Next week American Honda Motors will introduce its 2011 Odyssey at the Los Angeles Auto Show. The car comes equipped with what the company calls FM Traffic. This seemingly innocuous announcement marks a shift in the industry with wide ranging implications for both automotive radio and on-board traffic information.

Auto makers are confronting major decisions regarding content delivery to the car and the configuration of the center stack. The battle lines for content delivery divide over the question of embedding a telecommunications module or connecting the driver’s smartphone. Smartphone connectivity shifts the data plan burden onto the driver, while embedding allows wider latitude for vehicle data collection by the OEM.

The radio is the beating heart of the center stack and here a struggle is unfolding between and among traditional AM/FM technology, HD Radio, satellite radio and Internet radio. The battlelines are drawn over content delivery, personalization, localization, monetization and flexibility. Honda’s FM Traffic is based on RDS-TMC, a free (to the consumer) traffic data service delivered over the FM sideband. RDS-TMC represents the state of the art in North America for delivering accurate and timely information on traffic conditions. The Honda solution is unique in that it is supplied by the Broadcast Traffic Consortium (BTC), a nationwide group of broadcasters allied with Navteq.

The industry will have to wait until next week to see how Honda has implemented incident and flow messages, but it is likely that Honda and its supplier, Alpine, have added value to the traffic reporting proposition (http://automobiles.honda.com/traffic/). Alpine will also be bringing the BTC RDS-TMC solution to its aftermarket products. Honda is only the second North American OEM to deploy RDS-TMC from BTC, following Mercedes-Benz. More are expected.

The dominant RDS-TMC supplier in North America is Clear Channel, which is partnered with Inrix. The Clear Channel solution is offered by BMW, Volvo, Mazda and a few other OEMs. Honda’s decision is significant given that the company also offers Sirius XM’s NavTraffic service, which requires a monthly subscription. But Honda’s choice reflects several hard truths for the industry:

Truth #1 – The value of traffic data is declining. Once valued at $1/user/month, traffic data has declined in value to 25 cents/user/month or less at the supplier level. For the consumer, traffic information is perceived as free – especially since so much of it is readily available over radio and television broadcast sources as well as from Depts. of Transportation via the Internet. RDS-TMC traffic information is also free (to the consumer) and, therefore, fits this model and mindset.

Truth #2 – RDS-TMC traffic data is better than good enough. Anyone who has used RDS-TMC-equipped navigation systems in a heavy traffic corridor can attest to its accuracy and reliability. Satellite radio traffic information, by comparison, is not competitive – based on this analyst’s experiences. (Some European RDS-TMC data, Germany in particular, is the exception to this.)

Truth #3 – Traffic information services continue to evolve and improve and service providers must evolve along with them. While HD Radio deployment of TPEG traffic data services will be the next step, it will be followed quickly by solutions based on smartphone integration and, ultimately, embedded traffic data platforms that provide for Internet connectivity. All of this is bad news for Sirius XM. The company is already wrestling two alligators – a transition of existing Sirius users to XM service by 2016 (see http://bit.ly/bIWHJ6) and the introduction of Satellite Radio 2.0 in Q4 2011 (see http://bit.ly/bqiU7F).

While managing these two processes, the company is also justifying its existence on a quarterly basis before its investors as a public company.   Traffic data services are key to Sirius XM because they represent the most successful telematics service the company has been able to deliver. Unfortunately, because of the capacity limitations (traffic data for all cities must be delivered down a single connection leading to data being left out due to capacity limitations or delayed due to the carousel-like data transmission) and one-way nature of the satellite pipe, Sirius XM traffic is poor.  

In fact, Sirius XM traffic, based as it is on Navteq’s Traffic.com, has given Navteq’s data service a bad reputation – through no fault of Navteq’s. (This is not to be confused with the city-by-city audio traffic broadcasts provided by Metro Traffic.) Honda’s selection of BTC RDS-TMC is a shot in the arm for Navteq’s traffic team which is looking to bounce back from its reliance on Sirius XM.  The subscriber volume for satellite traffic has been poor as a result of the poor data. Some OEMs do not even offer satellite traffic for their satellite radio systems. This points to a wider problem for satellite radio. The company has yet to find a successful model for branching out beyond talk and music.  

