Retention is the key to the imminent rise of usage-based insurance. More accurate rating and customer acquisition may be the immediate motivations for insurance companies, but only customer retention has the power to transform the industry – and reduce carbon emissions in the process. These conclusions were clear from the Telematics Update Insurance Telematics event two weeks ago in Chicago. Returning home from the event, though, I was soon inundated with the daily tidal wave of car insurance advertisements on U.S. television. The multiple offers of the deepest discounts, lowest deductibles and superior service seemed like far more relevant messages to me as a consumer than the proposition of allowing the insurance company to monitor my driving behavior. Allowing an insurance company to monitor my behavior, to me, sounds like a particular circle of Hell inconceivable to even the vivid imagination of Dante. What I was forgetting in this kneejerk reaction is the equal and opposite force within me (or most consumers I presume) that is powerfully drawn to any discount – no matter how small – particularly if it is associated with cheaper car insurance – a product one pays handsomely for and hopes never to use. (Because if you use it you may lose it or end up paying more for it in the future.) The offers on television from Progressive, Nationwide, AllState, State Farm, Farmers and others addressed all of my concerns as a consumer. There were discounted rates earned by parents extended to teenage children. There were deductibles that decline over time when there are no claims. There were offers to top competing discounts. UBI insurance offers the prospect of cutting through the advertising clutter with a message that has the power to draw in new drivers while making them long-term committed subscribers in the process. On the surface, usage-based insurance looks like an expensive proposition (for the insurer) built around the concept of providing discounts to an insurance company’s best customers, according to multiple presenters at the Insurance Telematics event. So let me get this straight:  As an insurer I am going to spend millions of dollars to create a data acquisition and management system and deploy wireless monitoring devices all so I can charge my customers less money? It truly sounds crazy, until one understands the challenges of providing insurance. (No tears, please.) The insurance industry has few reliable tools to offer consumers proper insurance rates. What to the consumer appears to be a generally expensive product is priced based on an opaque process based on age, gender and location and a limited amount of driving history such as infractions, accidents and mileage. The industry was recently revolutionized by the deployment of credit scoring as a rating tool. Not surprisingly, credit bureaus featured prominently among attendees at the Insurance Telematics event. Credit scores, the early insurance company pioneers such as Progressive discovered, were an excellent segmentation tool and proxy for assessing risk. Possessing a more accurate tool for determining risk meant that underwriters using this tool could confidently justify deeper discounts than competitors and they won truckloads of business as a result. Of course, competitors soon learned about the new risk proxy and all companies began using credit scores for segmentation and risk analysis. Usage-based insurance is the new proxy and insurance companies are wary of missing a competitive advantage. From presentations at the event it is clear that the early movers in UBI insurance have learned that the process must be as simple as possible. As a result, Progressive has shifted from an OBDII plug-in device that had to be removed and connected to a consumer’s computer, to a wireless module the customer can plug in and forget. (Progressive has already moved on to the next incarnation as well, read on.) Similarly, Octo Telematics, the European pioneer of UBI insurance with more than 1M subscribers via multiple insurance partners, has introduced a device that clamps onto a car battery. This is an alternative to a device that was professionally (and expensively) installed on the vehicle and provided additional services such as stolen vehicle recovery. Multiple exhibitors at Insurance Telematics touted Bluetooth-based or cellular-based OBDII connections for extracting vehicle data – including Directed Electronics, Zoomsafer, Telenor, Walsh Wireless, Numerex, SmartDrive, Scope Technologies, Matrix Technologies, Xact Technologies and Octo Telematics. (Attendees actively discussed word of legal action between Hughes Telematics and insurance and device providers and others over the use of wireless technology for acquiring vehicle data via the OBDII port. Some companies are reported to have settled with Hughes or, as in the case of Progressive, countersued. Suffice it to say that the intellectual property underpinnings of insurance telematics are unresolved.) The powerful interest of consumers in obtaining discounted insurance taken together with the newfound ability of insurance companies to offer discounts based on more accurate risk segmentation is