By Joerg Dittmer

During the technology bubble of the late 1990s, passenger vehicle telematics was expected to be "the next big thing". However, the North American telematics market has been much slower to develop than anticipated.

Combining numerous industries, including automotive, computing, telecommunications, and content, telematics provides a host of in-vehicle services to drivers. With the following services, telematics brings vehicles into the information age:

Future services may include dynamic routing (incorporating real-time traffic information), entertainment on demand, onboard computing, Internet access, and mobile and location-based commerce.

Chart 1 illustrates the market structure, indicating relationships among the participants.

Chart 1

Passenger Vehicle Telematics Industry: Market Structure (North America), 2004

Source: Frost & Sullivan

 The onboard portion of telematics consists of hardware that combines computing power, a receiver for the global positioning system that determines the vehicle's location, cellular communications capability, and peripherals such as buttons and antennas. Response centers provide services, connecting to vehicles through cellular telephone networks. Content, such as traffic and weather information, is provided by various organizations through the response centers.

Why has telematics been so slow to take off? There are numerous reasons:

High cost:

When offered as an option, telematics hardware costs $695 to $1235 (manufacturer's suggest retail prices). Additionally, users must pay annual subscription fees of over $200 after the initial year of included service.

Many competing products:

The services offered by telematics also are available in many other forms, such as paper maps, autonomous navigation systems, GPS-capable cellphones, and vehicle tracking devices. Vehicle buyers who value just one or two services may be able to buy just those services at substantially lower cost.

Limited availability:

Telematics is not available on all vehicle models. Some automakers do not offer any vehicles with telematics.

Low awareness:

Many vehicle buyers are not aware of telematics, and many salespeople do not promote telematics even on vehicles where it is available. Thus, take rates are low when telematics is optional.

Low perceived utility:

20 to 30 percent of buyers of vehicles with standard telematics systems do not bother to activate their systems.

Low utilization rates:

Many owners of telematics-capable vehicles find that they have not used the service during their initial year of included service, and thus do not renew their subscriptions. Frost & Sullivan estimates that the market-wide renewal rate is just 43 percent, even when owners of telematics-capable vehicles who never activated their systems are excluded from the base.

As a result, the market has developed because certain automakers have taken the initiative in equipping their vehicles with telematics systems and not because vehicle buyers are asking for telematics. In model year 2004, General Motors offers telematics on about 50 models, Mercedes-Benz has made telematics standard on all but one of its models, and BMW has made it standard on the 5-Series and 7-Series vehicles and optional on all other models.

However, certain other automakers have stepped back from telematics. Infiniti, Jaguar, and Lincoln at one time offered telematics, but no longer do so. Acura discontinued telematics on the 3.2 TL. Chrysler Group does not plan to offer telematics, having instead begun offering Bluetooth technology on some of its vehicles. This allows drivers to use Bluetooth-capable cellphones with onboard technology that enables voice-activated hands-free calling, replacing a major function available with some telematics systems.

Chart 2 presents the status of telematics at various automakers in North America. Other automakers are not known to be considering telematics, although some automakers that have dropped telematics may bring it back once costs come down sufficiently.

Chart 2

Passenger Vehicle Telematics Industry: Status of Telematics by Automaker (North America), Model Year 2004

Source: Frost & Sullivan

Outlook

Thus, the telematics industry faces consumer resistance and sharp competition. Frost & Sullivan projects that the industry will grow at a moderate pace through 2010, primarily penetrating upscale vehicles. Hardware installations are projected to rise from about 2.2 million in 2003 to about 4.4 million in 2010, a compound annual growth rate (CAGR) of 10.2 percent. The subscriber base is projected to grow from about 3.1 million at the end of 2003 to about 7.3 million at the end of 2010, a CAGR of 13.1 percent.

Chart 3 illustrates that market penetration is expected to remain low, no matter how the potential market is defined. Frost & Sullivan predicts that only 2.7 percent of all vehicles in use will have telematics subscriptions in 2010. Furthermore, because some owners do not activate their systems and because renewal rates are low, only 25.5 percent of telematics-capable vehicles are expected to have subscriptions.

