Will Apple's over-the-air business model work in cars?
The electric Fiat 500 will be one of the cars within Stellantis to benefit from over-the-air updates
As car manufacturers look to ape the iPhone manufacturer and maximise revenue from software updates, will they be the golden ticket?
Apple’s profits margins are legendary, but topping them all are its margins for services, i.e. the software-based features which run at around 70%, roughly double those for hardware like iPhones. Car companies, used to working on margins of up to 10% if they’re really focused, slaver at the thought of profits like that.
Now they think they can lift margins to tech-company levels with the same strategy - offering software-based services that car drivers will be happy to buy regularly.
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“A regular subscription income is like gold dust to any business,” says Richard Peberdy, UK head of automotive at consultants KPMG.
Stellantis was 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 20 billion euros by 2030, at which time it reckons it’ll have 34 million data-connected vehicles (essentially, 34 million mobile phones on wheels), up from around 12 million now.
It already reckons it collects around 400 million euros annually from 400,000 people subscribing to connected services, but anticipates it’ll make the leap once it starts rolling out cars with super-fast ‘STLA Brain’ hardware/software combination from 2024. Features and subscriptions based services will “increase notably”, said Stellantis’ chief financial officer Richard Palmer in the presentation.
Palmer spelled out in vague terms what they’ll be, including updates and add-ons to improve safety, security, entertainment, navigation and remote options. There’ll also be features-on-demand operations that wouldn’t need subscriptions, plus usage-based insurance and for fleets, telematics services to better manage operations.
In the questions session however, Patrick Hummel, a financial analyst at the bank UBS, raised an objection. “The more I hear car companies talk about tech-like margins, basically everybody, the less likely it seems to materialise,” he said as a prelude to a question. His point was that while tech companies like Apple have unique digital eco-systems that customers are prepared to pay extra to get the most out of, car companies don’t.
In a low-margin, cost-focused business like the car industry, everyone shares suppliers to increase economies of scale, the upshot of which is that everyone has the same features. Then it becomes a race to the bottom as they tempt customers by offering more of those than competitors’. “It seems difficult to me to end up in a scenario where every player stays very focused on monetising rather than just selling the car and giving away some features for free,” Hummel said.
Stellantis CEO Carlos Tavares replied that the company could overcome this through the strength of its 14 brands and via its cost discipline, but it remains a good point: will we ever need to pay extra for digital services given someone, somewhere will probably give them out for free?
Right now services are few and far between. VW Group brands, for example, will charge to benefit from data sharing between your car and your app after a certain period when it’s given for free, but the cost is likely to outweigh the benefit for most.
Premium brands such as BMW and Mercedes have got smarter in offering digital downloads to upgrade your car after the event: for example, BMW will charge you to upgrade your cruise control to adaptive cruise control. Or if you don’t have Apple CarPlay you can add it for £265.
Competitors, however, will offer these features for free (or at least bundle it into the cost of the car). “The question is where does the line fall between what is attractive and free and therefore is a really important part of getting a consumer to choose your car, versus what people will pay for to achieve a good stream of regular income,” KPMG’s Peberdy says.
Customers might baulk at paying to access for something that they see as already being fitted to the car, but that is changing. Software upgrades delivered over the air can radically improve the functionality of hardware fitted to cars, for example the camera systems or an electric car’s battery.
The hot-potch of controllers for different functions in current cars is being swapped for smarter central brains that can deliver services faster. Renault is switching to a dual-chip system from 2026 powered by U.S. chipmaker Qualcomm that will power technologies such as the digital cockpit, 5G connectivity, over the air updates and Level 2+ driver assistance.
The service or feature being offered might not even be conceived at the time of purchase, let alone embedded in your car waiting for you to unlock it. Thierry Cammal, the head of Renault Group’s Software Factory told journalists in a briefing in January that Qualcomm’s ‘Digital Chassis’ technology will allow it to develop services in “3-6 months”, rather than the three years it takes now. Rather than it being downloaded into the car it stays in the cloud and you access via super-fast 5G modems.
What exactly we’ll pay for is still up for debate. Ford this week revealed one possibility in the form of car security. Its new venture, along with security camera company ADT, creates a subscription monitoring service for cars or commercials that’ll in the future use the vehicle’s own cameras and other sensors to detect potential break-ins. The subscription will give you access to staff who’ll investigate alarms.
One strong possibility is that we’ll pay extra to access autonomous driving functions. Tesla has pioneered this with its Full Self Driving function that can be downloaded to your car for $12,000 (just increased from $10,000) or $199 a month.
Other car makers are following Tesla’s lead. Nio in China has rolled out its NIO Autonomous Driving (or NAD) that costs 680RMB (£78 a month). As with Tesla’s system, Nio promises it’ll improve over time.
The danger is, of course, that once we take our hands off the wheel they’ll go straight to our phones, and that’s only going to help the revenues of tech companies like Apple and not the car companies. Those future ‘software-defined’ profit margins are not locked in just yet.