the motivating force behind a revolution poised to sweep the industry. But why is there little or no advertising of UBI insurance in the U.S. when Progressive has been in the game for 12 years? (European advertising of UBI insurance is widespread.) The answer is simple: The insurance industry is governed by 50 different state authorities, some of whom, such as Pennsylvania, have challenged the rating models and others that simply haven’t made their final ruling. (Pennsylvania withheld approval based on their requirement that Progressive disclose the details of there rating model.) Progressive’s SnapShot product is currently available in 23 states. Another learning from the early UBI movers has been that the device need not be indefinitely installed in the vehicle. Insurers active in UBI have learned that a limited time (ie. one month? six months?) “snapshot” of a driver’s driving behavior is sufficient to assess risk and applicable discount. The SnapShot approach also means the device can be removed and plugged into another customer's vehicle for yet another driver assessment.  Of course, this same snapshot is also key to determining which drivers qualify – and insurers have found that not all drivers are suited to UBI programs. As speakers at the Insurance Telematics event repeatedly said: Everyone thinks they are an above-average driver, but only 50% of those can be correct. The key to success in UBI insurance will be to move early. Insurers feel an overpowering need to deploy systems absolutely as quickly as they can because the likelihood is that the first module a customer installs will be his or her last. Once the insurer learns that customer’s driving behavior and can accurately and affordably underwrite their risk, the customer is unlikely to switch insurers. The competing insurer will always be at a disadvantage, not knowing the customer’s driving behavior. For this reason, the industry is struggling to move very quickly in the U.S. in spite of the state regulators and IP issues. UBI has the ability to change the balance of power in the industry and no company wants to be left disarmed. Conclusion: This battle has just begun. Insurers are likely to package offerings built around comprehensive portfolios of driver services such as roadside assistance, navigation and maybe even stolen vehicle recovery to say nothing of on-scene claims reporting – all built around the modules they are bringing to cars. UBI insurance will not only transform the insurance underwriting industry, it also has the potential to alter the relationships between insurers and OEMs. Insurers that deploy telematics systems are in a position to threaten OEM relationships with their own dealers and consumers. Wireless carriers too have skin in the game as insurance applications are already deployed to mobile phone platforms. Insurance companies have powerful leverage over the customer and cannot be ignored by any of these parties and the mobile phone is an alternative path for a UBI deployment. UBI insurance will rapidly achieve ubiquity nationwide. The prospect of obtaining discounts based on driving behavior will lead to some actual improvements in driving behavior but, mainly, it will contribute to a reduction in driving activity overall, which may be the best outcome of UBI deployment. In the end, the insurance industry will achieve the road charging objective of reducing carbon emissions (a Federal goal) which will forever be politically beyond the reach of  Federal authorities. Additional Insights:http://bit.ly/aWhNuC - Automotive Sensor Demand Forecast 2008 to 2017: Global Economic Rebound Sparks Growth - Mark Fitzgerald - Automotive Electronics Service http://bit.ly/9QCIVw - Automotive Sensor Demand Forecast 2008 to 2017: Global Economic Rebound Sparks Growth - Datatables - Mark Fitzgerald - Automotive Electronics Service http://bit.ly/c0OLhT - Consumer Implications for Smartphone-Vehicle Connectivity  - Chris Schreiner - Automotive Consumer Insights http://bit.ly/c1nvTq - Consumer Interest High for Connected Safety and Security Services - Chris Schreiner - Automotive Consumer Insights http://bit.ly/9PUqjp - UBI Market Poised for Growth - John Canali - Automotive Multimedia & Communications

IntelliDrive, the USDOT program intended to create intelligent highways, stands at the crossroads of major funding and deployment decisions but may be overlooking a solution capable of realizing the smart roadways dream in the twinkling of an eye – relative to current timelines. To do so, though, may mean setting aside, for now 5.9GHz DSRC technology in favor of a technology most recently associated with bad driving behavior. Smartphones and the cellular network hold the key to the deployment of wireless systems and services capable of revolutionizing automotive safety and achieving the dream of safe connected highway systems. This goal can be achieved through opt-in solutions that provide for the sharing of device data and could serve as a transitional technology between existing systems and the DSRC technologies not likely to be deployed for another 5-10 years. Alternatively, the government could step in with its regulatory and