Wild Ass Rumor of the Day: GM Turning OnStar Off?

A TTAC source has pinged us: “‘I’ve just heard 2nd hand that the Delphi OnStar team has had all their GM contracts canceled. It seems that GM may be getting rid of OnStar completely, but it isn’t clear when that would happen. This sounds like a pretty good business decision to me since cell phones have become so widely adopted, and navigation systems are getting cheaper.” This tip flies in the face of a recent Reuters report, in which the head of said OnStar claimed the service was wildly profitable. OK, “highly.” Which is the same as “wildly,” given GM’s current slide into C11. Anyway, “GM does not break out its revenue or profits from OnStar, but had said the division had turned profitable in 2003 and has been steadily and more profitable since. The division receives part of its revenues from consumer subscription fees.” One possible explanation (just in): GM is simply “de-sourcing” Delphi as OnStar supplier, as it prepares to deep-six the bankrupt parts-maker’s contracts. Or something. But wait! More tipster action from an ex-OnStar employee after the jump.

OnStar is marginally profitable. As stated by one of your commentators, a lot of the satellite service’s revenue comes from “transfer pricing” from GM. GM pays OnStar roughly $200 to $300 per car sold with OnStar on board. Somehow, OnStar has managed to convince themselves that this is “real” money. More proof that GM is excellent at ignoring reality.

OnStar also gets to book all of the money that XM radio pays them for putting XM receivers on cars. It’s nothing more than an accounting trick that makes OnStar look A LOT bigger on paper than it really is. And there is virtually no cost offset to this revenue. OnStar just cashes the checks for GM.

OnStar also receives revenue from subscription renewals. The overall renewal rate is well over 60 percent; 50 percent after year one, higher after that). The margins are very high; higher than the auto business. And that’s an extremely impressive retention rate. But remember: OnStar had access to GM’s bloated advertising budget. They’ve flooded the airwaves for years.

There’s also quite a nice revenue stream coming in from GM used vehicles now.

So what is just the OnStar portion worth on the open market? I’d guess the number starts with an “m” not a “b”. I mean if it was worth so much, why wouldn’t we have sold it already with the rest of the furniture? One possible reason: Red Ink Rick saw OnStar as one of his babies. Henderson doesn’t feel that kind of ownership.

It’s also worth noting that GM dumped billions of dollars into OnsStar (in the late ’90s) before it turned a profit. I’m pretty sure it still hasn’t broken even over it’s entire life.

I’ve heard that OnStar is talking to Verizon. Makes sense. Verizon provides the bulk of the cell network for OnStar. OnStar’s book value on how long its managers think they could maintain their existing customer base and whether or not they could get other carmakers into the mix. As most other automakers have started their own OnStar-like programs already, I’m not sure there’s a lot of potential for new business.

And as another commentator pointed out, technology marches on. Can OnStar keep up with portable devices with a younger clientele?

If anyone knows more on OnStar’s life (or death) during wartime, please email robertfarago1@gmail.com.