Monetizing apps: Experts warn of backlash

As automakers continue their digitalization efforts, focus is shifting to the development of in-car applications and subscription services in the hopes of creating lucrative additional revenue streams.

By offering paid apps — either through third parties or created in-house — automakers believe they can develop a closer relationship with customers after they purchase a vehicle while building a revenue stream that extends beyond the original purchase, even to successive owners. Fees could vary between subscription services and upfront payments, depending on the service and company strategy.

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.

Yet the apps that will make money for automakers aren’t the ones that first looked like the good opportunities, said Ford CEO Jim Farley.

“They’re not what we thought,” Farley said at the December Automotive News Congress in Detroit. “We thought it was gonna be infotainment — I don’t think you make any money on that stuff. We lost that battle years ago.”

Now, Farley believes, profitable software services will be those that improve functionality. Hands-free driving could become a big moneymaker, especially as it progresses into so-called Level 3 autonomous driving.

“We will never see pricing power like we will see when Level 3 gets democratized,” Farley said.

Another software-based service is predictive maintenance information, which is increasingly popular with fleets and other commercial vehicle customers.

“Does any retail customer not want to know what’s gonna fail in their vehicle?” Farley asked.

Then there are those services that improve safety and security. Farley described these as akin to the Ring home security system many consumers have. Such an application would record video and data that could help unravel liability in crashes or help parents monitor teenage drivers, he said.

Alan Wexler, senior vice president of innovation and growth at General Motors, said the company’s ability to develop an ecosystem of apps could lead to annual revenue on a par with companies such as Netflix and Peloton — about $25 billion by 2030.

In August, GM began requiring buyers of new Buick and GMC vehicles to pay $1,500 for a three-year subscription to OnStar, its long-standing in-vehicle safety, security and connectivity service. Previously, OnStar was an optional service. It now has about 4.2 million paying subscribers.

Stellantis, meanwhile, plans to generate about $20 billion in software-related revenue by 2030 from services and subscriptions.

Yet despite such optimistic overtures by automakers, they face multiple challenges as they attempt to develop and monetize a robust ecosystem of paid apps and subscription-based services.

An April survey by Cox Automotive found that consumers are hesitant to pay extra for apps and subscription services in the vehicle. Three-quarters of 217 consumers surveyed said they would not be willing to pay an annual or monthly subscription fee for access to additional vehicle features, particularly when it comes to safety and comfort.

So the challenge automakers face is designing apps and offering services that customers feel add enough value to merit additional cost, without creating the impression they are just looking to squeeze more money out of customers for something that should be included for free.

BMW found this out the hard way. It wanted owners to pay a monthly subscription fee to remove a software block for heated seats — hardware already installed in the vehicle. A furious online backlash ensued along with attempts to break through the paywall, at which point BMW backed down.

Still, the automaker continues to believe in the value of subscription services, including those that unlock performance capabilities.

Farley said Ford does not plan to ask its customers to subscribe to get heated seats in their vehicles.

Mathias Vaitl, head of Mercedes me and digital services, said the goal for Mercedes-Benz is to be an in-car software leader by combining its expertise with that of external partners. The Mercedes me app already has more than 13 million downloads, he said.

“However, to guarantee the Mercedes-Benz quality and look and feel, we still develop the key functions and innovations in-house,” Vaitl said in an e-mailed response to questions. “We always strive to deliver the apps that are important to the customer.”

Native integration is particularly important for Mercedes, he said, to enable the highest possible ease of use. This means offering apps that steer vehicle functions and change settings remotely. “It’s all about convenience,” Vaitl said.

The ability to upgrade vehicle functions after the initial purchase is a great opportunity for customers to personalize the car, giving them access to certain functions if they want them, Vaitl said.

“This also enables the second or third owner of a car to customize the vehicle according to their specifications,” he said. “They can add important, useful functions as needed and use them for as long as they want. We find our customers prefer this flexibility.”

Vaitl said demand for these services is rising as people are familiar with such offers because they are being provided them by devices ranging from their computers to their smartphones and kitchen appliances.

Pedro Pacheco, an analyst with Gartner, said automakers are still unsure how they will push forward subscription models and paid apps.

The conundrum, he said, is how automakers can leverage over-the-air updates and offer a feature as a one-off payment or subscription in a way in which customers see it as value-enhancing and not a ripoff. “They need to find the right way in terms of value proposition formulation, so it’s seen as value-adding, and something the automakers can use to drive revenue,” he said.

Volvo Chief Commercial Officer Bjorn Ann-wall said the revenue from subscription offerings will be more substantial in the second half of the decade.

“The actual profitability we are banking on from selling software-related upgrades is quite limited,” he told Automotive News Europe. “That’s not a major part of the business.”

Volvo is putting practices in place including over-the-air updates and is developing a customer-facing app to serve as the primary tool for drivers to interact with the automaker.

“The things we want to sell will provide a distinct consumer benefit,” he said. “Then you can charge for it.”

Annwall sees self-driving capability as a feature customers would pay for because it adds to the in-car experience.

“We will look into this kind of driver-assist functionality, where you might be able to upgrade, and then at some point we will be able to offer full self-driving in some use cases, in some locations,” he said. “That we would also charge for.”

Douglas A. Bolduc and Jerry Hirsch contributed to this report.