legislative powers and mandate the provisioning of cellular data transmissions for connected vehicle communications. (Such a scheme was described to me by an ITS America member at the recent Distracted Driving event in Washington, DC. The executive asked to remain anonymous because his proposal may actually be at odds with the short-term interests of his employer.) So cellular technology, which is already part of the IntelliDrive vision along with DSRC and Wi-Fi, can be used as a transitional alternative to DSRC on a voluntary or involuntary basis. (DSRC is universally preferred for safety applications because of its low lacency.) On the involuntary side, concept is to require smartphones to share their location data and to be used for the reception of targeted emergency or road sign messages. The proposition involves a monthly charge to the subscriber of approximately 10 cents – not unlike the current eight-cent charge for mandated 911 calling on mobile phones – to cover the cost of the first 500Kb of monthly data use on the phone for ITS purposes. (It is worth noting as an aside that Wi-Fi technology has already been pioneered – notably by Dash Navigation – as a V2V technology for communicating highway and traffic conditions. With Wi-Fi technology proliferating on smartphones it will not be long before this same capability emerges in the handset space.) Confronted with this opportunity opponents are quick to note the privacy and liability concerns associated with cellular (and Wi-Fi) technology and the need for, at the very least, an opt in mechanism. The bottom line is that these concerns are not insurmountable and a mandated system is feasible. Opening up a data channel on all phones for location data and automatic crash notifications (transmit) and in-vehicle messaging (receive) will open the door to wide adoption of telematics technology and achieve the goal of connecting vehicles to the infrastructure, in-vehicle messaging and to emergency services. The business models to support the service rationale are not unlike those for RDS-TMC, 911 and 511 services, which means this solution is designed to be low cost but still requires some third party support from private companies. The barriers to be overcome are numerous and include – inter-carrier cooperation, the creation of a data clearinghouse for processing and filtering data, and the creation of a broadcast mechanism most likely via multiple private entities. Achieving comprehensive deployment on mobile phones will also require federal legislative and regulatory action. Because the mobile phone-based system will pay for itself while also taking advantage of ubiquitous handset technology and the cellular network it has massive advantages over the proposed DSRC-based system. The 5.9GHz DSRC technology will require BOTH auto maker support for an added module and antenna AND a huge deployment of transmitters and receivers along roadsides and the corresponding data processing infrastructure. DSRC is inevitable, but why must the driving public wait for a solution that will save lives. If the mandated approach is too onerous, then it is more or less left to private enterprise to implement their own prove networks along the lines of Waze and the CloudMade communities which are multiplying around the world. These emerging networks have the capability to bring these services to market almost immediately. More importantly the proliferation of OBDII connections (admittedly using wireless communication protocols claimed by Hughes Telematics) means smartphones are also capable of communicating vehicle sensor and camera data, further enhancing the value of the proposed systems. The proliferation of low-cost sensor and camera systems means there is a wealth of available inputs such a system can put to work to enhance safety, reduce congestion and hazardous driving conditions, and improve the overall driving experience. In fact, the proliferation of smartphones and inexpensive cameras and sensors are rapidly combining to mitigate the demand for the IntelliDrive DSRC vision. Consumers and industry representatives may discover after the implementation of a smartphone based network sharing vehicle and sensor data and communicating traffic conditions, the incremental enhancement of DSRC deployment is unnecessary. The concept also suggests that those car makers with embedded systems should be able to gain an advantage from having more direct and complete control of the user experience. And those car makers with existing probe networks will gain the first-mover advantage of having a larger volume of inputs to process for the benefit of their subscribers. Facilitating the implementation of this vision will be the rapid development and deployment of handset connectivity technology. From terminal mode to Delphi’s D-Connect and Apple’s iPod out, the technology is rapidly falling into place – alongside OBDII communications and sensor proliferation to facilitate the communication of traffic and other urgent messages to primary and secondary displays in the car. In fact, the mobile phone industry is facing the prospect of a handset FM receiver mandate that will create yet another