Telematics:

How Economic and Technological Forces Will Shape the

Industry in the U.S.

May 2001

© Copyright 2001 inCode Telecom Group, Inc.

Table of Contents
Page
Executive Summary 1

What is Telematics? 1

Market Size 1

Service Offerings 2

Technology Issues 4

Current Value Chain 6

Dominating the Value Chain 8

Can Automotive OEMs Find Profits in Telematics? 10

Global Issues 11
Executive Summary
Telematics is the emerging industry of communication, information, and entertainment services
delivered to motor vehicles via wireless technology. Just a few years old, telematics will grow on
the heels of the wireless industry in the next decade as 3G networks and interoperable wireless
software platforms converge to meet consumer expectations and demands. To analyze the
dynamics of the telematics space, it is essential to separate over-hyped claims of future services
from that which is technologically feasible and economically viable. For example, limitations of
Interactive Voice Response (IVR) technology combined with driver distraction concerns will
dramatically shape the nature of future offerings. Ultimately, car manufacturers will own the
customer, dominate the industry, and achieve profitability through car-specific services, such as
navigation and telemetry (remote monitoring).

What is Telematics?
In the broadest sense, “telematics” refers to remote communications between systems and
devices. The standard AM/FM radio available in cars for the last few decades is an example of a
telematics device. Recent technological advances, however, have revolutionized and redefined
the term “telematics.” Telematics now refers to the emerging industry of communications,
entertainment, and information services delivered to motor vehicles via wireless technology.

Market Size
According to the Strategis Group, worldwide telematics subscribers numbered just 200,000 in
1999, but will increase sharply to 11 million by 2004. Figure 1 represents the size of the current
and projected global telematics market as measured by total revenues derived from end users:

Figure 1 - Worldwide Telematics Market Projections

50
Revenues from End Users

45
40
35
30
($B)

25
20
15
10
5
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Year

Source: UBS Warburg, Gartner, IDC, Strategis Group, Roland Berger, inCode Telecom analysis

The potential size of the telematics industry is enormous:

• Nearly 18 million vehicles are produced in North America annually
• According to JP Morgan, half of all new cars manufactured by 2005 will be equipped with
telematics devices
• Consumers currently pay up to $1000 for telematics hardware systems
• Consumers currently pay telematics subscription fees of up to $33 per month

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Demand for Services
Consumer Preferences
Telematics Service Provider (TSP) ATX Technologies claims a 94% renewal rate for its
subscribers, but this is misleading because ATX supplies only the luxury car market. The
telematics industry will not generate any profits until services are consumed by the masses. GM
OnStar, which is available on virtually the entire GM line of cars, gives away the first year of
service for free, but retention rates hover around 30%. Clearly, consumers are not willing to pay
significant fees for the basic safety and security services offered today, and carmakers have yet
to find a profitable combination of services and price.

The evolution of U.S. demand for telematics services will progress from a focus on safety and
security today, to information and productivity, and then entertainment, in the future:

Figure 2 – Evolution of Consumer Telematics Interests

Entertainment
Future Music, Movies, Games, Chat, Web
Demands Browsing, eCommerce

Information/Productivity
Navigation, Voice Mail, eMail, Calendar, Increasing
Contacts, News, Weather, Stocks, Sports opportunity for
product
differentiation &
Security Industry Profits
Roadside Assistance, Stolen Vehicle Tracking, Remote Door
Unlock, Telemetry (Remote Monitoring)

Safety
Automatic Accident Notification, Emergency Assistance, Medical Profiling
Current
Demands

To date, the primary value to the consumer has been confined to an intangible feeling of comfort
from knowing that in case of an emergency, help is just the push of a button away. Consumer
tastes are shifting toward pragmatic services as well, such as roadside assistance and remote
door unlock. Within the next couple of years, security and safety services will become
commoditized and these basic services will be simply the price of admission for selling cars.
Consumer prices will be driven down and carmakers will continue to lose money in telematics.

The next generation of telematics will include personal productivity and information services more
robust than those offered today. Specifically, navigation and telemetry are consistent with an
overall carmaker strategy that is focused on car-specific services. Internet content and
entertainment services may become important in the long term, but carmakers must leave
investments in product development for these exotic offerings to other service providers with
specific expertise.

