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3/27/2002
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The Telematics Challenge

Major carmakers are moving ahead with wireless automobile services, but can they navigate the road to a workable business model?

Most Americans' first awareness of telematics was a TV ad. Batman streaked through Gotham City in a Batmobile equipped with OnStar's emergency roadside assistance system.

General Motors Corp.'s telematics company boosted public awareness of wireless technology helping out a motorist in a pinch. The success came not just to OnStar, which says its consumer brand consciousness jumped from about 30% in the fourth quarter of 1997 to more than 80% by the end of 2000, but for telematics in general. "The market didn't take off until Mercedes made it standard across its model line in 2000 and GM extended telematics to 36 model lines," says a spokesman for ATX Technologies Inc., which sells telematics services to luxury carmakers. Some car manufacturers, including Honda, Audi, and Toyota (in Lexus models), use the OnStar system as well, though Lexus uses it under its own name.

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Low Interest in Car-Based Web Access
A survey of 20,000 households shows that few users would use an in-car telematics system to access wireless data services. Thats not so surprising given that the telematics industry has so far focused on voice and emergency-assistance applications.

Telematics refers to the intersection of telecommunications and computing, but the term has grown to encompass a variety of in-car systems that provide drivers with emergency roadside assistance and turn-by-turn directions, plus other services that include hands-free cell-phone use and access to road-condition reports and weather forecasts.

Ford Motor Co., DaimlerChrysler AG, and a host of telematics service aggregators are trying to build successful businesses based on wireless services to the car. Ford will sell 2003 model-year cars with Wingcast, its own version of OnStar. Last year, DaimlerChrysler said it would work with AT&T Wireless rather than build its own telematics service; the company plans to make telematics systems a dealer-installed option on several new car lines. In addition, companies such as MobileAria Inc. and Comworxx Inc., which aggregate telematics services, will sell systems through aftermarket consumer-electronics retailers such as Best Buy and Circuit City.

This year, the number of cars capable of delivering wireless services to motorists--from emergency assistance and stolen-vehicle tracking to directions, weather and traffic reports, and E-mail--will increase dramatically. "We're about to see a huge explosion," says Carla Ussery, executive director of retail sales and telematics for Verizon Wireless, which sells airtime to OnStar and Wingcast.

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Telematics has the potential to become the first big consumer wireless data breakthrough in the United States. Research firm Driscoll-Wolfe predicts that about 10.8 million American motorists will subscribe to telematics services by 2004, up from about 2.4 million today. Strategy consulting firm Roland Berger forecasts 100 million telematics subscribers worldwide by 2010, with 44 million of them in the United States. By 2010, Roland Berger says, telematics will be a $24 billion market worldwide.

However, the road is littered with numerous potential stumbling blocks. Will telematics services progress significantly beyond basic voice calling and security alerts (see Safety First But Not Foremost)? Are automakers the right companies to manage information services, or is that best left to other providers (see Should Carmakers Be Network Operators?)? And will consumers pay enough for the services to make them financially viable for the carmakers and service providers (see Telematics Beyond Voice: Look Ma, No Hands)?

After all, even the Caped Crusader's derring-do hasn't made OnStar a profitable business unit. "OnStar is not living up to expectations at all," says Michael Heidingsfelder, a partner at Roland Berger. Even worse, the value of OnStar has apparently been lost on many of those who might use the service. Perhaps it's no surprise that GM has slowed down implementation of the system in several vehicles.

chart 1

The Missing Business Model
The early telematics promise has not been realized. Automakers originally saw it as a way to gain a new, regular relationship with their customers, but the high cost of the hardware and the call-center operations kept it limited in both user base and functionality. That contradicts the fact that telematics is based on a service model: The more subscribers using the system, the more money the service provider makes. That's a model foreign to U.S. carmakers, whose businesses are based on moving units.

Service is a volume business, but carmakers have restricted the telematics market by making services available only on certain cars, mostly luxury models. A Ford spokesman says that Wingcast, too, will initially be a luxury option, as OnStar is with GM cars.

Today, the services are too expensive and too limited for most consumers. Of the 20,000 people interviewed by Driscoll-Wolfe, 71% say they are interested in location-based services, including emergency 911, emergency roadside assistance, stolen-vehicle tracking, and directions. But they would pay only an average of $8.65 a month for such services. OnStar's basic service is $199 a year, or $16.20 a month. Ford declines to say how much Wingcast subscribers will pay to use the service, but a spokesman says the company is considering charging on the basis of usage.

The hardware costs need to drop as well; Wingcast CEO Harel Kodesh says automakers have to reduce the cost of the telematics control unit and somehow persuade consumers to warm up to paying for them, as they do for airbags. "They just don't see that as part of the MSRP," he says.

"Price is a big driver," agrees Andrew Carrington, CEO of telematics company VCommand Inc. "When it's $200 or $300 worth of hardware, it's a no-brainer for the car organizations to integrate it into the car--it's like power windows." But he's hopeful that the hardware price will soon be at acceptable levels for consumers. "We're very close to those kind of numbers on a wholesale basis," he says.

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By the end of this year, the major American carmakers all will offer some form of telematics, and the coincident arrival of data-oriented 2.5-generation and third-generation Lite networks could finally provide the infrastructure needed to support a true mass market. Given the amount of time that Americans with cell phones spend in their cars, this could provide an opportunity for wireless application providers. While Ford and GM will offer services on their networks, they won't build all the applications themselves.

OnStar is already using applications developed by others. In the beginning, there weren't a lot of people with the skills to develop telematics applications, says OnStar's Bruce Radloff. "As the years have progressed, we've been trying to limit our investment to the things that make us unique and depend upon other application providers to bring capabilities to us," he says. OnStar uses content from the Wall Street Journal, ABC News, and Fidelity Investments. OnStar has also done joint development with Fidelity "that lets our subscribers invoke trading and other financial transactions that they've developed on their site," Radloff says.

chart 5

Wingcast's Kodesh says his company will operate the network and some core services, hoping that independent developers will provide applications, as they do with NTT DoCoMo's i-mode service in Japan. "We would like to engage people who develop content and services, and they would put their services on our network," Kodesh says.

In many respects, the stage seems set for wireless services delivered to motorists. But many data applications, including those that integrate voice with data, will have to wait until the United States has broad cellular coverage and 2.5G and 3G networks.

Chuck Lenatti, a former features editor at M-Business, is a freelance writer in the San Francisco Bay area.

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