Can Automakers Really Cash In on Connectivity and Subscription Schemes?

Matt Posky
by Matt Posky

A little over a decade ago, it seemed like everyone I knew was abandoning cable packages for online streaming services. They were cheaper, on-demand, and offered more choices with fewer advertisements. But as the years progressed, companies stopped selling their media to a handful of online video platforms and started building their own. Programming became more transient and isolated, forcing consumers to buy into additional subscription services. We’ve since hit a point where the overall consumer experience has diminished and grown more expensive, despite the steady influx of competition.

While automakers have been dabbling with subscription services of their own, their earliest attempts turned out to be such overwhelmingly bad deals that the public refused to play along. But they’re not giving up that easily. Industry players have been trying to figure out ways to charge customers indefinitely for years and are starting to settle upon subscription packages that can unlock hardware that’s already been installed into the vehicle or add software that can be downloaded via over-the-air (OTA) updates. Love or hate it, vehicular connectivity has opened up the door for new sources of revenue and businesses everywhere are eager to take advantage — with most companies projecting exceptionally healthy profits for the years ahead.

Some of that will stem from direct monetary transactions with the customer. Perhaps you want to update the look of your car’s instrument cluster to include Hello Kitty or upgrade its navigational system to be voiced by Patrick Stewart. Automakers will have you covered, for a fee. But several companies are also pitching business concepts where customers will be able to add features or boost the physical performance of a vehicle using the same methodology. And it sounds pretty futuristic until you realize that it’s pretty hard to add heated seats or additional horsepower over the airwaves. Though it’s incredibly easy to disable those items remotely using vehicular connectivity and then charge customers a monthly fee to unlock them.

But it’s also fairly simple for manufacturers to swipe private driving data from vehicles that can then be used for market research, leveraged on behalf of insurance agencies, or simply sold off to advertisers. So easy, in fact, that data harvesting is already commonplace on modern vehicles. You don’t even need to be the car’s owner. If you’ve ever synced your phone with an automobile, there’s an extremely good chance the car pulled as much data from it as possible before beaming it back to a data center.

Stellantis gave us a preview of just such a business model last week when it announced its plan to cultivate €20 billion ($23 billion USD) per year by 2030 via “software-enabled product offerings and subscriptions.” While the company isn’t what we would call a leader in the field, it’s committing itself to increase the number of connected vehicles it has sold from 12 million (today) to 34 million in under a decade.

General Motors, which has had its eye on monetizing connectivity a little longer, is targeting up to $25 billion in annual revenue by 2030 from software and subscriptions. To help the cause, it’s been updating OnStar and partnering with all sorts of companies to develop in-car applications. Similar projections (and plans) have been made by Volkswagen Group, Daimler AG, BMW, Ford, and a cavalcade of other manufacturers. Though it could be argued that Tesla is the company that’s currently leading the pack in terms of practical applications. It’s been making use of OTA updates to make changes to its vehicles for years and has rolled its misleadingly named “Full Self-Driving” suite into a subscription service.

There have also been a few scandals regarding how the company views personal ownership and secondhand vehicle sales — which we’ve covered. But this article is more about exploring whether or not the industry can actually bank on selling connectivity in the long term, rather than chronicling every perilous act that’s associated with the trend. Exactly how does the industry see all of this data-driven revenue shaping up?

“We intend to deepen the emotional bond between our customers and the brands they love,” Mamatha Chamarthi, head of Stellantis’ software business, said in a presentation to investors. “If the past was about increasing margins by moving customers north in hardware and trim levels, our future is about offering customers software-based services.”

It’s the old business model being conducted in new ways. But don’t let automakers fool you into thinking things are exactly the same. In order to make this all work, companies will probably need to standardize vehicles in a way that makes them cheaper to build while also possessing the relevant technologies that can be digitally unlocked via subscription fees. The data harvesting is also new(ish) and currently doesn’t provide the consumers with any real benefits beyond the prospect of receiving more relevant advertisements.

That could cause serious problems for automakers if customers find this new business model unappealing and start opting out — something more than a few people have told me that’s exactly what they’re planning. We’ve also found ourselves running into a period where the lower and middle classes are swiftly losing their purchasing power. The market may not be willing to entertain the automotive sector charging people an extra dollar per month to restore the intermittent setting on windshield wipers when drivers are finding themselves frustrated as to how they’ll afford gasoline and food.