Navigation
Global Positioning Systems (GPS) technology has played a prominent role in the development of
safety and security services, but has not yet been utilized to its full potential with regard to
navigation. Current navigation solutions, which are little more than electronic road maps and can
cost thousands of dollars, offer few advantages over more traditional, though less exciting

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substitutes, such as paper maps and radio traffic reports. Studies indicate that 75% of motorists
are interested in navigation, but compelling solutions have not yet entered the marketplace.

It is important to separate navigation systems from those that use real-time traffic to provide
dynamic route guidance, and those that do not. Navigation systems based on IVR, electronic
mapping, and GPS will appear before those that incorporate real-time traffic information. Some
technical issues remain unresolved in network servers and particularly with regard to IVR
technology, but these issues are quickly being resolved. Successful systems will employ route
guidance algorithms that interface with digital maps and communicate audible directions to the
driver, while limiting the necessity of processing voice input from the driver. In-vehicle screens
with graphics and text are not necessary for robust, turn-by-turn, navigation solutions.

Traffic Reporting
The “Holy Grail” of traffic-based, dynamic route guidance systems are far from a reality in the
U.S. Lack of Bandwidth and the questionable commercial viability of in-vehicle screens and traffic
sensing networks limit traffic-based dynamic route guidance

In the U.S., the traffic information industry is dominated by Metro Networks. Metro operates
planes, helicopters, and fixed-position cameras to deliver traffic reports to over 2000 radio and
television stations. The future of traffic reporting, however, belongs to personalized, real-time,
interactive navigation assistance. U.K.’s TrafficMaster appears to be well positioned to emerge as
a leading provider of traffic information to the telematics industry. TrafficMaster operates a
detection network that collects, sorts, and manages live traffic information and converts it into
average speeds, delays, and journey times. Dynamic route guidance services, whereby traffic
sensor networks interact with GPS sensors on vehicles, may turn out to be the killer app of
telematics.

In the long term, a technology referred to as Floating Car Data (FCD) may compliment, or even
supersede, fixed sensor networks. FCD simply refers to traffic information obtained from sensors
mounted on vehicles. Though FCD experimentation predates that of fixed sensor networks, it is
not commercially viable today. Whereas independent content suppliers are creating fixed sensor
traffic networks, carmakers would most likely make most FCD investments because they
manufacture the cars.

Telemetry/Remote Diagnostics
Largely ignored by carmakers and the media is the promise of telemetry services. Telemetry
represents a natural product development path for carmakers to follow, and 73% of consumers
have an interest in it, far beyond Automatic Collision Notification (CAN) systems today. The
majority of telemetry communication will be machine to machine, rather than machine to person.

The end goal of telemetry must be to save car manufacturers money, or drive revenues. For
example, it makes little sense for a customer service center to just monitor a vehicle’s engine
performance, because this function is already performed within the car. An effective telemetry
solution would be one that notified the driver of a problem (or potential problem) and
recommended a nearby service center. In this scenario, the consumer would derive a substantial
benefit and the car manufacture could take a transaction fee from the service performed. While
this scenario may seem just as farfetched as, say, video-on-demand in the car, it is much more
relevant to a telematics discussion. The personalization and customization revolution began by
the Internet will enter into telematics, but only through car-specific services.

Another way in which telemetry could provide value is by reducing marketing costs for
automakers, and even shifting these costs to the consumer. For example, mailings that remind
drivers of the upcoming need for 30,000-mile service could be eliminated and incorporated into
telemetry services.

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Remote monitoring and vehicle tracking systems for commercial fleet management are available
today. The Qualcomm TRACS line of products is one successful example. The technologies
developed for these applications will gradually be adapted for use in consumer navigation and
telemetry services as interest develops.

