The Real Information Super Highway After years of hype and oceans of red ink, the networked car is finally gaining traction--thanks to a visionary company called ... General Motors.
(Business 2.0) – I climb into one of Detroit's latest creations--the 2004 Cadillac Escalade, a shiny black SUV about the size of my living room--and throw it into reverse. "Boing! Boing! Boing!" Ultrasonic signals beaming from the back bounce off that white van I'm about to demolish, so I quickly hit the brake. Had I bumped the van hard enough to inflate my airbags, an emergency signal would have been sent out immediately through a built-in cell-phone system, courtesy of General Motors's OnStar service, which can also unlock my door if I leave the keys inside, locate my $60,000 Caddy should somebody swipe it, and make a hands-free call to Mr. Goodwrench asking him to figure out remotely why my dashboard warning light is blinking.
And I haven't even left the parking lot. Behind me is a long brick factory building that houses XM Satellite Radio in northeast Washington, D.C. On its roof, two giant satellite dishes beam Rosemary Clooney's swinging rendition of "How About You" 22,000 miles into outer space, where it collides with two geostationary satellites named Rock and Roll and hurtles back to Earth, landing in my car and bursting happily through a pair of Bose speakers. Having sold over 1.6 million subscribers on its 120-plus channels of music, sports, and talk in a little more than two years, XM is now expanding into sophisticated navigation systems, offering for the first time a graphical display of traffic snarls on your planned route, including the average speed of cars along the way and a continually updated estimate of your arrival time. This personalized traffic report, available in Honda's 2005 Acura RL and some GM models, also suggests alternative roads, making it something of a holy grail for commuters who spend their lives staring at brake lights.
Just two years ago, wireless communication in cars was derided as yet more techno snake oil. OnStar was struggling to turn a profit despite parent company GM's investment of an estimated $1 billion. Having burned through nearly $2 billion, XM Radio was running low on cash to fund its expansion. And Ford suddenly pulled the plug on a disastrous attempt to create its own wireless system, called Wingcast. The science of "telematics"--two-way communication in vehicles--would remain a space-age fantasy, critics said, until somebody could dream up a business model that actually turned a profit.
But a funny thing happened to the James Bond car on its way to oblivion. During the last two years, all manner of futuristic electronic devices have appeared in new cars as automakers searched desperately for the slightest edge over competitors. Only 12 percent of vehicles sold in North America are currently equipped with telematic devices, according to the Telematics Research Group, but by 2010 that number could swell to 60 percent. "The potential is huge," says Gartner lead automotive analyst Thilo Koslowski. "Right now, we're at the end of the hype curve and seeing increases in consumer demand and products."
As I pull out of the parking lot, Clooney's rhapsody about New York in June reminds me to call home. "Dial," I tell the Escalade's OnStar system. "Number, please?" it replies. Of the myriad possible networked automotive applications, these two--XM radio and OnStar--have made the deepest inroads into the consumer market. Execs at the brash startup and the blue-chip subsidiary, working closely together, believe that as the networked automobile gradually goes mass market, they'll clean up.
The problem is, both companies have already spent vast sums with little to show for it. XM lost a staggering $585 million in 2003 on revenue of just $92 million, and GM's claim last year that OnStar had become profitable was met with widespread skepticism, if not snickers. Both firms, in fact, acknowledge that they would not even exist today were it not for the stubborn, forward-looking support of the world's largest automaker. The question is how long GM can afford to keep making such huge, risky bets on two companies that operate about as efficiently as this gargantuan Cadillac, which blithely informs me that I'm getting 5.6 miles per gallon.
North Capitol Street, a few blocks from XM headquarters, provides a picture-postcard view of the Capitol, where satellite radio began in 1997. That's when Congress chose to auction off an unused slice of spectrum between 2,320 and 2,345 megahertz, eventually splitting it between two bidders later known as XM Satellite Radio and Sirius Satellite Radio. The auction price of about $90 million apiece was merely the ante, however. Both companies then had to build satellites and blast them into outer space, which cost XM nearly half a billion dollars and Sirius almost twice that much (Sirius launched three and XM only two; each also built a spare).
Sirius had a significant head start, having gone public in 1994, but its 261,000 subscribers leave it far behind XM today. Hugh Panero, the 48-year-old former Time Warner cable executive who became CEO of XM in 1998, says his company leaped ahead by figuring out how to produce radios and antennas far more cheaply and quickly than its rival, which had farmed out the job. As Panero likes to say, "We're part rocket science, part rock 'n' roll."
But even Panero acknowledges that XM would not be where it is today without the backing of Detroit's 800-pound gorilla, which last year had revenue of $186 billion. GM was an early investor, part of a group that included its then-subsidiaries Hughes Electronics and DirecTV, as well as Clear Channel Communications. More important, the automaker introduced XM to its giant customer base. GM has cranked out more than a million XM-equipped vehicles, and today three out of four buyers of those cars enjoy satellite radio so much that they buy the $10-a-month subscription when their three-month free trial expires.
