Collision of mobile business models

It’s no secret that automakers are building fancy navigation and entertainment systems into their cars. The LA Times this morning has a great article about how they’re not doing so well in competition with cell phone makers, who have products that are better, faster and cheaper.

At least in the US, the automakers want to control the customer, selling them expensive add-on systems; the most successful recently has been the Ford Sync, and before that the GM OnStar. But today the consumers who might buy such systems all have smartphones that do most of the same features (and more). They also run headlong into some of the freemium Internet business models (Exhibit A: Google Inc.) that give away stuff that automakers want to sell.

Here are a couple of great passages from the article by Jerry Hirsch:

[C]ar companies are spending millions of dollars developing interfaces, voice recognition software and navigation systems. Many of these functions either already come loaded on phones or can be downloaded at the swipe of a finger. Honda Motor Co., for instance, charges $2,000 for a satellite-linked navigation and traffic system on the premium version of its popular Accord sedan. But Waze, a division of Google Inc., provides the same functionality in a free app.
…
"People today bond more with their smartphones than their car," said Tom Mutchler, the senior engineer at the Consumer Reports Auto Test Center. "Car companies are going to have to live up to the expectations that come with that."

The whole article is recommended and doesn’t seem to be behind a paywall.

The article points out two problems the automakers face. First, in a race of innovative software between Ford and Apple, or Honda and Google, who do you think is going to win?

Second, you keep a car for 10 years and a phone for 2. So for the average consumer, which one is going to provide the better experience?

But the third problem Hirsch misses is that (as any strategy professor will tell you) Apple and Google and Samsung have economies of scale, and the car makers don’t. 700 million smartphones were sold globally in 2012, most using one of two platforms. In the US, 16 million cars were sold, with in-dash entertainment systems fragmented among a dozen makers.

As I teach my students, R&D is a fixed cost amortized as (total R&D) ÷ (number of units). Apple sold 137 million iPhones in 2012 (not counting iPads and iPod Touch using the iOS). Assuming GM or Ford gets 17% share and half buy the fancy infotainment system, that means about 1.4 million Americans are buying each car-based platform. (Toyota, Fiat/Chrysler and Honda sell even less). Given that’s two orders of magnitude less than the #2 smartphone platform, no wonder carmakers have to charge $2,000 for their systems.

It’s clear carmakers are going to lose this fight. Obviously, if you can’t beat ’em, join ’em — which is what Honda, Toyota and Hyundai appear to be doing. The article refers to the Car Connectivity Consortium producing the MirrorLink standard, which includes these three carmakers, as well as Samsung and HTC. In addition to these car companies, the CCC website also lists Daimler, GM and VW as charter members, with Ford and Subaru (“Fuji Heavy”) as a non-voting “adopter” member (BMW, Fiat and Mazda have limited voting rights). Nissan and Kia are nowhere to be found.

Volkswagen was early in partnering with Apple, so they may continue to lead on iPhone connectivity. Android compatibility could be a good foot in the door for the 3 Asian carmakers. But from the article and their market actions, it seems like some automakers (led by Ford) Ford are stuck in the slow lane trying to sell overpriced, soon-to-be-obsolete dashboard systems as though they can dictate what options American auto buyers will use on the road.