Future Services
Nothing is more uncertain than predicting consumer acceptance of services, but telematics
providers in the U.S. should look for parallels in the evolution of the following:
• The fixed-line Internet
• The wireless industry in general
• The wireless industry in Europe & Japan
• The telematics industry in Europe & Japan

With few exceptions (navigation and telemetry, for example), telematics service development will
follow, rather than lead, the wireless revolution. In general, services will not be accepted in the
vehicle until they are first proven outside. The demand for information-based telematics services
is speculative. Service providers are desperately looking to information, productivity, and
entertainment services for profits, but this desperation could impair their judgment. It is imperative
that providers critically analyze any proposed telematics service from economic, technological,
and psychological perspectives. For example, location-based eCommerce, while intriguing in the
abstract, in terms of cost and demand, are farfetched ideas within the vehicle.

Entertainment and eCommerce services may eventually come to the vehicle, but their arrival will
be independent of carmakers. In other words, carmakers should allow other companies along the
wireless value chain, such as PDA and handset manufacturers, portals and content providers,
and network carriers, to drive these developments.

Technology Issues
Embedded vs. Portable Devices
All telematics devices in use today are embedded within the vehicle. In contrast, Wingcast has
announced that it will offer systems whereby traditional wireless devices (such as handsets or
PDAs) will dock into the vehicle.

The design cycle for an automobile is typically 3 to 5 years with an average life of 11 years. In
comparison, wireless designs can become obsolete in just a couple of years. These two product
development cycles will never be fully synchronized, so telematics systems may need
replacements and upgrades several times throughout the life of the automobile. For this reason,
truly embedded TCUs will die out.

Modular Devices Will Win

The debate between embedded and portable devices is misguided. The TCUs that will survive
will be those that are modular, or plug and play. Similar to car radios, these TCUs will be easily
replaceable. As a result, these devices will have the advantage of embedded systems, with the
added benefit of easy upgrade. Hardware will never be completely standardized and modular
across different vehicle brands because individual styling differences permit vastly divergent
designs.

Although technological issues and consumer desires may create room for both portable and
modular configurations in the short term, modular systems will triumph over portable devices for
several reasons. Portable devices will raise new technical complications, such as call delivery, to
the vehicle. Handset and PDA manufacturers would have difficulty overcoming these hurdles
because they lack the necessary automotive electrical system expertise. Portable solutions raise
a series of coordination issues between carmakers and suppliers. Furthermore, users would often
forget to bring these devices into the car, rendering the telematics system virtually useless.

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Until very recently, most experts predicted the convergence of handsets, pocket PCs, and PDAs
into one all-encompassing wireless appliance. This scenario has not been realized. It appears
that technological advances have not conquered problems such as screen and keyboard size. It
would be a mistake for carmakers to pursue a portable device strategy because portable TCUs
would shift power to consumers, or PDA/handset manufacturers, or wireless carriers. With the
TCU within the vehicle, carmakers have captive users.

The integration of the vehicle with the home, office, and other mobile devices is uncertain. Hyped
claims of using Bluetooth technology to connect handset or PDAs to cars may never be
consummated; this would just add another layer of interconnect complexity that provides little
benefit to the consumer. No company today has a complete understanding of all of these wireless
markets. For modular devices (and carmakers) to win, carmakers must concentrate on car-
related services (emergency, safety, navigation, telemetry, etc.), and leave other services (e-mail,
e-commerce, etc.) to service providers with the requisite expertise.

Network Issues
The technical and economic complexities of 3G migration drive any discussion of the wireless
industry. Telematics is no exception.

One difference between telematics and a typical wireless handset conversation is that telematics
transactions typically involve simultaneous voice (conversation) and data (location) transmission.
The timetable for 3G rollout is uncertain, particularly in the U.S. TSPs cannot accept 3G
conversion as a given, especially in the next few years, so they must have plans for profitability in
the absence of 3G networks.

The switch to packet-based networks could have an enormous impact on the pricing of telematics
services. Specifically, packet-based networks give operators the opportunity to charge usage fees
based on data transmission volume, as well as, time (bits vs. minutes).

