A road map for telematics: Automakers betting on telematics face a highly uncertain market. They should focus on building great cars while choosing their telematics investments carefully.

Backseat video, gadgets that automatically notify the authorities of a crash or help drivers navigate, sophisticated diagnostics, and their kin--in the mid-1990s all this was expected to bolster the stagnant car industry by offering a flood of new revenues. But telemarics, a suite of technologies centered on communications systems within cars, now seems less likely to alter the economics of the automotive industry so radically.

Telematics technologies might indeed deliver an enticing variety of in-car services, which may still revolutionize the experience of driving. But carmakers aren't likely to capture a huge windfall from them. First, the total market won't be as big as predicted in some of the more optimistic forecasts. Second, the vehicle itself won't be critical to every application. Automakers should therefore shift their strategies and focus on dominating a few core telematics applications--not all of them. In the long run, investing primarily in the development of great cars while selectively pursuing telematics will have a much better payoff than pouring funds and management effort into a full offering.

Deflating the $40 billion promise

Some analysts and executives, eyeing the fees and valuations cable television operators netted by offering information and entertainment services to a ready-made audience, have predicted that by 2010, total annual US telematics revenues could reach $40 billion. (1) For carmakers, the lure has been the promise of a steady revenue stream from the subscription fees that their own captive audience--drivers--would provide.

As players in an industry whose growth is estimated at 2 to 2.5 percent a year, it is hardly surprising that many carmakers want to grab a piece of the telematics pie. General Motors leads the pack. Its OnStar system, first installed in Cadillacs in 1996, is now available in 36 of GM'S 54 models as well as in some models from Honda (Acura) and Toyota (Lexus). OnStar's features include voice-activated telephoning, navigation, roadside assistance, and remote diagnostics.

Another competitor is Wingcast, a joint venture created in 2000 between Ford Motor and the US wireless provider Qualcomm. DaimlerChrysler and BMW, working with Texas-based ATX Technologies, are in the race as well. But the attractive revenue payoff these companies seek seems increasingly out of reach now. To find the explanation, we considered four growth paths that telematics might follow over the next few years, looking particularly at potential differences in demand and in the availability of products. Although the most optimistic projections still have supporters, we believe that annual revenues will likely come to $15 billion to $20 billion (Exhibit 1). (2)

What will keep the market from reaching $40 billion quickly? Available technology and current demand simply don't support such rapid development. For the revenues of the US telematics industry to approach $40 billion a year, every car off the assembly line would have to be fitted with a telematics system, and average monthly revenues would have to be at least $50 per car owner (Exhibit 2). Comparisons with similar industries are enlightening. US cable television subscribers, for instance, pay an average fee of about $35 a month, while the typical US mobile-phone bill is about $50 a month. …