Mercedes lays groundwork for more software-based upgrades

SUNNYVALE, Calif. — Software-based vehicle upgrades generated more than $1 billion in revenue for Mercedes-Benz last year, the automaker reports. That's only a fraction of the more than $150 billion in global revenues the automaker earned in 2022, but the business could explode after 2025 when Mercedes launches its own operating system that will open the door to more digital services in vehicles.

That's also when Mercedes will roll out a robust menu of on-demand services, including charging and automated driving features.

"By 2025, we are targeting more than €2 billion ($2.12 billion) from our connected car park," Mercedes-Benz sales chief Britta Seeger said. "Automated driving functions are expected to emerge as our largest software-enabled revenue driver by 2030."

Automakers say they believe digital subscription services can create a lucrative revenue stream by selling customers new features and functionality long after the vehicle drives off the lot.

Ford Motor Co. projects that the global market for connected functions such as its BlueCruise driver-assist technology, new features and upgraded software content could top $20 billion by 2030.

Digital extras, such as live traffic information, online music, vehicle monitoring and remote engine start, play a "fundamental role in the decision to purchase a car," Seeger said at a media event in Sunnyvale, Calif.

"Our connected car park is forecast to grow by 60 percent in the next three years," she said. "This will have a huge impact on our software-enabled revenue."

A glimpse of the business to come may be seen on the new E-class, shown here this week. It contains Mercedes' next-generation MBUX infotainment system, which uses artificial intelligence to deliver greater personalization by learning the driver's frequently used comfort settings, enabling programmable routines and facilitating new apps to be added to the car, Mercedes said.

To help grow the subscription business, Mercedes has reached a revenue-sharing agreement with its retailers to sell on-demand digital services.

In 2023, dealers will receive 13 percent of their customers' subscription revenues. Starting next year, dealers must meet training requirements and hit subscription sales volume targets to earn the revenue share.

Profit-sharing is a "motivational program" that gives dealers skin in the game, Mercedes-Benz USA CEO Dimitris Psillakis told Automotive News.

Getting retailers on board with the new business model will be crucial to adoption.

"Dealers are our partners in the business," Psillakis said. "They know the customer, they know the lifestyle of the customer, they can promote and sell the products which fit the customer needs."

Automakers' efforts to directly sell digital services and performance upgrades blur the lines between retailer and manufacturer.

Jeff Aiosa, owner of Mercedes-Benz of New London in Connecticut, said dealers could construe over-the-air subscription services as crossing state franchise laws.

"But Mercedes' decision to give the retailer their margin on these over-the-air purchases removes the heartburn that could exist relative to state franchise laws," Aiosa said.

Garth Blumenthal, CEO of Unstoppable Automotive Group, which operates a Mercedes store in Temecula, Calif., described the revenue-sharing agreement as a win-win for the factory and its dealers.

"The fact they were willing to give us a piece of the action for really doing nothing other than selling the car, I think that's a plus," Blumenthal said. "It's extra revenue."

Mercedes' decision to bring its dealers along suggests the profit potential automakers see in the subscription business model.

General Motors projects up to $25 billion in annual revenue by 2030 from software and subscription services. In Germany and Norway, Audi offers upgraded Matrix LED headlights on the E-tron and E-tron Sportback EVs for a monthly fee after buyers exhaust a free trial. And owners of the Polestar 2 EV in Europe can buy a $1,100 performance upgrade that provides 67 hp more and faster acceleration.

"This technology is bringing convenience for the customer," Psillakis said. "It adds value; it develops the vehicle further with upgrades."

Mercedes-Benz CEO Ola Kallenius said the ability to deliver digital services and technology over the air means the vehicle doesn't get old. "It gets better all the time," Kallenius said.

Software-enabled services offer greater customization and new functionality over the vehicle's lifetime, just as a smartphone gains new capabilities with third-party apps.

Seeger expects on-demand subscriptions to boost customer retention by more than 80 percent for Mercedes vehicles less than seven years old.

Dealer Blumenthal said the ability to update the vehicle with new technology after the sale could help boost resale values.

"It enables the second or third owner of a car to customize the vehicle according to their specifications," Blumenthal said. "They can add useful functions as needed and use them for as long as they want."