But you don’t have to take my word for it. While CEOs have been discussing the need to reduce overhead by streamlining production, reducing headcounts, and focusing more on the wider margins possible via software purchases, those paid to watch the market are starting to express doubt. Automotive News recently explored the issue with Gartner automotive and smart mobility analyst Mike Ramsey, who suggested that consumers won’t have nearly the patience for these trends that manufacturers are assuming.

“I’m skeptical that any of these car companies will get anything close to the multiples they’re talking about from services,” he said.

From AN:

Automakers might be able to get customers to subscribe to features that go beyond what they have today, such as driver-assist technology, he said. But the companies will likely have trouble if they try the airline model of charging for amenities people are accustomed to having included.

“If they try to shake people down for heated seats, like BMW is considering, that’s probably not going to go over very well,” Ramsey said.

In Germany and Norway, Audi offers upgraded Matrix LED headlights on the E-tron and E-tron Sportback EVs for a monthly fee after buyers exhaust a free trial. And owners of the Polestar 2 EV in Europe can now buy a $1,100 performance upgrade that provides 67 hp more and faster acceleration.

Granted, companies are offering all sorts of new services that go beyond charging you for individual features and unlocking performance your car technically already had lurking beneath the hood. But some concepts are pretty invasive. Like other manufacturers, Ford is currently offering an updated version of its fleet management services. It’s been leveraging aspects of that for its retail business and plans to make connectivity a permanent fixture of its products to help maximize the prospective profitability.

“‘Always on’ means we are regularly interacting with our customers on things large and small,” Ford CEO Jim Farley said in July, “and we’re building new capabilities like connected services to enrich the customer experience and drive recurring revenue streams.”

This brings me back to the original cable-television analogy. When internet streaming hit the scene, it wasn’t long until it some people started seeing it as the better value. But that’s becoming less evident as the business model has matured and the market has become heavily saturated. Prices have only gone up and content has been divided between a growing number of platforms. This may feel counterintuitive, considering most technologies actually decrease in price over time. However, numerous industries are now pursuing the technology sector’s general obsession with monetizing users, rather than delivering true innovation or hardware people might want to own.

Automakers, game developers, media platforms, and other technology-focused industries currently seem to care more about customer retention and squeezing its existing clientele dry than drumming up new business. While that sounds like it could be a recipe for financial success in an over-saturated market, we’ve seen problems begin to manifest. Despite the pandemic giving the video game industry a huge boost, gamers are becoming disenfranchised with the industry’s heavy reliance on microtransactions and are spending less. As a result, literally every avenue of the business that isn’t tied to mobile gaming (e.g. tablets and phones) is expected to lose money this year.

Something similar appears to be happening with streaming services. According to the 15th annual Deloitte media trends report, the average user went from having 5 subscriptions in 2020 to just 4 in 2021. While the overall dropout rate was relatively low, hovering around 20 percent during the start of the pandemic, the rate climbed to nearly 40 percent between October 2020 and February of 2021. As belts tightened and more people got back to doing things in the real world, the elevated dropout rate has remained steady.

This doesn’t ensure the automotive sector will follow an identical trajectory as the entertainment biz. But it does provide food for thought if automakers are intent upon mimicking some of their tactics right when it seems like they’re not working as well as they used to. It’s unclear to this author how carmakers plan to tackle all these new subscription services when they’re also trying to mainstream electric vehicles, transaction prices continue skyrocketing, and the typical consumer has less money to spend. Maybe someone more optimistic can explain it in the comments.

[Image: General Motors]

Matt Posky
Matt Posky

A staunch consumer advocate tracking industry trends and regulation. Before joining TTAC, Matt spent a decade working for marketing and research firms based in NYC. Clients included several of the world’s largest automakers, global tire brands, and aftermarket part suppliers. Dissatisfied with the corporate world and resentful of having to wear suits everyday, he pivoted to writing about cars. Since then, that man has become an ardent supporter of the right-to-repair movement, been interviewed on the auto industry by national radio broadcasts, driven more rental cars than anyone ever should, participated in amateur rallying events, and received the requisite minimum training as sanctioned by the SCCA. Handy with a wrench, Matt grew up surrounded by Detroit auto workers and managed to get a pizza delivery job before he was legally eligible. He later found himself driving box trucks through Manhattan, guaranteeing future sympathy for actual truckers. He continues to conduct research pertaining to the automotive sector as an independent contractor and has since moved back to his native Michigan, closer to where the cars are born. A contrarian, Matt claims to prefer understeer — stating that front and all-wheel drive vehicles cater best to his driving style.