Integrated Voice Response (IVR)

Technology Barriers
Voice Recognition is a technology that is always “18 months away.” For telematics, the car
environment compounds voice recognition issues. For comparison, defense contractors have
unsuccessfully invested millions of dollars and years of effort trying to make IVR work in extreme
military environments. To the extent that IVR advances stall, complex telematics services that are
driver-focused will stall as well because IVR is critical for safety. The following technical issues
will continue to be important:
• Noise suppression
• Recognition algorithms
• Microphone placement
• Transducer characteristics
• Echo cancellation

Safety
Voice recognition technology is more important to telematics than the larger wireless industry
because of safety and convenience concerns. “Hands free” operation facilitates any application
and legislation may necessitate it. In the tradeoff between safety and productivity, safety will
always win in the car. On the one hand, most productivity and entertainment services aimed at
drivers will fail in the short to medium term because of IVR limitations, but on the other hand,
these services aimed at passengers will fail due to the existence of superior substitutes. For
example, if a passenger wants e-mail access in a car, he or she will surely use a PDA or a
handset, rather than a TCU.

Automation

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IVR is critical to automating communication and thus achieving economies of scale. Current U.S.
telematics business models are not scaleable. A live operator is necessary to assist the user,
whether for emergency, or navigation services. A proportionate number of call center employees
must be added, as new subscribers are added. While live operators will always be necessary for
certain situations such as emergencies, IVR will be critical to automate other transactions, such
as finding a nearby restaurant.

Current Value Chain

The telematics value chain mirrors the overall wireless industry value chain with the vehicle
serving as the service delivery platform:

Figure 3 - Telematics Value Chain

Content Telematics
Hardware Wireless Automotive
Service
Manufacturers Carriers Providers OEMs
Providers

Examples Examples Examples Examples Examples

Visteon Sprint PCS Metro Networks OnStar (GM) GM
Delphi Verizon TrafficMaster ATX Technologies Ford
Motorola AT&T CNN Tegaron (DaimlerChrysler DaimlerChrysler
Qualcomm Cingular Yahoo & Deutsche Telekom) Honda
Wingcast (Ford &
Qualcomm)

Automotive OEMs & Telematics Service Providers

Figure 4 presents a general overview of the Telematics Service Providers (TSPs) and
automakers that have driven the development of the industry thus far, and that will play an
integral role in its future:

Figure 4 – Overview of Telematics Service Providers

OnStar Wingcast Tegaron ATX
Ownership Division of GM Joint venture between Joint venture between Independent of
Ford & Qualcomm Deutsche Telekom & automotive OEMs
DaimlerChrysler
Founded 1996 2000 1997 1996
Headquarters Troy, MI San Diego, CA Bonn, Germany Dallas, TX
# of Employees 1066 300 (projected) 250
Automotive OEM GM - Cadillac, Buick, Ford - beginning in Mercedes Europe Lincoln (RESCU)
Users (System Chevrolet, Pontiac, late 2001
brand name in Oldsmobile, GMC,
parentheses) Saab, Isuzu, Subaru
Toyota/Lexus (Lexus Mazda - after 2001 Renault - (Odysline) Mercedes U.S.
Link) (TeleAID)
Honda/Acura - 2002 Nissan - after 2001 Volkswagen Infiniti -
(Communicator)
Fiat (Viasat) Jaguar (Assist)
Audi -(Connect)
Wireless Carrier Verizon Sprint Deutsche Telekom Verizon, Sprint, AT&T

The telematics landscape is complex and dynamic, and the preceding chart is far from all-
inclusive.

With OnStar systems installed in over 1 million cars, and available on 32 of 54 models by the end
of 2001, GM has been the most aggressive carmaker in terms of telematics activity. GM is clearly

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the first mover, though whether this gives them an advantage is to be determined. Ford currently
offers telematics on just a few luxury car models, but Wingcast will bring telematics services to
the mass market as OnStar does. DaimlerChrysler offers telematics only on select Mercedes
models and has no immediate plans to rollout services to non-luxury cars in the U.S.
DaimlerChrysler is essentially waiting to see how the market unfolds, and banking on a second
mover advantage.

The telematics opportunity for the automotive industry

In an auto industry characterized by excess capacity, thin profit margins, and sluggish top line
growth, telematics represents a rare opportunity for innovation and brand differentiation. GM
recently announced the discontinuance of the Oldsmobile line largely because young consumers
did not view Oldsmobile as “hip” enough. Ford’s formation of Wingcast last year was an attempt,
in part, to retain its slight lead over GM in consumers’ perceived innovation. Telematics has
additional value to carmakers beyond marketing. Telematics offers a recurring revenue stream,
similar to that of the very profitable financing segments of their businesses. In the long term,
telematics will expand the relationship between carmakers and their customers, providing
carmakers with valuable customer usage data. The recently announced ATX partnership with
Customer Relationship Management (CRM) software leader Siebel hints at this enormous
potential.