Both Sirius TV (Chrysler) and TravelLink (Ford) are seen in the industry as failed services due to low subscriber volumes. Of course, the business models were also flawed. Sirius TV only offered three channels of rearseat entertainment, a fatal limitation, and most of the TravelLink services – for parking or inexpensive gas – are available on smartphone apps.  Now Sirius XM is setting the stage for Satellite Radio 2.0. In a report to LibertyMedia shareholders last month, CEO Mel Karmazin tipped his hand a bit by referencing the possibility of transmitting local movie times and/or red-light camera info to drivers via satellite radio. He also mentioned enhanced time-shifting technology, presumably from storing or buffering some satellite content.  Other reports regarding Satellite Radio 2.0 suggest more sophisticated search functions for finding particular artists or songs that may be playing at any given time across the voluminous satellite radio dial. Some industry sources say SR 2.0 is expected to have 25% more capacity. It’s not clear whether any of these SR 2.0 possibilities are true, possible or even compelling to future subscribers. 

But Karmazin has a compelling story for investors. He told them last month that OEM penetration of satellite radio as a percentage of new cars was 60% and that the number of satellite radio factory-enabled vehicles in operation in North America was approximately 30M and on a path to hit 80M by 2015. For this reason, the company is continuing to promote certified preowned vehicle programs for satellite radio re-activation – which is seen as a key to future growth.  Karmazin further notes that Sirius XM has some of the lowest subscriber churn in the media landscape (1.8%), has one of the largest subscriber bases (19.5M, second only to Comcast), and now captures 15% of overall radio revenue ($2.8B) vs. $15B for terrestrial radio, and ~$1B for Internet radio/music services. He also notes that satellite radio’s subscriber revenue is $2.8B vs. ~$300M for Internet radio which translates to per subscriber revenue (annual 2009 est.) of $136 vs. $1.25/user for Internet radio and $10-$20/listener for terrestrial radio. 

Conclusions  It’s worth noting that Karmazin made no reference to either HD Radio or to Sirius XM’s stated transition to XM by 2016. While the present looks promising for Sirius XM in the form of rising vehicle sales and the launch of new certified pre-owned vehicle programs, the long-term outlook is less rosy.  The wider deployment of competing and free traffic services should put the last nail in the coffin of Sirius XM’s telematics ambitions. Embedded telematics services and smartphone connectivity, combined with FM- and HD Radio-based solutions, will obviate the need for any Sirius XM data services.  A new front end to Sirius XM’s audio content will provide a short-term lift in allowing for easier access to specific types of music. And premium sports and personality content remain a demand wild card and, combined with nationwide reception, preserve the satellite value proposition.   But car makers are still not likely to integrate satellite radio into the core of their center stack platforms, meaning satellite radio will remain an add-on, particularly given ongoing system upgrades. In a matter of years, cars will be shifting to Internet connected solutions allowing for personalization and location awareness, two propositions with which satellite radio cannot compete. Additional insights: 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 http://bit.ly/deumcd -# Traffic Data Quality Will Determine #Telematics Winners - Lanctot - blog - Strategy Analytics