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  • Steve Lynch Steve Lynch on Dec 16, 2021

    Like Tesla has already proven, this will create utter chaos in the used car market. Unless you trade your car in at a same make dealership, the carmaker may not know you no longer own it. The day they find out out they will cancel the new owner’s car’s subscription features as they are blissfully driving down the road.

  • Vulpine Vulpine on Dec 17, 2021

    Personally, I wish they would drop the idea of the vehicle being a 'rolling hotspot' for the passengers; I am constantly annoyed by the OEM of my pickup truck begging me to subscribe to data services over and above the push-button emergency calls and voice-navigation functions, of which the navigation has NEVER been used in the course of more than three years of ownership and the other was used only once to complain about an OTA update that totally screwed up the infotainment system WHILE I was driving. Meanwhile, I find out that a smartphone/smartwatch company is setting up to have those devices automatically notify emergency services if they detect a crash, making such OEM subscription services redundant and likely unnecessary, as depending on the severity of the crash, the vehicle may not be capable of doing so. I already use both the watch and the smartphone mentioned and they're even more useful than the old, "I've Fallen and I Can't Get Up" pendant devices so touted by TV advertisers (and also don't require you to be conscious to use them if you do fall. In fact, they require you to be conscious to PREVENT them from calling if they detect a potential incident. Honestly, I wish my mother had had this in her last weeks; she might still be alive if she had.) My point is that outside of the original purpose of those push-button-help systems in vehicles, the other services are a waste of time and money, ESPECIALLY now that smartphones are so much more capable. Better to let the vehicle rely on the personal phone than to have multiple, redundant, data services that rely on the exact same infrastructure.

  • Varezhka I have still yet to see a Malibu on the road that didn't have a rental sticker. So yeah, GM probably lost money on every one they sold but kept it to boost their CAFE numbers.I'm personally happy that I no longer have to dread being "upgraded" to a Maxima or a Malibu anymore. And thankfully Altima is also on its way out.
  • Tassos Under incompetent, affirmative action hire Mary Barra, GM has been shooting itself in the foot on a daily basis.Whether the Malibu cancellation has been one of these shootings is NOT obvious at all.GM should be run as a PROFITABLE BUSINESS and NOT as an outfit that satisfies everybody and his mother in law's pet preferences.IF the Malibu was UNPROFITABLE, it SHOULD be canceled.More generally, if its SEGMENT is Unprofitable, and HALF the makers cancel their midsize sedans, not only will it lead to the SURVIVAL OF THE FITTEST ones, but the survivors will obviously be more profitable if the LOSERS were kept being produced and the SMALL PIE of midsize sedans would yield slim pickings for every participant.SO NO, I APPROVE of the demise of the unprofitable Malibu, and hope Nissan does the same to the Altima, Hyundai with the SOnata, Mazda with the Mazda 6, and as many others as it takes to make the REMAINING players, like the Excellent, sporty Accord and the Bulletproof Reliable, cheap to maintain CAMRY, more profitable and affordable.
  • GregLocock Car companies can only really sell cars that people who are new car buyers will pay a profitable price for. As it turns out fewer and fewer new car buyers want sedans. Large sedans can be nice to drive, certainly, but the number of new car buyers (the only ones that matter in this discussion) are prepared to sacrifice steering and handling for more obvious things like passenger and cargo space, or even some attempt at off roading. We know US new car buyers don't really care about handling because they fell for FWD in large cars.
  • Slavuta Why is everybody sweating? Like sedans? - go buy one. Better - 2. Let CRV/RAV rust on the dealer lot. I have 3 sedans on the driveway. My neighbor - 2. Neighbors on each of our other side - 8 SUVs.
  • Theflyersfan With sedans, especially, I wonder how many of those sales are to rental fleets. With the exception of the Civic and Accord, there are still rows of sedans mixed in with the RAV4s at every airport rental lot. I doubt the breakdown in sales is publicly published, so who knows... GM isn't out of the sedan business - Cadillac exists and I can't believe I'm typing this but they are actually decent - and I think they are making a huge mistake, especially if there's an extended oil price hike (cough...Iran...cough) and people want smaller and hybrids. But if one is only tied to the quarterly shareholder reports and not trends and the big picture, bad decisions like this get made.