pathway for communicating information into the vehicle either via the on-board radio or via the mobile phone. The handset FM mandate is intended mainly for the transmission of emergency alerts, but will also enable regular FM transmissions. Conclusion: The concept of using mobile phones and cellular technology to supplant or serve as a transitional solution to the proposed DSRC network for V2X communications is radical and lacks an advocate as a mandate but is already emerging as a voluntary solution in the form of discreet smartphone applications and related user communities. The mandate path is likely to die since the very companies that most recognize its value – those with currently deployed embedded telematics systems  - have the most to lose from its implementation. Other market participants such as content and applications providers and even telecommunications carriers may also be opposed to a mandated proposition as it threatens existing business models and relationships. But all parties are beginning to recognize the mobile phone as the key to solving multiple safety challenges in the vehicle. Whether anticipating hazardous intersections (Global Mobile Alert) or sharing probe data (Waze, TrafficTalk) the smartphone has established its credentials as a safety device. The phone also benefits from the support of a rich developer community rapidly moving smartphone technology into realms not previously foreseen. Additional Insights: http://bit.ly/aWhNuC - Automotive Sensor Demand Forecast 2008 to 2017: Global Economic Rebound Sparks Growth - Mark Fitzgerald - Automotive Electronics Service http://bit.ly/9QCIVw - Automotive Sensor Demand Forecast 2008 to 2017: Global Economic Rebound Sparks Growth - Datatables - Mark Fitzgerald - Automotive Electronics Service http://bit.ly/c0OLhT - Consumer Implications for Smartphone-Vehicle Connectivity  - Chris Schreiner - Automotive Consumer Insights http://bit.ly/c1nvTq - Consumer Interest High for Connected Safety and Security Services - Chris Schreiner - Automotive Consumer Insights

Mid-week thunderstorms in Detroit appeared to be Mother Nature’s comment on momentous industry events, but it was Harman International that stole OnStar’s thunder with its announced acquisition of Aha Mobile. While OnStar celebrated its 15^th anniversary by announcing plans to offer voice-enabled access to text messages and Facebook, Harman’s Aha Mobile acquisition introduces the prospect of the first cloud-based telematics solution. The timing of the two announcements was extraordinary in juxtaposing two very different visions of the future of telematics. It showed OnStar still struggling to create a solution capable of stimulating organic consumer demand, while Harman is showing the way toward a platform capable of responding to and moving with changing consumer requirements. The Harman announcement also defined a third path – different than both the dominant OnStar embedded and Ford Sync connected solutions. It is a path likely to rapidly attract adherents and converts – especially given Harman’s command of the high-end infotainment market. The greatest challenge facing the telematics industry is the inability to get consumers to pay for additional subscription services. This shortcoming is manifest in the free months and years of service that are offered to prospective telematics subscribers and the corresponding retention rates of, at most, 50%. The free service is a lie, of course, since the system cost is already baked into the price of the vehicle. But the proposition is described to the customer as a giveaway, which has multiple negative connotations. As a giveaway, the telematics service is immediately perceived as either not having any value OR as something the customer will not normally request and be willing to pay for. This is a very shaky foundation for any industry. In fact, giving away anything is usually the first step toward that product or service being discontinued – with the possible exception of navigation. A good example of this phenomenon is satellite radio vs. Internet radio. Satellite radio continues to be subsidized by the service provider with a free subscription period for the consumer. The high cost of the service and hardware is masked by the supplier’s subsidies, but the cost remains and it is because of this cost that satellite radio is increasingly a consumer-selectable option or is no longer offered on a growing proportion of cars. In contrast, the millions of users of Internet radio services have demonstrated that they will go out of their way and pay handsomely for the privilege of accessing this service. Car makers and carriers could not kill consumer demand for Internet radio even if they wanted to. The fact that satellite radio is subsidized and offered “free” to the consumer is a long-term predictor of failure. The automotive telematics industry faces this same prospect every day. Rare is the Mercedes, BMW, GM or Toyota customer that crosses the dealer threshold requesting telematics services. In fact, dealers are hesitant to mention these services because of the occasional customer that might want the system removed from the car! (Don’t