Wireless Carrier Selection

Verizon is the leading telematics carrier due in large part to its exclusive agreement with OnStar
and its ongoing relationship with ATX. ATX, similar to its strategy with regard to automotive
OEMs, does not have an exclusive deal with any one wireless carrier. Sprint will soon compete
with Verizon via its partnership with Wingcast. Tegaron is, of course, locked-in with their co-
owner, Deutsche Telekom.

Many network issues in telematics parallel those in the larger wireless industry: price, coverage
and quality of service. Telematics also elevates the importance of reliability because safety and
security are an integral part of today’s telematics offerings. A strong motivating factor in
telematics purchases is the consumer fear of the need for emergency assistance in remote areas.
Therefore, coverage and reliability are critical.

The wireless carriers that are successful in the telematics space will be those that are willing to
work with TSPs and carmakers in terms of product development and 3G migration. In other
words, existing successful wholesale models will for the most part translate to successful
telematics models.

Content Providers
The prominence of content providers on the Internet does not necessarily translate to the wireless
industry or telematics in particular. Navigation and telemetry will be the most important telematics
content. Further in the future, other content, such as eMail, news, weather, stocks, and
eCommerce may play a larger part in telematics. It is unclear whether consumers will want these
next generation services because they are not yet widely accepted in the larger wireless industry
(in the U.S.).

It is possible that traditional Internet content will not become part of telematics at all. Wireless
Internet content may evolve separately and it may never converge with telematics.

Hardware Manufacturers
Telematics hardware manufacturers consist of two groups of firms:
1. Automotive parts suppliers (Delphi, Visteon, Denso, etc.)
2. Handset manufacturers and component suppliers (Ericsson, Motorola, Qualcomm, etc.)

PDA and Pocket PC manufacturers appear to be shut out of the telematics space because their
primary advantage, screen size/Graphical User Interface (GUI), is not important to telematics

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offerings today. Delphi and Ericsson recently announced a partnership to develop a solution that
is easily installed across many different vehicle models. Visteon and Nokia have partnered to
offer a GSM-based solution for Europe. Qualcomm, of course, is intimately involved in telematics
through Wingcast and plays a significant role in telemetry.

Dominating the Value Chain

To predict the evolution of the telematics value chain, players in the space should again look to
the evolution of the following (while noting the similarities and differences of each with regard to
telematics):
• The fixed-line Internet
• The wireless industry in general
• The wireless industry in Europe & Japan
• The telematics industry in Europe & Japan

Automotive OEMs
In the traditional mobile communications value chain, the carrier controls economic value, based
on coverage and Quality of Service (QoS). The end consumer typically selects a carrier first and
then contemplates a handset. The decision process is reversed in telematics. Customers will
surely select a car first and carrier selection will be determined by this initial decision.

The Telematics Role in the Auto Industry

Although telematics offers novel benefits to car manufacturers, it is important to note that it will
not revolutionize their business. According to UBS Warburg, GM OnStar, the leading TSP, will
garner $6 billion in worldwide revenues in 2010. For a corporation expected to have nearly $300
billion in revenue in the same year, $6 billion represents a small amount. Because telematics will
always be such a small segment of the mammoth automotive industry, carmakers would be
advised to delegate many functions to suppliers and focus on the integration of telematics
services. In particular, carmakers should spin off call centers and retain their own telematics
brands.

Carmakers will be challenged by the need to develop new competencies to take full advantage of
the telematics revolution. Carmakers must learn to integrate hardware and services from a new
telematics value chain that is unlike the well-structured, traditional car value chain. Since
carmakers have thus far shouldered most of the costs in setting up the telematics industry, they
should have sufficient motivation to win the space.

