This essay is an excerpt from 'World Telematics Industry,' a report by UBS Warburg LLC, a financial services firm.
Perhaps the most important question about telematics is how much the consumer will be willing to pay and for what services. In the telematics industry, we have found that there are some fairly disparate opinions. OnStar seems to be on one end of the spectrum. Companies such as Renault and Citroen in Europe, and the Japanese companies in their home territory, are on the other end.
OnStar charges its customers $18 to $35 a month for service. Renault, Citroen and HelpNet all have decided to offer telematics at prices considerably lower than those of OnStar and Wingcast. These companies have decided that consumers are not willing to pay high subscription prices for telematics services and have tried to price their services accordingly.
Renault, for example, recently slashed subscription fees 50 percent to 70 percent in response to consumer resistance. Fees now range from $8 to $15 per month. The company believes it was a mistake to assume that it can charge high monthly fees to its customers for safety and security features. Moreover, it believes that within a few years, drivers will expect these features to be standard.
Automakers essentially repackage telematics services and sell them to consumers. For example, OnStar may provide turn-by-turn navigation to Premium plan customers, but to provide this service, it must license digital mapping information from NavTech. As consumers demand more services without a corresponding increase in price, the profit margins of automakers will suffer.
For example, Jaguar soon will launch a navigation system in Europe that includes Trafficmaster's real-time traffic information. For this, Trafficmaster will charge Jaguar $150 a year per customer. Since consumers likely will demand this service at little extra monthly cost, one can see how quickly profit margins could shrink.
Although OnStar services include unlimited air time, all indications are that current pricing levels are too high. Prices will have to fall if OnStar wishes to maintain high continuation rates for its services (which it will need, given all of the hardware it plans to install). OnStar's current retention rates are high, but that is a little misleading. OnStar provides one year's worth of services for free to all customers who have OnStar factory-installed. As GM made OnStar standard equipment on many vehicles this year, the majority of the 800,000 or so GM customers who have OnStar this year won't pay OnStar a penny until next year at the earliest. OnStar reports about a 70 percent retention rate for its clientele after the first year of service.
But this number cannot realistically be applied to OnStar's clientele going forward. The 70 percent retention rate applies to OnStar's clientele before the company's big push to add customers. That initial clientele is made up almost exclusively of wealthy, older Cadillac drivers who apparently are terrified enough about their well-being that they are willing to shell out $18 to $35 a month to have OnStar look after them. Indeed, OnStar's advertising strategy plays on the fears of its clientele. One OnStar commercial finds a car full of people broken down in the middle of the Arizona desert, surrounded by snakes. Luckily, these people have OnStar, which will soon be there to rescue them.
It is highly unlikely that this sort of strategy, which seems to work with relatively price-insensitive Cadillac owners, will work for all OnStar clients. OnStar's customers historically have selected the Premium plan for $35 per month over the Safety and Security plan for $18 per month in overwhelming numbers. We believe this is because they don't really care how much it costs as long as it makes them feel more secure. We simply do not believe that most normal people, for example, people for whom price is actually an issue and who are not unduly concerned about personal safety, will pay OnStar's relatively high fees.
With a more diverse customer base, we expect that OnStar's customer retention rate will drop precipitously to 50 percent or lower. In response, we believe that OnStar will eventually be forced to lower prices. We predict the first major price break will occur in 2003. We anticipate that prices will be lowered sufficiently to restore the current customer retention rate of about 70 percent for the long term.
Furthermore, OnStar has repeatedly stated that it plans to add services whenever possible. We believe the company most likely will not raise its prices as services are added. Virtual Advisor and Personal Calling, two features coming this fall without a raise in OnStar prices, are two good examples.
You can e-mail Saul Rubin, leader of the firm's Global Autos Team, at [email protected]