believe everything you read about OnStar’s claimed influence over GM vehicle purchases. Those messages are coming from OnStar, not GM.) It is in this context that OnStar announced the prospective capability for drivers using the Gen 9 system to receive audio Facebook updates and to receive and send text messages. The group also announced what it described as a platform offering the “potential for open development.” The focus on Facebook showed OnStar reaching out for an application that will offer users daily relevance – something missing from run of the mill safety and security applications. But this laser focus on a single application misses the greater goal of enabling GM customers to safely access any application they may desire. OnStar scores big points for identifying the most popular application within its target demographic, but what it misses is the ethos of that customer base which is freedom and personalization. This is where Harman scores with its Aha Mobile acquisition. While OnStar is testing and recruiting university students to cook up creative application concepts, Aha Mobile has already created a cloud-based location aware platform purpose-built for automotive environments, that is voice-enabled, traffic-data enhanced and ready for integration into automotive solutions. More important, the Aha Mobile strategy is to rapidly deploy application programming interfaces to enable the latest applications regardless of what they may be. In other words, it isn’t all about Facebook. Aha Mobile’s success is built on a portfolio of content and applications delivered in a manner suitable and responsive to the user. There are other Aha Mobile-like platforms, such as Aloqa, representing the latest wave of cloud-based aggregation solutions. But Harman’s acquisition, coming on the heels of 18 months worth of divestitures of divisions, facilities and personnel, reflects its importance in the context of a telematics market seeking that elusive objective: organic consumer demand. It will be interesting to see which Harman client is able to push to the front of the line to deploy the Aha Mobile solution: BMW, Mercedes, Chrysler, Toyota, PSA, Volkswagen, Audi or Hyundai. Might OnStar be interested in deploying Aha Mobile? What about Ford? With the acquisition of this tiny start-up Harman may breathe life into a telematics industry in desperate need of a marketing lift. Additional insights: http://bit.ly/bUoJKc - Consumer Implications for Smartphone-Vehicle Connectivity - Chris Schreiner - Automotive Consumer Insights http://bit.ly/c0OLhT - Consumer Interest High for Connected Safety and Security Services - Chris Schreiner - Automotive Consumer Insights http://bit.ly/aLtrF7 - Google, Nokia and New Entrant Positioning in Automotive Infotainment - Lanctot - Automotive Multimedia & Communications http://bit.ly/d0aLhq - Connected Vehicle Telematics: Car Maker Profiles - John Canali - Automotive Multimedia & Communications Service

In these times of economic travail it’s hard to believe that car makers are leaving money on the table, but they are and they have for many years. With car makers and carriers wailing about how to get consumers to pay for content and services a very obvious multi-million dollar (Euro?, Yen?) opportunity for add-on business for dealers and for the OEMs themselves has been left undisturbed – and Roadside Telematics has the answer. The amazing thing is that Roadside Telematics has been around beating a drum for its RoadMedic solution for more than 10 years – adding endorsements and winning awards – but failing to achieve much OEM recognition beyond Ford and Kia. The interesting thing is that this telematics solution requires no box, no call center, no fancy wireless connection, but it does require a smidgen of customer consent and a communications link to the National Law Enforcement Telecommunications System (NLETS) – the same communications network leveraged by LoJack and OnStar for their stolen vehicle solutions. The beautiful thing about RoadMedic is that it solves an age old problem for dealer and car maker alike: how to capture the crash parts and vehicle replacement business opportunity from new and existing customers that have gotten into accidents. A damaged or totaled car can mean a lot of things to a dealer, the vehicle owner or the car maker. A damaged or totaled car can mean a chance to sell a new car or repair an existing car (still under a lease or other financing) with genuine, authorized parts. It can also mean the opportunity to provide roadside assistance and/or a loaner vehicle both of which services are already provided for in existing warranties or OEM sponsored roadside assistance plans, though the customer may not realize it. In others words, it is a customer service opportunity. The primary purpose of the RoadMedic solution, as made clear by its name, is to deliver emergency contact information to police officers responding to accident scenes. The problem is that due to a wide range of circumstances the amount of time that elapses, on average in the U.S., before family members can be notified is six hours. Roadside Telematics has secured the support and assistance of the American Association of State Highway and Traffic Officials along with a variety of other health and safety affiliated organizations including: HIMSS, IEEE, AHIMA, IHE, CCHIT, HITSP and GHSA to encourage the OEMs to collaborate and cooperate on the development and deployment of a nationwide emergency contact locator system, like RoadMedic. RoadMedic allows dealers to reach out to customers, with their consent and at their request, in the event of accidents to provide necessary services thereby strengthening the brand message. It’s a patented business proposition that Roadside Telematics calls “reverse retailing.”  