Passenger Vehicles Telematics Industry: Subscriber Base Forecast (North America), 2000-2010

Source: Frost & Sullivan

 

What will support the industry? The following factors are expected to be market drivers:

• Declining prices for onboard hardware
• Rising awareness, especially in light of growing desire for safety features
• Additional services, such as dynamic routing and remote vehicle diagnostics
• Insurance discounts, based on where, when, how, and how much a vehicle is used

The last point could potentially be a major market driver. Some insurance companies have run trials in which they offered customers discounts in return for being allowed to monitor vehicle use. An offsetting savings such as this could encourage more drivers to acquire and renew telematics services. If the concept catches on, insurance premiums for non-participants may rise to offset the discounts that participants receive. This would give more and more people incentive to participate.

An elaborate quantitative model of the telematics market developed by Frost & Sullivan projects the North American telematics market to grow from about $1.3 billion in total revenues in 2003 to about $2.7 billion in 2010. The CAGR associated with these figures is 11.1 percent.

This projection includes hardware, service, and cellular airtime revenues. However, some double counting may lurk in these figures, because some subscription revenues go to automakers to subsidize hardware installations. Only about half of subscription revenues go to response center operators such as ATX Technologies, Cross Country Automotive Services, and OnStar Corp. (a wholly-owned subsidiary of General Motors).

Cellular airtime charges for calls to response centers are included in subscription fees and therefore are not added into total revenues separately. Personal Calling revenues, generated by use of the embedded cellular hardware for calls not to response centers, are added into total revenues because these calls are paid separately. BMW and General Motors permit Personal Calling on their telematics systems.

Chart 4 graphs telematics industry revenue data, segregated by hardware, service, and Personal Calling revenues.

Chart 4

Passenger Vehicle Telematics Industry: Revenue Forecasts (North America), 2000-2010

Source: Frost & Sullivan

While market revenues of $2.7 billion in 2010 may appear to be substantial, it pales in comparison to projections made before the dot-com bust. Reasons for the lower revenue projection are:

• Lower installation rate forecast, resulting in a lower unit shipment forecast
• Lower renewal rate forecast, compounding the lower subscriber base forecast implied by the lower installation rate

The following price factors partially offset the above market size restraints:

• Less aggressive forecast in reduction of hardware prices because of lower projected unit shipments
• Essentially flat forecast for subscription rates, as opposed to an anticipated decline in rates, because of slower subscriber base growth

Since most vehicles carry only the driver most of the time, only services that can be used while driving are likely to find much interest. Even voice-activated hands-free calling is suspected of unduly distracting drivers - even with eyes on the road and hands on the steering wheel, attention that is given to a phone conversation is attention diverted from driving. This applies to email that is read by text-to-speech software as well as to telephoning. Other high-involvement functions that have been suggested for telematics, such as e-banking and stock trading, are likely to turn out to be similarly unsuitable - people probably will not want to be distracted from important tasks by driving any more than they should let other tasks distract them from driving.

Services that require looking at a screen are even less practical for drivers. Thus, productivity functions enabled by in-vehicle computing are not likely to boost the market. Even stop-and-go traffic does not generally provide significant stretches of time where a driver can attend to other tasks.

The fact that a particular telematics service is technologically feasible does not mean that it will necessarily find a market. The automotive industry is notoriously slow to incorporate new technologies, because of long design cycles and the risks associated with introducing new technologies. The North American automotive market has passed over many exciting technologies, usually because they are too expensive and vehicle buyers are not asking for them. Some examples are high-intensity discharge lighting, heads-up displays, and night vision systems.

In North America, safety and security features have provided the biggest draw for telematics. However, many potential customers say, "Good idea - but not at that price." This leaves the industry in search of a "must-have" application or suite of services. This is most likely to be found in functions that are specific to driving, such as dynamic routing, remote vehicle diagnostics, and usage-based insurance pricing. Additionally, the industry is aware that lower prices are needed for the market to gain traction.

Chart 5 presents a timeline of the development of the telematics industry from 2000 to 2010. Development of the hardware, service, and telecommunications sides of the market are shown.

Chart 5

Passenger Vehicle Telematics Industry: Technology Timeline (North America), 2000-2010

Source: Frost & Sullivan

Development of third-generation cellular communications networks will enable additional telematics services, but Frost & Sullivan does not regard these as critical to the telematics industry. Vehicles are not an ideal venue for productivity functions associated with onboard computing, and many formats (media-based and broadcast-based) compete with the in-vehicle entertainment functions that could be provided through telematics systems.

While the market has been slow to develop, it still holds promise. Frost & Sullivan anticipates that the installation rate for telematics systems will saturate at about 25 percent of vehicle sales in 2010, compared to about 12 percent in 2003. A rising renewal rate as drivers' familiarity with telematics services grows also is expected to support the market.