How Subscriptions Are Changing the Automotive Business Model How Subscriptions Are Changing the Automotive Business Model
Software

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September 20, 2022

How Subscriptions Are Changing the Automotive Business Model

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For more than a century the motor vehicle was a hardware object, burning fossil fuels. This era is coming to an end. Our decade sees a radical paradigm change: Software costs, currently 10% of the vehicle bill of materials, are expected to reach 50% by 2030. This will entail not only a revolutionary shift in automobile design and manufacturing but the business model as well.

This series of articles covers factors that will determine the future of the vehicle and the vehicle of the future. Last time we wrote about Sensing Our Way to Connected Vehicle Innovation

Today our topic is …subscriptions

Long Ago

Let us go back to where the story began for a moment: More than a hundred years ago the horse carriage lost the horse and gained an engine as means of propulsion. Remarkably, as revolutionary as the motorcar was, in the beginning, it still looked like a carriage, sans horse. Manufacturers simply availed themselves of the existing design. This made sense, for nothing comes out of nowhere and it is close to impossible to conceive the completely new. The disadvantage of these early constructions was that they did not leverage the benefits and advantages of the new car and age. This came only later, with further development.

This invites the interesting question if, with another revolution in transportation underway, we are in the next age of horseless carriages, so to speak. Are the radical changes that come with the connected, software-defined car reflected in the way vehicles and manufacturers operate? Because not only is the mode of transportation evolving, the way of doing business fundamentally changes. Soon, software and services will yield the bulk of profits and margins.

Software

There is more and more space for software-based services in cars and some of them are already in place. Infotainment options, many of them subscribed services, are only one example. The number of these functions and services is set to rapidly grow, to assist divers and enhance the driving experience.

With this accelerating development, the whole concept of profits and added value is changing. Until now vehicle manufacturers made the bulk of their revenue and profits at the point of purchase. However, revenue and margin will soon span the lifetime of a vehicle, via subscriptions of services. Enormous opportunities are opening up this way, and because of the fundamental change of concept organizations that for a century saw forging and selling hardware as the core of their business will have to rapidly evolve. The horse is being put out to pasture, to stay with our example from the beginning, but the new horseless and its producers will both have to go through an intense period of evolution.

Many sectors have in recent years switched to a subscription-based business model. The movie market, for example, went from tickets for theater seats to subscriptions to a streaming service. Admittedly, movie theaters still do exist, but only as a niche.

On the road to subscriptions, brands have failed that once seemed utterly solid, if not dominant. Why is this the case? One factor is the importance of thoroughly understanding what the new paradigm is and how to appropriately implement it. Such paradigm changes pose a challenge to any organization and the bigger the organization is, the greater the challenge.

Revenue Models

To understand what car makers and many other companies are facing, it is important to clarify the distinction between purchase, rental, and subscription. Some examples will help to elucidate the concepts.

Long-term hardware items are often seen as investments and may even inspire a certain pride of ownership. Cars in particular are often customized, at additional expense. Car rentals fill a gap in transportation for a limited time; housing is rented because of the lack of capital needed to buy.  All these transactions involve complete, functional hardware units.

Subscriptions are quite different. They typically are taken out for services that provide a flow of contents or functions. Consumers will find subscriptions convenient if they believe they will use the product regularly and perceive an ongoing delivery of renewed value.

From Sale to Subscription

As such, at the core of subscriptions are constant delivery, quality, and further improvement. (This in turn opens up opportunities for even more added value and revenue for the vendor.) If these categories are fulfilled, consumers will understand that the provision of such services comes at a cost for the provider and they are prepared to pay when they see value for themselves.

The good news is that these subscription qualities are all classic categories of software as a service. The bad news is, these are uncharted waters for vehicle manufacturers because the business case and life cycle of the automobile were so different until now.

One threshold consumers will not easily cross is a subscription for something they do not perceive as a subscription in its essence. Pushback will be the result. To mix up the concepts of what a purchase, a rental, or a subscription is is not the road to innovation and will not give the appearance of being innovative. The automotive sector will have to rapidly adapt to the new service world that will change driving experience and business—think of what became of the horse carriage, its design, and manufacturing methods. 

There is a certain flexibility in how to charge for products that may fall into more than one category. Tesla gives its drivers the opportunity to purchase its full-self driving computer (FSD) or to subscribe to it. Many companies offer connected services for information and assistance, often even with the opportunity to contact an operator. Such options will always find subscribers, for performance and benefits are obvious, as is obvious that the provision means ongoing costs.

However, what is perceived as simply physical is perceived as owned (or rented) and ongoing charges will find little acceptance. Nobody would “buy” a magazine to have it delivered forever; no one will want to subscribe for the trunk or windows of the vehicle they own.

New Opportunities

Great opportunities open up when the new paradigm is leveraged, when genuinely subscription-worthy services are offered, pratfalls are avoided. Given the possibilities of modern manufacturing, the customization of vehicles could reach new levels. Manufacturers already see a strongly rising demand for customization and personalization in the market of light passenger vehicles.

A very simple example is that the classic car rental at the airport might offer many more options for customization. To go further, the vehicle of the future and the vehicle ownership model of the future may look and feel very different from today. Car-sharing services, for example, might be far more developed, with sharing models that make vehicles readily available that are customized to driver’s preferences.

Some drivers of the future may just buy or even rent a basic shell of a vehicle and then take everything else as a subscription, including maintenance, entertainment, infotainment, navigation, autonomous driving, and advanced safety—as well as other services that will be developed in the future. Still, many consumers will still purchase a car and take out subscriptions only for such functions that firmly remain in the classic subscription paradigm.

All this means a massive increase in the bidirectional flow of data to and from the vehicle. There will be more software in the car, more memory, more sensors. Not only will the recorded data from vehicle sensors and ECUs have to be logged and transmitted, but the software in the vehicle will have to be managed, updated, and patched.

Sibros’ Deep Connected Platform provides, via APIs and a Web Portal, the tools for the full vehicle life cycle. The platform is safe and secure by design, hardware agnostic, and ready for various operating systems and vehicle architectures. It offers selective and precise logging from every ECU and sensor, software updates, and remote commands, all of it over-the-air.

The Outlook 

Will car manufacturers ever leave the business of bending metal into shape and welding it together? Hopefully not, for we still want them to deliver well-designed, elegant, and comfortable vehicles. As movie theaters are still around, the driving experience will not disappear. But the connected vehicle is here to stay and with it the age of subscriptions. Organizations that do not try to transfer a hardware and purchase mindset into the software and subscription age will not be at the forefront. Companies that move nimbly, and offer innovative, value-added services, will have an advantage. To use your advantage and harness the data, talk to us today.

Max Reinhold
Max Reinhold has been in the writing and technical communication space for more than 15 years. He spent the better part of his twenties disassembling motorcycle engines—sometimes he was even able to assemble them back again. Model airplanes make him feel nostalgic. He graduated from Humboldt University of Berlin.

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