The Roadside business model is dependent upon customers providing their emergency contact information at the dealership point of sale. The business model calls for OEMs to pay Roadside Telematics on a per-vehicle basis which is included in the wholesale delivered price to the dealership, similar to the existing business model for OEM sponsored roadside assistance.It is hard to believe, but in an age of proliferating vehicle connectivity, cars can automatically notify public authorities of an emergency situation, but there remains no provision for expediting a connection to family members or other designated emergency contacts. OnStar rolled out a system nearly 10 years ago with a partner called Global Med-Net. But the Med-Net solution – customer endorsements of which are still visible on the company’s Website – was fax based and overreached somewhat by trying to integrate medical information. The Roadside Telematics solution is officially characterized as handling health information in the form of emergency contacts. The Med-Net solution, in contrast, sought to include important medical history. This complicated the point-of-sale paperwork and when combined with the fax-based portion of the notification process proved fatal to the program. It was terminated in 2002. The Roadside solution will allow police officers using NLETS to tap into both the RoadMedic emergency contact database and DMV databases to locate appropriate emergency contacts – providing a critical customer service. In fact, it is an even more reliable service than existing embedded telematics systems or even mobile phones because the notification is based on the police look-up of the VIN# and not on an unpredictable carrier connection.But it is the accident aftercare opportunity that is most intriguing for dealers. A customer will be able to call the dealer for accident aftercare services such as towing or to obtain a replacement car. Today, most customers are provided a wallet-sized Roadside Assistance card which is often misplaced. Worse, the average customer does not even think of adding the roadside assistance card to their wallet or purse. At point of sale the customer can opt in for this accident aftercare and, in the event of an accident, the dealer will get an accident vehicle sales lead – which is where the patented reverse retailing model comes into play. The dealer then has the option to contact the customer to offer to repair the vehicle, with authorized parts, or replace it and/or to provide a loaner vehicle. Roadside Telematics estimates net average OEM results from RoadMedic implementation as rising from $5.5M to $23.4M over the first three years with corresponding revenue gains for dealers. Best of all, the philosophical objectives of the service fit well with the safety and security objectives of existing telematics sytems. Of course, there are also insurance implications to the Roadside Telematics proposition. There is no doubt that insurance companies will always want the earliest possible notification of an accident. The good news for insurance companies is that they are usually the first ones to get the call from a conscious driver, but in the event of a more severe accident they may not be contacted right away. Some car companies, most notably Kia Motors, have embraced the Roadside model, though none have implemented it. Ford conducted a test of concept in Texas in 2004 and Volvo has committed to a test in Los Angeles. Roadside’s goal is to see the system put in place globally and allows that a typical OEM might even seek to reach out to existing vehicle owners to implement the system retroactively, while dealers may want to apply the system to certified pre-owned cars. Conclusion: As someone who has bought four cars in the past 7-8 years and who continues to receive service notifications for cars I no longer own or that no longer exist (due to accident) this analyst sees a powerful business proposition for dealers, OEMs and insurance companies. As a dealer, I want to know when my customer needs a loaner or replacement car or maybe even a repair. As a vehicle insurer, I want to know when that vehicle, that may not yet be paid for, is damaged or destroyed and/or when and if the driver is injured. In fact, if the vehicle is going to be repaired, I will want it repaired with genuine parts. As an OEM, I don't want to lose a customer who may have lost their vehicle entirely. Clearly, car makers, insurers and  dealers can all agree on the RoadMedic value proposition - the public authorities already have.