A quick spin through the Cadillac's XM dial makes it clear why. If you've spent a lifetime listening to commercial FM stations, you probably don't know how great radio can sound--until you turn to XM's "Bluesville" channel and hear the crackling honky-tonk piano of Jimmy Burns's "Stop the Train" or suddenly catch Los Lobos tearing it up on "XM Café." You can also groove to three Christian rock stations, if that's your thing, discover unsigned bands, or let the kids listen to children's stories and songs. (And when the kids aren't around, you can get erotic fiction and sex tips on Playboy Radio for an extra $2.99 a month.) Most of the music is programmed by live DJs on the second floor of XM's headquarters, and all of the music stations are commercial-free.
Wall Street welcomed XM with open arms when it went public in the fall of 1999, but things started to unravel in 2001. XM's satellite launch was aborted just 11 seconds before takeoff due to a human error. The relaunch went smoothly, but the new service then fell victim to a horrifically unlucky choice of inaugural date: Sept. 12, 2001. The first broadcast had to be postponed two more months.
By then, of course, the nation was deep in recession and investors were in no mood to hazard good money on space-age gizmos. This was especially frustrating for XM because customers loved the product. More than 200,000 subscribers signed up in the first year, one of the fastest adoption rates of any new consumer technology, and Time named XM "invention of the year." Even so, subscription fees were bringing in only $3.3 million a month by the end of 2002, while the company was burning cash at about 10 times that rate.
Panero had little choice but to go back to XM's sugar daddy once more to keep his company alive. Despite some potential for duplication of services down the road, XM is not a direct competitor to OnStar--it's a one-way pipe, while OnStar transmits in both directions--and the companies are close partners. OnStar president Chet Huber actually sits on XM's board. Moreover, customer satisfaction surveys also indicated that XM was a big reason buyers were happy with their GM cars. With every incentive to keep XM in business, GM agreed just before Christmas 2002 to give it a $450 million financing package that included payment deferrals and new cash. Panero says that's enough to keep the company solvent into the first half of 2005, when he expects cash flow to turn positive.
Plowing so much money into the unproven business of satellite radio might seem risky for an automaker, but it wasn't nearly as bold as betting on OnStar. Traditionally, Detroit is wary of new technology that could easily become obsolete by the time its cars roll off the assembly line. On the other hand, GM's brass could see as well as anyone the potential to boost the auto industry's single-digit margins with lucrative subscription fees. So in 1995, GM's then-vice chairman, Harry Pearce, approached Huber, an executive in its locomotive division, about becoming president of a new subsidiary built around cellular telephony.
"Part of the issue was defining what OnStar was," says Huber, 49. "It could be anything from 'Holy cow! Dancing holograms on the dash of the car!' to mobile commerce--remember that? You'd drive by Starbucks and they'd beam you a coupon for a latte and you'd drive right in and pay for it wirelessly."
Such delusions permeated the entire industry. Ford's CEO, Jac Nasser, actually told analysts in 2000 that Wingcast, its own version of OnStar, would one day bring in more profit than the vehicles themselves. By then, of course, most car buyers already had cell phones. Why should they pay a separate fee for a phone built into the car? Unable to answer, Ford pulled the plug on Wingcast in 2002 after less than two years and about $150 million.
Rather than follow suit and shut down OnStar, GM decided to reposition it. Turns out that most people drive cars not to surf the Web but to get where they're going safely. So OnStar canceled an expensive ad campaign featuring Batman using OnStar and instead offered real-life stories of people like Victoria, a cute little blond girl who explained how OnStar had saved the day when her mother had a seizure. Each month, GM says, 25,000 people use OnStar to unlock their doors (sometimes with a child strapped into a car seat), 23,000 for remote diagnostics, 8,000 for emergency calls, and 800 for stolen vehicles. OnStar hears from another 800 whose cars automatically call in an alert when their airbags deploy.
In each case, the car's GPS technology tells OnStar operators exactly where the vehicle is. This raises privacy issues for some--OnStar could conceivably tell your wife where you were last night, though the company promises it won't--but women with children, in particular, say the service gives them great peace of mind.
Whether OnStar makes money, however, is anybody's guess. The parent company's chief financial officer, John Devine, told analysts in February of last year that OnStar had turned the corner, but Paul Hansen, publisher of "The Hansen Report on Automotive Electronics," says, "I'd be amazed if they were profitable." Steve Millstein, CEO of Texas-based telematics competitor ATX Technologies, declined to be interviewed for this article but last year told trade magazine Automotive Design & Production, "I don't believe they're making a dime. And if they are making money, they're doing it by shifting costs back to the car brand." ("We don't care," Huber responds. "What's the difference if people believe us?")