Owning the Customer

It is imperative that carmakers retain ownership of the customer if they want to dominate the
telematics industry and maximize profits. In a few years, TSPs will function primarily as call
centers like they do today, but with an added emphasis on data acquisition. While TSPs may
operate call centers, automakers must own the customer and effectively mine the data collected
by the TSPs. Enormous value in telematics will lie in knowing the customer and using this
knowledge to create profitable revenue streams. Because carmakers control the distribution
channel to the consumer, they should always own the customer. Carmakers can ensure that they
continue to own the customer by concentrating on integrating car-specific services with modular
TCUs.

TSPs
As independent entities, TSPs will function essentially as call centers, or safety and security
content providers. To maximize profits, call centers will need to use IVR whenever possible, and
offer value added services when live operators are necessary. 24/7 availability and reliability will
be even more important to telematics call centers than typical customer service applications.

TSPs may migrate to Mobile Virtual Network Operator (MVNO) models. In this capacity, they
would essentially buy bulk minutes from carriers and resell these minutes, along with other

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content services, to automakers. However, TSPs may not have sufficient scale to buy minutes at
a better rate than the automakers can.

Figure 5 – Future Telematics Value Chain

Hardware Wireless TSPs Automotive
Manufacturers Carriers OEMs

Auto Suppliers Traditional Call Centers Car/Truck

PDA Manufacturers Content Providers
Wireless Carriers Manufacturers
Handset Manufacturers Portals

Wireless Carriers
Carriers will struggle to position themselves as value-added TSPs, not just the ‘pipe’ providers.
Two potential developments could shift economic value toward the carrier:
1. If telematics devices evolve into fully portable devices outside the vehicle
2. If the success of the industry is driven by consumer services (e.g., e-mail) rather than
automotive services (emergency, remote diagnostics)

In the short to medium term, these developments will not play out.

Bargaining Power
In negotiations with carriers, carmakers should have a great deal of bargaining power because
they assume they aggregate the demand of a large customer base and take care of billing.
Consumer wireless access plans can cost as little as $.10/min, but current telematics wholesale
prices to carmakers are far greater than this.

The key to carrier contract negotiation will lie in the ability of carmakers to design systems that
are flexible across different carriers. If a telematics system can only be used with one carrier, or
one network architecture (CDMA), carmakers will not be able to use the threat of switching to
achieve low network access costs. Conversely, if a telematics system can be easily switched to
work with other carriers (over-the-air, for example) carmakers will be able to negotiate very
favorable network access costs.

Content Providers
With the exception of that which is related to navigation and telemetry, content will not play a
dominant role in telematics. First, most content, in the traditional sense of the Internet, is still
years away from reaching the car. At this point Internet content providers such as AOL and
Yahoo may battle for control of the customer, but TSPs and automakers will already be
entrenched in the business.

Content providers will be able to provide value to the extent that they generate consumer traffic
for the carmakers. Carmakers can increase revenues by increasing usage. Content providers that
increase consumer usage will always receive a piece of the revenues In the handset world,
portals have had difficulty gaining access to the end customer; this access will be even tougher to
get in telematics.

Hardware Manufacturers
Automotive suppliers will try to balance the desire to standardize hardware and software to take
advantage of economies of scale, with the desire to differentiate units to keep margins high. To
the extent that telematics hardware remains embedded within the vehicle, tier 1 automotive
suppliers will be the hardware suppliers of choice, and not the handset/PDA makers. If devices

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become mobile and operable outside of the vehicle (we do not see this happening), wireless
hardware manufacturers will play a more significant role. Auto parts suppliers will always control
the distribution channel to the car manufacturer, while handset and PDA makers will have the
requisite wireless expertise. Should a healthy telematics aftermarket develop, the role of
hardware manufacturers will expand.

Can Automotive OEMs Find Profits in Telematics?

The following two competing schools of economic thought exist regarding telematics:
1. Telematics will become a profitable, albeit very small, part of the automotive industry.
2. Carmakers will never directly profit from telematics. Telematics hardware and services
will be included with the price of all new vehicles, and used primarily to drive car sales.

