Industry Mulls Role for Dealers in Selling, Profiting From Software-Driven Features

Dealers and OEMs are in the early stages of sorting out the potential new revenue that digital subscriptions, on-demand features and over-the-air (OTA) software updates represent. How dealers get compensated when their customers buy new infotainment apps or download updates to existing features for their vehicle, without visiting the dealership, is one of the biggest questions of the day.

Software-based features and services are proliferating in today’s cars and trucks, and estimates are the electronics needed to drive these systems now account for more than 40% of the price of a new vehicle.

Features range from pushbutton concierge services such as General Motors’ OnStar to automatic crash notification systems that summon first responders in the event of an accident, as well as more basic infotainment technology such as navigation and satellite radio.

But a growing number of models also offer things like WiFi connectivity and ways to pay for gasoline and order food via apps accessed through the car’s infotainment screen. Connectivity software such as Hyundai’s Blue Link lets owners remotely start or unlock their vehicle and track location if it is stolen. Many vehicle brands are beginning to offer onboard artificial-intelligence-based virtual assistants such as Amazon’s Alexa as well.

Automakers now are looking to go even beyond that with more on-demand features that owners can buy or subscribe to for even short periods of time after they’ve purchased their car.

BMW reportedly is planning to offer owners the ability to purchase temporary access to built-in functions such as heated seats – potentially providing warmth  during a week-long ski trip into cold-weather territory, for instance, while avoiding paying the full up-front cost of the option at the dealership. Adaptive cruise control could be another function owners download for temporary use, perhaps ahead of a planned long vacation drive.

Other OEMs are considering providing software upgrades post-sale that would boost a vehicle’s horsepower, firm up handling or add special performance gauges for a trip around the track. Some are hinting at upgrades for massaging seats, ambient lighting packages and other wellness features.

Tesla – which has factory-owned dealerships – already sells numerous OTA upgrades that improve performance and advanced driver assist features for thousands of dollars.

Consulting firm Strategy& estimates the shift in the way automakers offer feature upgrades post-purchase could be worth an extra $180 billion to the industry annually by 2022.

So far, most of the digital products available today have been packaged into vehicles by automakers as standard equipment for specific trim levels at various price points, requiring the dealer to do little if any selling to convince vehicle buyers to take them. And for subscription items such as satellite radio or Onstar, getting customers to extend those services beyond the free trial period of months or even years so far has fallen directly to the vehicle manufacturer, not the vehicle retailer.

However, the industry is beginning to consider whether that will remain the best path as features begin to proliferate and their complexity deepens. The question many are mulling is, should new-vehicle dealers have a bigger role to play in the digital-economy’s future?

One important factor favoring dealers is that despite the availability of online, how-to videos and brochures, research shows in-person instruction remains the best way for customers to learn which features their vehicles have, what the technologies do and how they work, according to the J.D. Power Tech Experience Index Study (TXI).

Without that understanding, customers may have a harder time operating new features or seeing the value in purchasing add-ons. The need for education implies a continuing role for brick-and-mortar dealerships, even if customers get new features and subscriptions OTA.

HIGH STAKES

The stakes are getting higher all the time as the menu of what’s available expands. Luxury brands such as Tesla, Audi, BMW, and Mercedes-Benz were all early movers. But several mass-market brands, including General Motors and Volkswagen, plan to offer OTA capability on next-generation vehicles, including their upcoming lineups of battery-electric vehicles.

Ford is adding OTA capability as it introduces all-new or redesigned vehicles as well. Those include the ʼ21 Ford F-150 pickup on sale now, and the ʼ21 Ford Mustang Mach-E battery-powered crossover, which reaches showrooms in December. The automaker is expanding its connected-vehicle dealer training to cover OTA updates launching in its new vehicles. But the first updates won’t be out before next year. Until then, the company isn’t saying much about what will be available.

For sure, dealers are aware of the potential of OTA updates. For one thing, software updates currently performed at the dealership represent sales. Losing that revenue hurts. What’s more, even if a software flash is free, which is often the case with recalls, any dealership visit generates opportunities to sell additional parts and service.

Still, many dealers don’t seem to have on-demand features and products very high on their radar screen, possibly because they’ve had little input on selling those options so far.

In a Wards Intelligence/Ally survey of more than 160 U.S. automobile dealers, very little interest is shown in having access to data on how buyers interact with infotainment and services apps onboard their vehicles. Dealers are fairly evenly split on who should offer OTA software upgrades, dealers or OEMs; 54% say no matter who reaches out to customers on the upgrades, OTA updating – rather than a trip to a dealer service bay – is okay with them.

CUSTOMER ACCEPTANCE

Whether they’re sold at the dealership or over the air, customer acceptance for updates and subscriptions will be an issue the industry needs to solve.

Researcher J.D. Power rebooted its Tech Experience Index Study for 2020 to devote more attention to emerging technologies and explore pointed questions, such as how often do customers actually use their vehicle’s high-tech features? Is it all of the time? Or do they try them only a couple of times and then give up on them? And how do they learn to use them?

“Manufacturers are very focused on subscription services and additional revenue models going forward,” says Kristin Kolodge, J.D. Power’s executive director-driver interaction and human machine interface research, who oversees the TXI study. “They’re thinking, ‘How else can we upsell the consumer with various connected products going forward?’”

But the actual-use results are not very encouraging for services like Key by Amazon package delivery, GM Marketplace for in-vehicle transactions or “virtual assistants” that can interact with your car and report data to you remotely, such as how much fuel is in the tank.

“With each of those technologies, half or more of the respondents never use it, or try it and no longer use it. We have an uphill battle to get many of these owners who have these technologies, to use it,” Kolodge says.

Onboard Wi-Fi is one of the features few consumers are seeing value in. In the 2020 TXI study, 53% of baby boomers report they don’t use it, or tried it and no longer use it. That number is even higher for Generation Z, at 71%. Kolodge says customers ask, “If I have a hot spot in my phone, why do I need that?”

Conversely, Tesla customers, who can download adaptive cruise control and other performance upgrades, are highly satisfied with OTA updates, because they feel like the updates enhance a vehicle’s capabilities and keep their vehicles up to date. “That’s one of the highlights for Tesla owners. They know they have the ability to get an update (and) that Tesla is always going to be putting the latest version out to them,” Kolodge says.

If Tesla is a guide, and as other brands start to offer more substantial OTA updates and on-demand features, maybe customers will feel differently about updates that deliver more noticeable, tangible benefits – and dealers will feel differently about selling them.

Although an early mover on OTA updates and feature packages, most of BMW of North America’s service remains focused mainly on infotainment. BMW’s online ConnectedDrive store offers customers the ability to renew subscriptions online to services such as the “S.O.S.” button that connects the driver to the BMW Assist Response Center or purchase a 12-month subscription to Real-Time Traffic Information for $50.

TIME TO RE-THINK

Automakers now are wrestling with those business models and trying to determine what will work best for the customer, as well as the vehicle brand and its dealer network.

Most digital services BMW customers buy, for example, are activated by the dealer at the time of purchase, usually for a four-year subscription, the automaker says. Down the road, when owners make subsequent purchases at the BMW ConnectedDrive store, dealerships don’t get compensated.

But BMW now is re-evaluating that policy as the brand expands its OTA update menu. The concept under discussion of what BMW calls “options as a service,” is that when an OTA software update provides the customer with access to a new feature they didn’t have before, the dealer would be compensated. If the update is just that, an update to an existing feature or service, the dealer wouldn’t receive compensation.

Dealers should be watching closely for BMW’s next move, and whether other automakers veer toward a similar path.

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