When IBM had the personal computer industry in a headlock, the company was able to freeze customers’ plans to purchase competing PCs by releasing fear, uncertainty and doubt (FUD) in the marketplace. It achieved this goal by announcing its own plans for new products 6-12 months in advance. Sirius XM used its earnings call earlier this month for the same purpose, announcing plans for Satellite Radio 2.0 for Q4 2011. The difference, of course, is that Sirius XM does not control the market for broadcast radio content. In fact, the company is facing competitive pressures from both terrestrial and Internet-based sources. Further diminishing the Satellite Radio 2.0 gambit, is the declining portion of Sirius XM’s revenue and unit volume coming from retail, aftermarket devices. (According to estimates from the Consumer Electronics Association, satellite radio sales to dealers fell to $64M in 2009, with declines forecasted through 2013.) Sirius XM executives stated in the Q2 earnings call plans for the launch of the XM 5 satellite in October and the launch of Sirius 6 in Q4 2011. Also due to arrive in Q4 2011 is the newly touted Satellite Radio 2.0. Sirius XM execs said that SR 2.0 will offer consumers greater capacity and more functionality – both enhancements are intended to stimulate average revenue per user (ARPU). These same execs noted that no additional satellite launches will occur for several years, setting the stage for improved cashflow and profitability. In addition to the satellite and service launches late next year, the Federal Communications Commission (FCC) limitations on Sirius XM subscriptions will end in August 2011. All of these indicators are positive for Sirius XM except for the fact that competition has intensified. With the FCC limitations removed, Sirius XM will have a much broader scope of subscription options given the 150+ range of stations to choose from. SR 2.0 promises even more ARPU upside with added channel content and, as Sirius XM execs clearly indicated in their earnings call, a wider use of data for telematics and other applications. It is interesting to hear Sirius XM getting excited about telematics as a potential ARPU contributor, and it is an indication that the company is moving in the right direction and recognizes the shortcomings of the existing service. It is also, no doubt, a response to competitive pressures from HD Radio and Internet radio. The question is whether or not this awakening at Sirius XM is coming too late to matter. HD Radio technology is proliferating as more OEMs adopt the technology and more radio stations join the burgeoning ranks of participating broadcasters. HD Radio is appealing since it operates over the same FM frequencies, though requiring some additional hardware, and it is free. At the same time, more and more OEMs are lining up music service solutions such as Pandora along with Internet radio - via smartphone connectivity in the short-term and embedded solutions in the long run. The success of Pandora is a testament to that company’s ability to deliver a solution that is able to integrate seamlessly with automotive systems. Competitor Slacker’s content-caching music service is not less compelling, but OEMs have not found integration to be nearly as simple. Still, the tide that is lifting Pandora's boat will likely benefit other music services and Internet radio providers, such as ClearChannel's IHeartRadio. The timing and manner of Sirius XM's announcement of Satellite Radio 2.0 suggests that Sirius XM is attempting to prevent OEM defections to HD Radio, music service solutions or Internet radio. OEMs are in the process of making decisions today that will impact vehicle platforms four and five years hence. Sirius XM executives refused to explain exactly what SR 2.0 will be. But given the short launch window, it will no doubt arrive in the retail aftermarket first. The company is currently briefing OEMs regarding its confidential plans. Sirius XM has already lost momentum in the automotive market. Car makers (and aftermarket system makers) have shifted toward offering satellite radio as an option rather than as a standard feature. And both Sirius XM and its OEM customers are using subscription conversion data to determine which cars should and should not be offered with the service. This means that even though Sirius XM has been able to show subscriber gains in its past two quarters, rapid growth is a thing of the past and pales by comparison to the subscriber numbers of a Pandora or Slacker. On the earnings call Sirius XM execs said that availability of satellite radio technology in cars was at approximately 60% of car models with a paid subscription conversion rate of 47%. The company currently claims more than 19.5M subscribers and anticipates somewhat more than 20M by the end of the year. OEMs say that if it weren’t for their multi-year agreements with Sirius XM they might have walked away from the relationship a long time ago. (Several OEMs are also shareholders in Sirius XM.) This sour sentiment does not bode well for Sirius XM moving away from the subsidy model it maintains in the automotive market. This subsidy model also means that the cost of acquiring new subscribers – given the decline