Though GM originally started OnStar to be a substantial profit center, analysts who follow the telematics industry say focusing strictly on the bottom line misses the point. "The potential for these services is really in customer relationship management, not revenue," says Gartner's Koslowski, because they allow automakers to maintain close contact with their customers long after they drive out of the showroom. "GM spends billions on advertising in the United States. Why not put some of that money into telematics? Subsidize it, and once you show consumers how it provides value to them, there will be a big revenue opportunity." After investing nearly a decade and more than a billion dollars on its car of the future, GM can only hope that payday comes soon.
OnStar ready," says my Cadillac, which is, apparently, a woman. "Dial," I say. "Number, please?" she asks. When I say "Two," she seems to understand. But then I say "One," and she replies, "Five." Five? Where'd she get five? "Back," I say.
"Nine," she says, and I laugh. "Six," she says. I laugh again. The whole thing feels absurd, like a Samuel Beckett play.
"Pardon?" she says. "Cancel," I say. Then, apologetically, "I was just laughing at you. Nothing personal."
"Two. Five. Nine. Six," she replies. I give up. An XM executive riding with me puts the call through by talking to her sternly and crisply, as if he were ordering a dog to lie down.
Clearly, conversing with our cars will take some getting used to, but voice-recognition technology is improving rapidly, and soon we'll be asking our vehicles for all kinds of things. In fact, the auto industry is only beginning to understand how to exploit the digital information already pulsing through our cars. Data in our vehicular networks might reveal, say, that our brake pads are getting thin and that a mechanic in the next town can see us immediately. As automobiles become increasingly reliant on microprocessors and software to make them run, automatic software upgrades via XM's satellites or OnStar's cell-phone system could make either service--or a bundle of the two, if they remain partners--a must-have option for car buyers.
But, understandably, the auto industry is a bit hesitant to speculate too grandly these days. So OnStar plays down the fact that its service can already read you stock quotes, horoscopes, sports scores, soap-opera updates, and even your e-mail as you drive. "Know why we don't talk about it?" Huber asks. "It's a marketing issue. We've learned that until people clearly understand the foundational value of safety, security, and peace of mind, those niche services confuse more than they engage."
Some industry observers think OnStar is making a mistake by embedding its technology deep inside the vehicle rather than viewing the car as simply one node in a network with devices that are interchangeable between home, office, and car. (XM, for its part, avoids this trap by selling a $130 portable tuner that mounts on your dashboard and also works with your home stereo and a specially made boom box.) Recently, OnStar addressed a common complaint by working with Verizon to create a way to forward calls to an OnStar-equipped car from a mobile-phone account. General Motors is working with industry groups (see "Building the Plug-and-Play Car," page 121) to create standards that would allow a host of new devices to plug into your car's electronic nerve center. But it has little reason to push too quickly on this front. It hopes OnStar becomes the de facto standard for telematics applications and has already tested the waters by licensing its technology to competitors in a limited way.
XM has endured fewer criticisms about its business model, but the satellite company's top brass shares OnStar's reticence to get too carried away. XM recently gave a public demonstration proving that it can now deliver crisp, clear video feeds directly to your car, but Panero would rather talk more modestly about the company's gradual expansion into weather services for airplanes and boats and the new traffic navigation device that Honda and GM will be putting in their cars next fall.
A glance at the company's income statement explains why. XM is still operating at a substantial loss and will do so until it reaches about 3 million subscribers--a goal it won't hit until next year at the earliest. But the company is meeting its growth targets, the stock price is healthy, and you get a sense of the potential of satellite radio when Panero compares it to the cable industry, where he worked for 15 years. "Just like the cable guys put a pipe into the home, car companies and XM are developing a pipe into the car," he says. "Then you evolve that pipe. It starts off with this entertainment-based service, now it's evolving into traffic and weather, and then you start looking for other things you can layer on top of that. If we get 20 million customers by 2010 and we can't figure what'll happen next, some other smart people will."
Twenty million? After pulling the talking Cadillac back into the XM parking lot, I check my notes. Sure enough, there are 136 million cars in the United States, 115 million households, 12.8 million recreational boats, and 93 million trucks. If even a small percentage pay $10 a month for a service that offers an astonishing array of channels for music, sports, weather, traffic, video, software upgrades, and God knows what else--well, Panero's roughly $15.5 million stake in the company will look like lunch money.
Just a few years ago, a technology executive in his position would have climbed up on the rooftop of this factory building, pointed up at the clear blue sky beyond which Rock and Roll hover silently, and screamed, "Look up there, son! See that?! The sky's the limit!" But Panero never did, even though he knows it's true.
Paul Keegan is a contributing writer for Business 2.0.