Telematics business models discussed and dissected

Precksha Saksena: What are critical factors for companies in the telematics industry to consider for 2008 and 2009?

Thilo Koslowski: There are multiple elements that companies will need to address in their strategies.

First of all, they must create innovative and flexible business models that can adapt to changes in demand, competition and technology. Telematics remains an emerging category, and any rigid strategy will have limited chance of success. For example, broadband wireless Internet access will have a profound impact on how content is distributed to consumers and will force automotive companies to reconsider charging for certain content offerings in the car.

Secondly, companies must embrace telematics and vehicle-centric information and communication technologies across the entire organisation. Telematics need to be joint and integrated into other key business objectives for an automotive organisation in order to provide the full ROI. For example, automotive companies must leverage remote diagnostics, not only within their own organisation, but extend any newly gained insights to its suppliers and dealers.

The third most critical factor to consider in the next eighteen months is to continue or start to establish new partnerships and supply chains that are centred on providing services and content to drivers and to establish a unique experience in the vehicle. Traditional automotive suppliers will continue to play an important role for the required hardware in a vehicle, but as important – if not even more important – will be the role of software and service providers. This will require a different mindset and the need to embrace new innovation areas that are not typical to the traditional automotive industry. Thus it will be crucial for automakers, traditional suppliers, TSPs, etc. to clearly define roles and be willing to take on new responsibilities as the market evolves.

However, most important for the automotive and telematics industry will be to stay focused. In times of softening markets there is always a risk that companies fall back into doing business the ‘old way'. I have seen this over and over again as the cyclical automotive industry goes through its stages. This approach, however, is contra-productive to telematics and new innovations. While an automotive company may decide to stand still and wait things out, consumer electronics and the Internet won't.

In the worst case, this could lead to an innovation gap that would be hard to overcome for an individual company.

PS: What's the best course of action for car manufacturers to ensure they keep the revenue from in-car infotainment?

TK: Vehicle manufacturers have a tremendous opportunity to create a unique and rewarding experience for customers who want to be connected to content and services, and to create an ongoing relationship with the automakers and dealers. User interfaces, content and device integration, and improving the vehicle ownership experience are just a few of the areas in which vehicle manufacturers can excel. We're just at the beginning of this, and, if done right, consumers will pay for this added benefit and unique value.

However, if not executed well, consumers will focus entirely on the aftermarket and consumer electronics side to find the solutions they want. Creating ongoing innovation, defining the right partnerships and understanding consumer needs and wants will be critical success factors for vehicle manufacturers seeking to generate revenues from telematics and vehicle ICT.

Ten years ago, when we started to provide strategic analysis to automotive companies regarding telematics, we established the following advice: It's not about replicating a consumer's experience – it's about enriching their experience when driving in the car. This advice still holds true today.

PS: Would the Asian model of extremely tight partnerships between OEM, network and device providers work in the US and Europe, or is another model emerging?

TK: While close working relationships with partners are a crucial element for any successful telematics offering, it's important to realise that these partnerships can't be exclusive or they'll stifle business model and service innovation.

The benefit of tight partnerships lies in accelerating the development and launch of new offerings, especially for those companies that require a knowledge transfer to understand limitations and opportunities outside their own industry. For example, some Asian network carriers have far more expertise in mobile Internet services than any of the OEMs. Vehicle manufacturers in Japan leveraged this expertise, which enabled them to launch certain telematics services faster.

PS: Do you think the Telematics arena can look at the present "free" business models for Internet services and adapt them to their advantage?

TK: Internet-centric information offerings are not really free, even when you're using your PC. That only occurred during the heydays when the Internet was born. Internet companies and content providers offer free information to consumers in return for exposing them to obvious or hidden marketing and advertising messages. However, consumers still pay for the access in form of WiFi subscription fees, etc.

The same is true for Internet content on mobile devices: You don't really pay for the browser or Internet content, but you pay for the wireless data plan.

I predict that we'll see a very similar model for ‘direct content distribution' (content being offered in the car wirelessly) in vehicles. You'll pay for the access, but not for the content, unless it is very specific content that has been exclusively designed for the vehicle driver (e.g. a Mercedes-Benz traffic service only for Mercedes customers; remote diagnostic offerings that, after the warranty expires, can become similar to virus protection on your laptop).

The challenge the automotive industry will have to address is that consumers may already pay for multiple Internet access subscriptions (e.g. at home and on a mobile phone). Convincing consumers to pay for a third form of access to gain the same content will be tough. It's not a consumer choice but rather the consequence of technology limitations (e.g. WiFi or GPRS doesn't work everywhere).

Instead automotive companies must (a) offer the integration of Internet-enabled devices in the vehicle and (b) prepare for new wireless technologies that will change the current business model (e.g. WiMax will be a disruptive factor for delivering Internet content with no location limitations).

I created the term "sponsor-based, contextual information" in 2005, and use it to describe the way that companies (automotive, mobile and Internet firms) will use an advertising model to deliver information in a context such as the user's specific location, environment (home, work, office) and needs (e.g. searching for movie times).

PS: Is there a space for OEMs to profit from mobile phone integration in the vehicle? Should car manufacturers aim at owning the driver's relationship between their device and the car or would they profit more from opening up completely to all devices / apps?

TK: Enabling mobile phone integration in the vehicle is a prime example of an opportunity to provide a superior user experience for drivers. We introduced the broader approach in 2001 and called it "Device-to-Vehicle Integration". The focus has to be on making it easier, better and safer for consumers to use their existing devices in the vehicle environment context. It's not about replicating the device's functionality as an embedded solution. When done right, consumers will value this integration enough to be willing to pay for it. This requires more than a simple embedded Bluetooth solution, though. Instead, vehicle manufacturers should explore new user interface technologies, create use case scenarios for multiple occupants, etc.

PS: Can the telematics industry really expect the global environment concerns to have an impact on consumer demand?

TK: There's an opportunity for the automotive and telematics industries to address consumer awareness and demand for environmentally friendly technologies. Telematics services could extend beyond the vehicle and offer PC applications that allow users to maximise fuel efficiencies via improved route management (e.g., combine various individual trips to the grocery store with other business-related activities when travelling in a given proximity). A few companies have begun to explore this area, and I'm excited to see innovations in the near-term.

However, this approach will require a solid understanding of consumer behaviour that goes well beyond transportation needs. I predict that, within four to six years, some telematics- and navigation-related functionality will transition from a luxury feature to a necessity required by law. For example, navigation applications will become necessary to address growing traffic management needs in metropolitan areas and will accurately measure a driver's impact on pollution, etc. This isn't a scenario I personally look forward to, but I believe it's inevitable. Proactive initiatives by the automotive industry and innovations for alternative vehicle power plants will counter such legislative trends.

Thilo Koslowski is vice president of Gartner's Automotive & Vehicle ICT Manufacturing Industry Advisory Service.