With Apple’s software-based services offering up 70% of its profit margins, the question is whether this over-the-air (OTA) business model will ever work in cars.
In comparison car manufacturers often only gain only 10%. For this reason, automakers are turning to ‘software-defined’ vehicles to boost their profits in the hope that the OTA will be a lucrative subscriptions goldmine. In an Autocar article asking the question: “Stellantis is the latest carmaker to spell out exactly how much money it thinks it can make from so-called ‘software-defined’ vehicles at an event dubbed Software Day in December. It predicted revenues of €20Bn ($22bn) by 2030, at which time it reckons it’ll have 34 million data-connected vehicles (essentially, 34 million smartphones on wheels), up from around 12 million now.”
Manufacturers’ opportunities
Mathias Vaitl, head of Mercedes me and digital services business, Mercedes-Benz AG explains that OTA is certainly a trend for the automaker because vehicles are increasingly connected and they are more software-driven than previously. Part of the reason is the need to keep functions and features up-to-date and OTA offers new opportunities for vehicle manufacturers to add new functions to the extent that over-the-air enables “to become a more and more effective tool for the customer as time goes on”, he says before claiming that Mercedes customers “will always have the latest software in the vehicle in the future”.
Vaitl thinks there is lots of potential in OTA updates, for example by enabling the updating of the majority of control units in the vehicle for maintenance purposes. By using the technology, customers’ time is saved. There is no need to visit a workshop to update the control units.
He adds: “With seamless and efficient OTA updates, the data-enabled technologies inside the car are always actualized, no matter where our customers are. OTA updates not only affect our vehicles but also component parts like wallboxes. We will soon launch the new Mercedes-Benz Wallbox, which has the technical option of receiving software updates "over-the-air" in the future. In this way, additional practical functions can be added continuously, for example access control with RFID or the smart integration of the wallbox into the customer's own energy network and energy management system.”
Improvement
Oleksandr Odukha, head of automotive at Intellias, says the OTA updates are being developed for the entire software in each vehicle. Vehicle manufacturers deploy OTA include Tesla, Polestar and Ford. Despite this he warns that a solution to update anything and everything is not there in the mass market yet.
He believes the first trend must be about achieving this ambition. He stresses that the market is split into firmware updates and content updates and he suggests that it’s essential to be able to “update any part OTA, as software can hardly be bug-free, and this is particularly important for autonomous cars”.
Odukha remarks that ADAS and autonomous driving are by design prone to issues. Carmakers, he explains, are often reluctant to do the updates whenever they are required to recall cars and to get service centers involved. One reason is the high price of labor to complete them. Yet these small fixes are often essential to the efficient running and safety of the vehicle. He therefore concurs with Vaitl, arguing that OTA “really adds value… My car is already connected, so I can use some services and get updates for navigation. So, it’s already possible to exploit it.”
Smartphone
Most connected vehicles use Linux OS systems, Apple CarPlay or Android Automotive. Comparing cars with smartphones, he says Android smartphones developers provide customers with security updates for every month over 3-4 years. However, regulation is missing. “So, even when you have your mobile phone connected to your car, to perhaps your Apple CarPlay, nobody can guarantee that your smartphone can’t be used to attack your phone and the car.”
OTA is therefore vulnerable to attack and it can represent a major safety issue. “One hacker showed that he had full control of 21 cars, so it could do whatever he wanted,” he reveals before commenting that Tesla is advanced. However, being a Tesla doesn’t make the vehicle bulletproof. In fact, it just attracted the hacker’s attention. He explains: “There is no software that is bulletproof. It’s just that some software has either been exploited or fixed. So, we need to bring to the automotive industry the monthly security updates we have with our smartphones.”
Software
Vaitl stresses the need for appropriate software to deploy OTA, stating that software is the foundation and not data. However, data quality is still crucial. He says it ensures the best customer experience can be delivered and maintained. He explains: “Data makes it possible to develop and utilize innovative services like OTA. Moreover, we can individualize services, products and offers for customers with the help of data and of course, we can also learn through our customer’s data – if they allow the use of their data.”
Key to the data element is trust in how, for example, Mercedes handles customers data responsibly and securely. “The guiding principles of transparency, choice and data security are crucial to us as a company,” he comments before adding: “The explicit consent of the user is always a precondition for OTA updates, and we rely on mobile radio technology and the communication module installed in the vehicle because of the high security standard.”
OTA profit
So, how feasible is it for automakers to match Apple’s potential profit margins with OTA software and software-defined services subscriptions? Odukha demonstrates how the market has changed by talking about how the smartphone market has changed. In 2007, when the first iPhone was launched, profits were made by selling handsets, then by selling ringtones. However, they didn’t work out. Apple’s invention of the Apple App Store did. Its purpose was to sell content and services. The biggest revenue stream was no longer the handsets themselves. They became revenue streams through the app stores, which today generate billions of dollars yearly.
He finds that car manufacturers have the same problem as the pre-iPhone market: “Automakers and their ecosystems make the majority of the money from selling the car and by selling some car services such as repairs or aftermarket parts and customizations but most people just service the car themselves to keep the costs down. The car manufacturers need to convert the car into a revenue stream. A smartphone is able to convert consumer time to money, and that’s not the case yet with cars.” Compared to cars, which are stationary up to 95% of the time, smartphones are always close to us.
To run the car into a revenue stream, Odukha believes there are two options: to sell some features of the cars as a subscription, or where people buy additional features over time – such as Tesla’s Autopilot feature. He nevertheless warns: “The actual use cases need to be evaluated by OEM carefully; you don’t pay a subscription to have a new bumper. So, when OEMs try to mimic smartphones or MNOs, it may not work directly.”
He adds that it’s not about the features of the car, it’s about content and applications to improve the experience of using the car. The second consideration is how to make money – the business model, which requires automakers to align with other ecosystems such as streaming services in the same way that TV manufacturers do with Netflix or Amazon Prime. The need is to convert the car into a revenue stream. Without this, he thinks: “OEMs will limit their abilities to compete against Apple, Google and so because the big players already have their own ecosystems. OEMs therefore need to move now. Some of the big players see it, and some OEMs are moving in the right direction.”
Subscriptions goldmine?
So, why is the OTA business model a subscriptions goldmine? Odukha concludes that it’s not really a subscription goldmine today. There is a need to think about the business, and to consider what the carmakers want to sell beyond just their vehicles. This includes consideration of how to connect with other ecosystems to be able to monetize, streaming, software, maintenance and other services.
“It’s about adding real value, instead of digging gold and trying to monetize everything which may go wrong, and Apple and Google are two big ecosystems – you may stay with them for years, whereas the car OEM landscape is rather small in volume and very diversified,” he says before suggesting that automakers should consolidate by teaming up with a maximum of two or three ecosystems. So, for example, if German manufacturers can find a way to consolidate, it will make it easier for customers to switch brands while staying within the same marketplace ecosystems.
From Mercedes’ perspective, it’s not just about saving money as a manufacturer, which they can do with OTA. It’s about the customer, allowing customers to book and add additional services and optional extras, which can be added over-the-air. Vaitl ends by stressing that OTA is not just about software updates, it’s about features which haven't even been invented yet. If carmakers can get it right, even if it’s not yet a goldmine, it could be with the right business model in place.