Revolutionary product ideas often require heavy initial investment and produce little financial
return for the first several years. The same will be true for telematics: investment now will pay
immediate dividends in terms of market knowledge, and in the future, profits. Carmakers cannot
earn profits solely from the basic emergency and security offerings of today, but with the proper
strategy that balances technology, economics, and customer, carmakers can turn telematics
services into a profitable revenue stream.

Figure 6 - Possible Telematics Revenues and Costs for Automotive OEMs

Direct Other
Operating Indirect Income & Startup
Revenue Operations Costs Expenses Costs
Costs

Activation Fee Network Access Administration/ Royalties Product Development

Subscription and/or Activation Overhead Subsidies Network Operation
Usage Fee Call Centers - Billing Advertising Center
Hardware Content Advertising Carriage Fees Working Capital
- Telematics Control Hardware Marketing Transaction Fees
Unit (TCU) Legal
Facilities

Revenue Streams
The interesting question is not whether carmakers will dominate the industry; it is whether they
will realize returns on their investments.

Hardware
Services present a greater revenue opportunity than hardware. In countless durable goods
industries, the business model has shifted from one of earning a profit on the initial sale of the
product, to earning profits only on follow on services. Many manufacturers essentially give away
their product at cost, and then make money on the ensuing relationship that they established with
the customer. Taken to an extreme, some manufacturers even lose money on the initial
transaction. Telematics devices may eventually be commoditized and prices will certainly be
driven down (especially as the devices move to non-luxury cars), but carmakers must be careful
about losing money on the hardware because the magnitude of service revenues is uncertain at
this point. Carmakers cannot forget that they are in the car business and most of their profits will
always come from selling cars, and not services. In the short term, market experimentation and
the need for individual car styling differences may allow car makers to earn a great deal of profits
from telematics units.

Subscription Fees
Current OnStar subscription fees range from $17 (basic) to $33 (premium) per month, but this is
expected to drop as competition increases. Telematics subscription prices can be compared to
that of three other services:

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 • Wireless phone access
Example: Verizon offers 75 minutes/month with no long distance or roaming charges for
$25/month & a one time $35 activation fee
• Internet access
Example: AOL offers unlimited monthly Internet access for about $20
• Automobile clubs
Example: AAA offers roadside service for roughly $4-$8/month (A Direct comparison
between telematics and AAA is difficult because AAA services are different from those
offered in telematics, and these fees, of course, do not include a phone. Also, AAA fees
vary greatly with geography and service level.)

Based on time or data transmission, telematics usage should generally be less than that of the
Internet or mobile handsets because consumers will not spend hours surfing the web in their
cars. Most current usage is emergency based, and thus, very small in terms of volume.
Increasing usage will be the primary means in which to increase subscription fees.

Based on the above numbers, it appears that telematics subscription fees above $20 may not be
sustainable. Psychologically, It is important that carmakers take into account consumers’ attitudes
when pricing telematics services. Consumers are generally prepared to pay more for access,
compared with content, which they feel should be free.

Advertising
Much is being said about location-based advertising in the wireless world, but little has been done
so far. Privacy concerns are one potential barrier to location-based telematics advertising. Safety
may be another concern, particularly if advertisements would appear visually, rather than audibly.
Advertising revenues over the web have generally been less than originally expected, and
advertising over the wireless web is unproven, so it is possible that telematics advertising
revenues never materialize at all. The best opportunity that carmakers have to create advertising
revenues is through navigation and telemetry services.

Transaction Fees
Transaction fees will not represent a significant portion of telematics revenues in the short term
because eCommerce in the car will be limited. However, telemetry and vehicle repair will
generate transaction fees in the long term.

Bottom Line
The primary operating costs are related to wireless network access and the call centers. Network
carrier and call center contracts must be negotiated such that these costs are less than the
subscription fees for which consumers are willing to pay.

Global Issues
The European and Japanese telematics industries may take paths that are far different from that
of the U.S. To analyze these global markets, the following region-specific macroeconomic factors
must be kept in mind.
• Wireless industry
o Infrastructure
o Carrier competition
o Consumer use
o 3G migration status
• Automobile industry
o Value chain
o Competition
o Consumer use
o Transportation infrastructure
• Culture

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 o Internet use
o Consumer tastes
o Demographics
• Government regulatory environment

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