[Will the car become little more than a smartphone accessory on wheels? This question is highly relevant after the recent CarPlay and Android Auto announcements. Car makers face a choice that could well determine their success for many years to come: keep tight control over the in-car experience, or cooperate with Apple and Google and benefit from the immense value that they have created. But do car makers have a choice at all?]
“Will there be head units in the future, or just mirrored phones and devices?” Annie Reddaway kicked off the Q&A section of a webinar about the app mania in cars with this simple enough question from the audience to expert speakers from Ford and INRIX (at the 38 minute mark). She might as well have asked: will the car become little more than a smartphone accessory on wheels?
A long, tense silence followed. This question – highly relevant after the recent announcements of CarPlay (at the Geneva Motor Show last March) and Android Auto (at Google I/O in June) – clearly touches a nerve with even the most forward-looking car makers like Ford.
After a pause, John Ellis, self-proclaimed “software guy” at Ford, answered that the concept of what is a head unit will evolve, moving somewhere along a continuum from dumb screen to fully integrated app system. (Note the resemblance with the much-feared “dumb bit pipe” scenario for mobile telcos. Not a coincidence.) Let’s see if we can pinpoint where we might land along this spectrum.
The trillion dollar dilemma
Car makers face a critical dilemma. You can either have full control over the car’s functionality (i.e. in-vehicle apps), or you can embrace Apple and Google in the car, benefitting from the immense value that they create in smartphones and from their automotive initiatives. But you cannot have both.
What do we mean by control? In answering the head unit question, John Ellis paints a picture of what’s at stake: “You have to remember that we’re building an object that’s going to be used by people who, at the tender age of 16, get taught what a stop sign looks like. (They don’t get taught how to drive a car!) And then they buy these very high-end, safety-equipped vehicles and then take them out at speed.” Or, as another automotive insider put it: “We make one of the few products that literally kills people.” ‘Control over apps’ means accepting the liability of what happens when a user crashes the car while using an app, which will inevitably happen. With that liability comes a great responsibility to curate and shape what goes into the car, certainly when it is made by third parties.
So far, car makers have opted to retain tight control to avoid liability. However, this has slowed them down in creating value for users and in competing with over-the-top solutions, like just using your smartphone while driving. Once more John Ellis: “We [the users] are demanding personalization at a rate that is far in excess of what [car] OEMs can handle.” Automotive has become a market where choice and innovation-by-open-experimentation, not engineering, are the basis of competition. Car makers are far out of their comfort zone, as we’ve explored in-depth in our March report on connected car apps.
The alternative to fighting this losing battle is to delegate (and therefore give up) control over in-car apps to over-the-top players. Companies like Apple and Google can solve fragmentation and are experts in developer-centric innovation, i.e. in building vibrant communities of software entrepreneurs. They’ve proven in the mobile space that they know how to create massive value for users and developers alike. Car makers can leverage the expertise of ecosystem specialists, and then use it to their own gain. More and more of them are willing to consider, as the graph below shows.
Isn’t this a utopia? Won’t car makers be blown away if they embrace Apple and Google into their products? I don’t think so. In mobile, companies like Facebook, Amazon and WeChat have proven that the model when these companies leverage rather than compete with ecosystems can work very well too.
Mobile precedent: why an OTT future might be inevitable
If the mobile industry’s history is any indication, car makers might be taken in speed. There are several strong arguments why an over-the-top future for in-vehicle infotainment will be inevitable, despite the best efforts of car makers to stay in control. (After all, telcos and handset makers had the exact same intention in the pre-iPhone era).
The basis of competition in automotive has changed. We know that the basis on which people make car buying decisions has irreversibly changed, with in-car technology taking a more prominent role. Smartphones are driving people’s expectations of what car infotainment should offer. People don’t want to be connected with their car, they want to be connected with their life while in the car, and smartphone ecosystems are best positioned to offer that. A 2013 Accenture study found that 61% of people find it essential or important to have the same operating system on the dashboard and on their devices. (see Q10)
It’s a predictable new market disruption. If you’re familiar with Clayton Christensen’s Innovator’s Solution, in-car technology might seem like a deja-vu of his transistor radio example. While transistor technology was not a good solution for table-top radios in the 1950s, it resonated with youngsters who wanted music on the go (even at worse quality). The millennial generation today doesn’t care too much for the car as a status symbol or for driving experience. They care about digital lifestyle and about a personal transportation solution that might be multi-modal, doesn’t necessarily involve car ownership, and is above all convenient to get from A to B. Is it any wonder that they’ll turn to the familiar mobile players first? Watch this video if you want to see this generational difference play out before your eyes.
Car makers will have to get creative with their products and their business models and optimize them for new customers who may not be interested in buying a car as it exists today.