of retail satellite radio sales – will continue to rise as the balance between retail and OEM sales continues to shift toward subsidized OEM subs. Further clouding the otherwise rosy long-term outlook for Sirius XM is the mandated switchover to XM. OEMs currently offering Sirius satellite radio service have been told they will have to switch to XM by 2016. The honeymoon for Sirius XM is clearly over. The question now is whether SR 2.0 can save the store. Satellite Radio 2.0 There are three areas where SR 2.0 could help Sirius XM hold onto its existing subscribers while attracting new subscribers. Here are Strategy Analytics’ thoughts on what SR 2.0 will look like: Audio – Sirius XM faces its biggest audio challenge from Internet radio and music services generally and Pandora in particular. All of these services are paid and Internet radio has suffered a blow from the onset of tiered data plans limiting the use of such services. Nevertheless, OEMs have embraced Internet radio because of the powerful consumer demand and awareness – several times the user base of satellite radio and widely and easily accessed on multiple platforms without any additional hardware. The only solution Sirius XM can offer is more or better-targeted audio channels. Ironically, the more channels Sirius XM adds the more difficult it is to use. Expect Sirius XM to update its content search and save capabilities to better replicate an Internet radio experience. Sirius XM can also be expected to enhance its iPhone and iPod integration with song-tagging not unlike HD Radio’s capabilities. Expect Sirius XM to add additional capabilities, along the lines of what iBiquity Digital has been showing in HD Radio demos for the past 2-3 years. Enhancements are likely to include more artist, track, album information; album art; song duration; maybe even reviews or other metadata from suppliers such as Gracenote or Rovi. Traffic – For some reason Sirius’ traffic data services are not comparable to offerings from direct competitors such as ClearChannel’s RDS-TMC. Side-by-side comparisons conducted by this analyst of both XM NavTraffic and the Sirius traffic service have found them to be lacking in comparison to both PND and embedded solutions. The only good news for Sirius is that RDS-TMC is only offered standard by half a dozen car makers. Still, with the proliferation of HD Radio technology, Sirius will soon be up against TPEG traffic data content, putting it further behind the eight ball. Sirius must bring its traffic data services up to a competitive grade. Strangely, the company does not even use the same flow and incident sourcing between its data (Traffic.com) and broadcast traffic services (Westwood One). Expect Sirius XM to do something about the shortcomings in its traffic reporting. OEMs are definitely making comparisons between HD Radio and satellite radio traffic services and making critical long-term decisions. Expect major traffic data improvements in SR 2.0 including the implementation of a standard traffic database system – such as Gewi’s TIC 3 – and/or TPEG traffic information services. Only time will tell if the changes will be enough or will occur soon enough to preserve strong OEM relationships. Even more ominous for Sirius XM is the fact that more and more OEMs are building the cost of traffic into the cost of their vehicles. The $3.99/month traffic subscription for Sirius XM traffic data will not survive this process of commoditization - especially if the data quality is not competitive. Data – Sirius XM’s Travel Link service, offered by Ford, is an impressive voice-driven offering of content such as gas pricing, ski conditions, news, weather, and sports. Expect Sirius XM to bring this offering up to speed with a greater variety of content delivered with improved graphics. The competition here comes mainly in the form of smartphone solutions, so the challenge to compete is steep. Can Sirius XM breathe life into its retail aftermarket position with SR 2.0? Can the company preserve its standing with OEMs, which are more concerned with reducing costs and complexity? For now, Sirius XM is on a path to continue to build its subscriber base, enhance its service and reduce its operating expenses. But the future of the company hinges on whether car makers will continue to tune in beyond 2016. Further insight: http://tinyurl.com/2bz9zq6 - Google, Nokia and New Entrant Positioning in Automotive Infotainment - Lanctot – Automotive Multimedia and Communications Service http://bit.ly/dniNxa - Navigation Heuristic Evaluation: Telmap5 – Schreiner – Automotive Consumer Insights http://bit.ly/95NCoW - Automotive DMB Digital Radio: Marketing Strategies an Increasing Priority – Blight – Automotive Multimedia and Communications Service http://bit.ly/dtRE5C - Automotive Telematics Services: Shifts in Pricing and Monetization Expected – Canali – Automotive Multimedia and Communications Service http://bit.ly/bwdwcW - Connected Vehicle and Vehicle Device Connectivity System Database by Feature, Region, and Price 2010 – Canali – Automotive Multimedia and Communications Service http://bit.ly/d0aLhq - Connected Vehicle Telematics: Car Maker Profiles – Canali – Aumotive Multimedia and Communications Service