Carol D. bought a Lexus in the mid-2000s equipped with a heads-up LED map display with maps located on CDs in the armrest. As the maps got out of date, the dealer offered to replace them for $400. Her latest Lexus comes with over-the-air real-time maps that she paid for with the initial purchase. In future models, dashboard screens, real-time maps and traffic, heated seats, onboard sensors, satellite radio, and concierge service will be built in as standard, but only be available to use through subscription.
Recently I spoke with an executive from Ford Motor Co. who told me they were looking to develop services that would outpace product sales. Try as I might, I couldn’t fathom the extent until I stumbled across descriptions of services that are in the works. These are known as recurring revenues, which consumers know as subscription services.
Companies across the board are looking to convert “one-time purchases into subscriptions,” Car and Driver. Automakers are no different. According to a McKinsey report, one US EV maker earned roughly $20 billion from traditional sales, while software upgrades and over-the-air (OTA) updates contributed more than an estimated $25 billion.
Five automakers—Audi, BMW, Cadillac, Porsche, and Tesla—have subscription services for activating driving assistance and voice recognition. Recently, BMW was charging an $80-per-year fee to use Apple CarPlay, which the automaker later abandoned. They already charged $300 on the sticker to equip a car with CarPlay. “That did not go over well,” says Sam Abuelsamid, a principal analyst at Guidehouse Insights, an industry consulting firm.
The subscription business model is familiar to those who pay monthly for cable, streaming, and music subscriptions. More recently, product manufacturers have gotten into the game with subscription-based razors, toys, and software. Adobe, for instance, once sold its software program for about $700. But nowadays, its software is only available through monthly subscriptions. At the same time, Adobe regularly updates its software with new features and fixes. To many, that is a win-win.
With the automotive industry, the shift is coming at a time of increasing market disruptions. Analysts are predicting consumers could wind up replacing vehicle ownership with ride-sharing or switching to electric vehicles that run more efficiently and more predictably, and a combination of both.
Subscriptions also benefit automakers by reducing manufacturing costs and increasing the speed of delivery. Instead of building cars with different option packages to spec, they can produce one fully-equipped model and charge consumers to turn on the features they want. “You’re going to have increased complexity in the car but less complexity in manufacturing,” Abuelsamid says. “There may be enough economies of scale in reducing manufacturing cost to save the cost of adding hardware.”
Automakers could also see residual value over the life of the car. When owners sell, the automaker can continue earning revenue from selling subscriptions to the next customer.
Yet as these features come out, there remain questions: Do consumers get equipment guarantees with free updates and repairs?
The overall question remains, however, is how consumers will respond. Some comments online talk about how to hack these services. Once a feature is installed, “they should work just fine without a subscription by disabling the satellite communicator” that connects to the automaker. Others are more enthusiastic, “lower the overall cost of a car and charge me for what I use . . .,” such as “I don’t need heated seats in the summer.”