DETROIT -- After struggling for years to sell software for expensive automotive navigation devices, Microsoft Corp. is reverting to its classic business tactic: introduce a dirt-cheap product and expand the market.
This year, Microsoft software will operate 16 percent of the on-board navigation systems sold in the United States. That's not enough. In keeping with its rule-the-world ethos, Microsoft wants to put navigation devices in the price range of practically every car buyer.
The software giant's weapon: an in-car computer, code-named TBox, that connects the electronic devices consumers want to use in a car.
For a couple of hundred dollars, motorists can get a system that provides directions, make hands-free phone calls and plays digital music on their own personal digital assistants, cell phones, iPods and other devices. TBox does not have a screen and is controlled by two buttons on the instrument panel or steering wheel (see story, Page 70).
TBox also offers access to telematics services such as remote vehicle diagnostics and electronic yellow pages, which the motorist would purchase separately from a service provider.
Electronics suppliers will produce the hardware for TBox, which Microsoft will market to automakers.
TBox does not have any North American customers, but Ford Motor Co. is giving it a serious look. That's because TBox eliminates the need for navigation systems, which often cost $1,500 or more per vehicle.
The TBox offers basic services that motorists want, says Peter Wengert, 34, group marketing manager for Microsoft's Automotive Business Unit, in Redmond, Wash. "The U.S. market is all about safety and security, low cost and distraction control," he says.
At the heart of Microsoft's strategy is the software that runs TBox, called Windows Automotive. When it was introduced about a decade ago, Microsoft's software cost an estimated $30 to $50 per vehicle. Today automakers pay about $3 per vehicle.
Worldwide, 12 automakers have adopted the software for 24 nameplates, including the Honda Accord and Mercedes-Benz S class. But navigation systems are expensive, so U.S. motorists were slow to buy them.
In 2002, Microsoft had only 7 percent of the software in navigation systems sold in the United States, according to the Telematics Research Group, a research firm in Minnetonka, Minn.
So Microsoft changed its strategy. In early 2002, half a dozen software designers holed up in a room at Microsoft's headquarters in Redmond for a brainstorming session. They emerged two days later with a product idea - TBox - and a new sales strategy.
Other companies market products that allow for hands-free calling and in-car computing. But Forrester Research Inc. of Cambridge, Mass., says Microsoft "has finally cracked the code with a working device that provides more functionality at a lower cost than anything else available today."
Forrester predicts TBox will help Microsoft win "huge swaths" of the telematics market in the United States and Europe. Another research firm, GartnerG2 of San Jose, Calif., predicts that if the low-cost TBox strategy works, Microsoft will become a player in a telematics market that is projected to generate $6 billion in sales by 2010.
Peter Wengert on Microsoft's approach: "The U.S. market is all about safety and security, low cost and distraction control."
But creating technology is one thing. Getting cost-conscious automakers to buy TBox is another. That's where Wengert comes in.
Since 1995, the automotive operation has doubled its staff. It is part of Microsoft's fastest-growing division - called Mobile and Embedded Devices - which generated sales of $247 million in the fiscal year that ended last June.
And Microsoft has found its first big TBox customer: Fiat Auto. Last year Fiat agreed to equip its vehicles with at least three versions of TBox, each with a different mix of features. Fiat will offer TBox across its model lineup of 23 Fiat, Alfa Romeo and Lancia models. Magneti Marelli S.p.A. will produce the TBox hardware.
Microsoft would not reveal terms. But Microsoft said the Fiat agreement was its largest in-car software deal.
Now Ford is testing TBox in a Focus sedan. Ford wants a telematics system that allows motorists to plug in a variety of features.
Ford previously had demonstrated plug-and-play hardware in concept cars, but those vehicles featured Java software from Microsoft competitor Sun Microsystems Inc. Java is an expensive proposition, Ford says, without revealing the cost. So now the automaker is considering Microsoft.
"To convince us that what they have is good, they created this implementation with the (hardware) under $100," says Vladimir Rasin, a technical expert in Ford Research and Advanced Engineering. "It's very impressive. It would cost much less, much less. We cannot get such cost for our Java-based implementation."
Previously, Ford was able to design telematics only for luxury vehicles. "We can't even get close to low- and middle-end vehicles," Rasin adds. "With Microsoft's solution, we can easily do it."
Rasin says Ford likes the TBox's low price but is hesitant. "As of today, there are no concrete plans yet to do something," he says. "We're thinking about what to do next."
Other automakers are exploring TBox, says Russell Shields, president of Ygomi LLC, a Chicago company that funds technology ventures. As the founder of NAVTEQ Corp., the dominant supplier of map databases, Shields is an astute judge of navigators and their market prospects.
Shields says automakers like the fact that they can position the TBox anywhere in the vehicle rather than in the instrument panel, where space is at a premium.
But TBox may have at least one major flaw: It depends on voice-activated commands, a technology that has been prone to mistakes. In a noisy vehicle cabin, the software doesn't always recognize vocal commands.
Microsoft says TBox has overcome some of those shortcomings. Wengert says TBox uses speech technology first introduced in consumer products such as personal digital assistants and cell phones.
Still, Microsoft's ultimate challenge may not be in its software but its image, says Thilo Koslowski, chief automotive analyst at GartnerG2.
"The biggest challenge for them will be to convince other OEMs that Microsoft has changed, that Microsoft is behaving more like a supplier instead of the arrogant, gigantic computer company that's taking away customers," Koslowski says.
"I think to change that perception in the marketplace is a huge challenge for them."
You may e-mail Ralph Kisiel at [email protected]