OTA Upgrades as Post Sales Revenue Generators

Over-the-air (OTA) software updates are seen by virtually all automakers as a critical avenue to high margin revenue generation.

However, so far, only Tesla has fully exploited the capability for its customers, although others are slowly catching up. These OTA updates will help give automakers the chance to establish a deeper, longer lasting relationship with their customers but it will require companies to rethink business models and the way their vehicles are made.

“Tesla has been doing this for years and that’s because of the way they were set up differently,” said Jefferies analyst Philippe Houchois. “Cars, until recently, were results of layers of technology that were added to the vehicle, whereas Tesla was a complete software driven vehicle from the beginning.”

The multiple computing hardware and software layers of today’s vehicles pose a challenge for automakers looking to move more fully into OTA updates, he said. “When you try to do OTA updates for different functions, you’ve got to get through firewalls and the information gets lost,” he said. “The layering of different apps means the software architecture is just not streamlined.”

In order to keep cars fresher and up to date, software updates will need to move to the fore for automakers, Houchois said. “Potentially, automakers will create their own app store that will be approved by them to sell apps and they will take a cut,” he said. “Either it happens that way, or automakers will purchase the content of the app – that part still needs to be worked out.”

The key point for carmakers is how they will develop and keep a captive customer base, he said. “That’s one of the most interesting changes in the business model,” he explained. “As soon as your car can help you read your email to you or power your house, the function of the car goes up significantly because it’s useful more of the time. That’s one of the most interesting changes in the business model. It’s not just about transport, it’s about much more.”

For Mike Ramsey, analyst with Gartner, the basic answer to the automaker push to OTA updates is cost savings and content generation. “Before, and even now, everything was built around a product that was then launched with as few problems as possible, that pleases customers enough so that, three-to-five years later when they want the new thing because it doesn’t have the new features, they come back,” he said.

With OTA software updates, Ramsey said what the owner gets initially is, in some ways, the worst version of what the car will be and, short of adding hardware or more memory or a graphic card, automakers have realized the changing business dynamics of OTA updates that move the automobile closer to the smartphone. “If you look at the way mobile phones work, you can also now have the ability to improve your vehicle and add content to it that it didn’t have when you got it, which changes the business model for automakers quite substantially,” he said.

In addition, car companies now can identify problems with the vehicle and fix them OTA, allowing automakers to fix broken cars with no issues for the consumer, another big issue from a cost-savings standpoint. “If you could fix all things with software update at home, you’d save $15Bn on costs globally,” Ramsey said.

He also pointed out adding content does two huge things for automakers. First, it provides “super high margin” new revenue on software and, second, it connects the company more directly to the consumer forming a potentially more lucrative, long-lasting relationship. “People are connected to the automaker, not some random dealer, and this has lots of implications for them when they think about developing opportunists and experiences and how their software is developed,” Ramsey said.

Catch-up

He noted automakers are hiring customer experience specialists with, most recently, Volkswagen and their appointment of Markus Kleimann as chief experience officer, to figure out how they can best use OTA to sell new content and fix problems. “Car companies need to be very careful about being too greedy, however,” Ramsey said. “They get big eyes about ways to shake down customers that are already spending $42,000 on a new vehicle. I worry they’re casting about to wring more money out of people when they should be thinking about ways to make something cooler.”

He thinks automakers should be focusing on paid OTA updates that offer the owner ways to differentiate their vehicle, either visually or through sound. Downloadable software that allows you change the engine sound, or a steampunk instrument cluster. “The customer thinks, hey, I would pay $50 for that,” he said. “That’s where they need to be thinking. They should maybe be starting small.”

Ramsey noted it’s important to differentiate between OTAs and value-added services that are simply streamed to the vehicle. “Those streaming services do establish a direct connection to the consumer but it’s not really an OTA update because you’re not changing the car, you’re just piping in information,” he said. “A lot of times automakers mix those two things together but its more about exploring the connectivity: how does having a connecting data pipe to the car do to all these business models?”

For now, Tesla is still the clear leader in the OTA update space, though Ramsey noted automakers from VW to Ford are rolling out update capabilities. “These efforts are starting get closer to where Tesla is but they are all still pretty far behind,” he said. “Let’s be honest, they’re taking steps to close the gaps but Tesla isn’t standing still and the downside for Tesla is, as it puts more vehicles on the road, updates become much more challenging, it will get harder for them and they won’t have the speed that they used to have.”


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