting opportunities, like Remote Early Diagnostic, or Usage Based Insurance (which uses the individual driving habits to determine the insurance premium, not by the general population’s risk profile). Another thing higher on people’s shopping list are those time saving info like Real Time Traffic, Parking Allocation etc.
Customer generally turns away from pure convenience benefits (like delivering the shopping items to my vehicle truck), or some of new and highly advanced features (like driver fatigue monitoring, augmented reality).
How Big is the New Auto Revenue Per Vehicle?
This is most pressing question for all players. The Wall Street or industry analysts all put their yardstick targets out. The industry leaders also put their inspiration targets to rally the stakeholders and employees. But the real revenue or cost saving still takes years to materialize.
Internal Cost Saving:
With almost real-time data from vehicle fleet on the road, the companies are able to shift the processes to really use the data to cut down the cost. The OEMs are leveraging the connected vehicle data to deep-dive customer’s needs, re-design the vehicle to the customer preference, cut-back warranty cost with early diagnostics, or simply optimize the internal processes.
For example, the early and remote diagnostics capabilities can discover the vehicle issue earlier, notify the customer at first failure, fix the pinpointed issue at the first repair. With the remote diagnostics and early repair, it can increase the service revenue, reduce warranty cost and boost customer loyalty.
Tesla was reported of being able to resolve quality issues within about 2 weeks from issue identification to software over-the-air fix. The traditional OEMs usually takes months to identify, and then months to fix with costly recall actions.
The internal cost saving is perceived to be the biggest opportunity, maybe bigger than the external-facing revenue opportunities.
External Business-to-Business Value:
Many revenue opportunities exist in the vehicle ecosystem. The suppliers like to buy their part usage and diagnostics data to improve their parts’ design and manufacturing. The insurance giants are willing to pay for drivers’ driving behavior data to optimize their personal risk profile. The fleet businesses like rental car companies or shipping companies are willing to pay premium to know the condition of driver and vehicle. The mobility service companies have different use cases: Xevo needs driver profiles and vehicle locations so to order grocery or dinner on the way home; Yoshi needs vehicle location so to fill the gas tank while vehicle is in the remote parking lot; the data aggregators like Otonomo and SmartCar consolidate vehicle data to serve many different use cases.
Vehicle data is valuable. In most cases, data pricing points are individually negotiated. Until recently, some companies like BMW started to put its pricing sheet out as €0.29 per individual data key retrieval, but up to the maximum monthly amount of €5.00 per vehicle. Industry experts estimated $0.1 to $5 per vehicles based on different B-to-B use cases.
In June 2020 McKinsey predicted that revenues from data could generate approximately €50 a year per vehicle combining many use cases together.
External Business-to-Customer Value
In the Business-to-Customer area, many opportunities to be developed: subscription, loyalty, up-sale, cross-sale and others.
Subscription model is preferred to most OEMs and consumers. The studies from major auto markets like US, German and China showed that the maximum revenue for individual Connected Vehicle feature subscription is about $100 to $150 per year. Bundled features and services are more acceptable and economic to the customers.
Premium brand vehicle owners are more willing to pay a higher price for upgraded vehicle features than volume owners, but not too much higher.
Any one-time up-sales of ADAS features are getting populated by Tesla’s AutoPilot program. Lately, Tesla’s “Full Self-Driving” option, which currently enables Autopilot features like changing lanes on highways and automatic car parking, now costs $10,000 in US, or $2,000 more than before. Tesla CEO Elon Musk announced in a tweet in Oct 2020 in response to the launch of the Full Self-Driving beta. The traditional OEMs will be offer similar program as well once their Over-The-Air capability got improved. GM and Ford just announced their autonomous vehicle features in first half of 2021.
Loyalty has great potential as well. Like airline’s frequent flier program, the customer can earn points by repairing at dealership, purchasing in the car, subscribing to regular services, or simply engaging in some promotional activities. All the loyalty points can be redeemed for services or perks.
Conclusion:
Maybe Tesla and others are doing well, or at least well-known, in monetization of some features and data. But overall, GM continues to be ranked by industry analyst as the frontrunner due to its diverse nature of its strategy: On-Star install base, internal efficiency on diagnostics and warranties, its partnership with data marketplaces (wejo), in-car commerce platform (Xevo) and a number of bespoke B-to-B and B-to-C use cases.
Transforming to software-based revenue stream takes the cross-enterprise transformations: from one-time big purchase to monthly small incomes, from product revenue to service revenue, from inward enterprise effort to outward ecosystem expansion, from linear business to platform business. The transformations require the investors, OEMs, suppliers, ecosystem partners, and even customers, to collaborate and jointly win in the new automotive ecosystems. Monetization of vehicle software features and data is the breathtaking transformation defining the auto industry in the next twenty years.