The differences in development lifecycle favor an over-the-top solution. People replace their smartphones on average every 2 years. Cars last a multiple of that; many manufacturers offer 5+ years of warranty, so a 10-year lifetime wouldn’t be surprising. Cars also take much longer to design. The result is that at any time, the technology in your car is likely to look inferior to that in your phone, if not outright obsolete. On which of the two platforms would you prefer to build your functionality? Silicon Valley investor Marc Andreessen (here and here) knows what he would choose. He concludes that cars will become accessories to the phone, not the other way around. Car screens should (and will) be 100% tethered and controlled by the up-to-date device in your pocket. In a poll at the Consumer Telematics Show (Jan 2014), 54% of experts agree that “standardized integration of mobile devices” will be the best way to align with the speed of development in consumer electronics devices. My colleague Mark Wilcox offered the only alternative: “If car makers don’t want the in-car computer to be dumb glass with a better GPS antenna and speakers then they need to make cheaply replaceable head units and swap them out at every service.”
Company inertia too favors the challengers. The capabilities, resources, processes and business models needed to successfully innovate with car apps are nicely aligned with those needed to innovate with mobile apps. Developer-centric innovation is in the DNA of Google and Apple, while it is a very different mode of operation than that of a traditional car business. As many of you will know, it’s very difficult to get anything at all done in a large organisation, let alone change its core. Based on this, over-the-top players will have an easier time implementing the new regime, which gives them a substantial head start over car makers.
Taking the lesson from the smartphone revolution, we even have a pretty clear picture of how exactly control over in-vehicle software will move from car makers to over-the-top platforms; a scenario that today might be unthinkable for many in the industry.
How the mobile industry was overturned in 5 easy steps:
The proprietary portal Telcos attempt to build their own tightly controlled service “portals” (incl 3rd party apps). This fails, as it is too restrictive for both users and developers.
Tactical gain for early adopters Several over-the-top players come in and are adopted by small subset of incumbent telcos and handset makers who seek short-term tactical gain. They might be able to sell an extra high-value connectivity service or become more attractive to the large/affluent OTT player’s customer base.
New basis of competition The over-the-top players redefine what is important when buying a phone. Smartphones who have integrated the OTT solution take off in popularity. Consumers show a disregard for traditional metrics of performance in favor of the new platform.
Must-have status The popularity of over-the-top solutions quickly makes them a must-have for all handset makers. All other OEMs are forced to adopt, or see their market share and/or profitability eroded. (see image below)
Shift of control With wide-spread adoption, control over the app ecosystem moves inevitably to the over-the-top platform players. Telcos and handset makers become “decision takers”, not “decision makers”, as they no longer have the market power to enforce own rules.
Can we replace telcos and handset makers with car manufacturers in the story above?
The first three steps are already clearly in motion in the connected car market. (See our report for a full discussion). Car makers are making their own app stores, with almost no apps or user traction. The table illustration above shows how some car makers will certainly adopt CarPlay and Android Auto (due to their large traction in smartphones) and possibly others like MirrorLink. The Accenture study mentioned above already clearly shows the shift in customer criteria when buying new cars.
When looking at the list of car makers who promise to adopt CarPlay and Android Auto, we might even argue that stage 4 is underway as we speak. Already we can see that OEM-specific head unit software will not remain a differentiator. It might be a lowest common denominator, i.e. having the top internet radios on the car, like now an AM/FM radio is included.
If the scenario plays out, then Apple and Google will soon become the guardians of driver safety – they will be the ones applying driver distraction rules and curating apps. It will cement their position as ecosystem owners.
Be prepared
The odds are stacked against car makers as the controllers of apps and guardians of driver safety. It looks like they have already stepped on the slippery slope that will eventually shift control to over-the-top car app platforms. The pattern is remarkably similar to the events that occurred in the mobile industry, with the same key players and just a few short years ago.
Car makers would do well to prepare to embrace the alternative choice: welcoming over-the-top platforms and leveraging them to sell more cars and boost profits.
If not, they risk losing the control anyway, without the leverage to boost their core business. One only needs to look at the shifts in the handset industry to appreciate how serious a scenario that is. Many of the ‘kings of mobile phones’ from 2006 are now out of business, have been acquired, or are in deep trouble. Handset profits have shifted to just two companies who understood what was going on and acted correctly.Telcos from their side have seen their VAS business replaced by apps, and are now seeing their core business of messaging and voice being pressured by non-telco apps with superior value propositions.
On the other hand, car makers that succeed in leveraging CarPlay, Android Auto and other platforms await a bright future. Also for this scenario, many examples can be found in the mobile industry. Smartphone maker Xiaomi, a 4 year old startup the leverages Android and builds it own differentiated services on top, sold 26 million devices in H1 2014. That’s already more than in all of 2013 and puts the company in the global top 10 of smartphone makers. In its home market China, Xiaomi outsells Apple and has already outsold market leader Samsung on two occasions. OTT² platforms like Line see revenues in the hundreds of millions of dollars, built on a commodity messaging base.
So what will the choice be? Over the coming years and decades, trillions of dollars in car revenues ride on this question.