TomTom’s marketing machine was in overdrive last week with announcements of a new OEM relationship (Mazda) and advances with existing partners (Toyota, Renault), enhancements to its (European) market-leading traffic solution (HD Traffic) and a traffic manifesto. But undoing all that positive spin was the note that the company still wants to charge about $50/year for its Live Services. It looks like TomTom didn’t get the latest email about automotive value propositions. As connectivity comes to more vehicles, drivers (and passengers) will get more of their content and services from the “cloud.” What this means is that car makers will increasingly have in place systems for sending, receiving, processing and managing all types of vehicle data – the “back end.” (This is not unlike what is happening at your average NASCAR or Formula One event every weekend – without the parking space availability and Internet radio.) The value of this data is manifest to the car makers for better understanding the performance of their vehicles on the road as well as better understanding how consumers use and abuse their cars. The implications for cost avoidance, warranty and recall management are in the millions of dollars of savings. There is no immediate or obvious benefit to the driver. For this reason, this kind of vehicle connectivity ought to be free. (On the other hand, OnStar and others have demonstrated that people will pay for safety and security.) As more drivers shift to smartphones (with mandatory data plans) with access to a wide range of content and services, they will be less likely to pay for any service from the car (or PND) maker that is available for free (or for which they are already paying) via their mobile phone. So how is the industry (and TomTom) going to monetize all this connectivity? Enter the back end value proposition. Auto makers and Tier Ones have gotten the message and recognize that driver and passenger eyeballs and “click-throughs” have value. A driver asking for directions to a restaurant or movie has economic value. A system that knows the location of the driver has value. Beyond this, a system that is able to provide a broader “cloud” perspective of all location-related activity – including everything from prosaic traffic information to “heat” maps of gatherings of people, weather, etc. – has other value-add implications for drivers, passengers and roadway systems and public transportation overall. But in the short-term, vehicle related information for diagnostics, safety and entertainment take priority. Continental, Harman, Visteon, Delphi and Pioneer clearly understand this. All of these companies have introduced systems or platforms that seek to leverage vehicle location information for commercial opportunities. Even Best Buy’s connected PND delivered sponsored links in its Google Search. Unfortunately, Tier Ones face an uphill struggle in trying to get a piece of this action. The telematics eco-system consists mainly of a telematics service provider (ie. ATX), a carrier (ie. Sprint or Verizon) and a system integrator (ie. TCS). Each of these operators is interested in the other’s business – with the possible exception of the call center. (No one wants the call center hot potato – too much cost.) While the call center tends to be shunned, the data back end tends to be either misunderstood or underestimated. But the back end system is rapidly becoming the backbone of the system altering the competitive landscape. The power and influence of back end systems is visible to the consumer in the growing variety of free content and services via smartphones. Google probably has the largest back end system currently influencing developments in the automotive market. With its free navigation, traffic and search and an open source operating system, Google has rattled the industry mightily over the past two years. Carriers, meanwhile, are trying to fight there way in – not content to be simply white label suppliers of bandwidth. Among the carriers sniffing around the telematics back end opportunity are Verizon, Sprint, T-Mobile, Telenor, Orange, AT&T Mobility, Vodafone and Ericsson. All of these companies recognize that their servers are as valuable as their networks. Some of these companies fancy themselves Tier One players. At least three handset makers have the potential to rise to the Google challenge: Nokia, Apple and RIM. Like Google, Nokia is offering free navigation while also seeding the market with open source development tools (Qt), operating system softare (MeeGo) and smartphone connectivity technology (Terminal Mode). But Nokia remains ambivalent about the automotive opportunity. MeeGo is not ready for market and Ovi has not been designed for automotive opportunities. RIM brings a unique value proposition combining its smartphone system experience with its newly acquired QNX automotive expertise. RIM represents the most immediate threat to Google’s potential dominance in the automotive market because of its potential to deploy navigation and traffic applications (based on handset probe data) and its ability to monitor, manage and mine its network data traffic. Apple’s strength lies in its secure systems for managing commerce for downloading applications and enabling the purchase of content. For these reasons, Apple and RIM both have the scope and scale to add value to automotive opportunities. The massive giveaway of content and services by both Google and Nokia is a setup for capturing click-through traffic and back end processing opportunities for creating metrics and analytic output. Google already has the analytic tools in place, unlike Nokia. The current landscape for back end services is highly fragmented and includes companies such as TeleNav, Airbiquity, Hitachi, TeleCommunications Systems, Hughes Telematics, WirelessCar, Oracle and IBM, along with the previously mentioned wireless carriers, RIM and Apple. (Strangely, Microsoft seems to have disqualified itself – having disbanded its automotive business unit. The original vision defined by Microsoft at multiple industry events included integrating more and more Microsoft solutions such as Bing, Tellme, and Silverlight into automotive platforms, but the complete vision – including back end services – never materialized. The one exception to this no-show for Microsoft are the company's ongoing efforts to capitalize on the Bing search engine.) The value proposition of back end service providers revolves around secure management and processing of vehicle and driver data for applications ranging from vehicle performance and safety to content and infotainment and, ultimately, commerce opportunities. Neither OEMs nor Tier Ones are equipped to manage this opportunity and traditional telematics providers lack the scale. The lack of scale is one reason Airbiquity has partnered with Hitachi to service Nissan’s connectivity needs around the world. It is likely that companies such as Hughes and TeleNav will seek partnerships with larger integrators such as IBM or Oracle for the same reason. Nokia, like RIM, already has the scope and scale and like Apple already has the commerce platform (Ovi) but, unlike Apple, has done little beyond the introduction of terminal mode to optimize its offerings for automotive. TomTom is another player in need of a partner to provide the scope and scale necessary to compete in the connected space. The larger organizations that are able to monetize the connectivity proposition will force out smaller players dependent on subscription revenue. If TomTom can enhance its navigation and infotainment platform to include safety and security telematics, it will greatly improve its value proposition and the likelihood of building a devoted subscriber base. Conclusion Google and RIM are best positioned to leverage the back end data processing opportunity presented by the automotive industry. Google faces trepidation among potential OEM customers who are suspicious of the company’s motives and objectives. Google’s failure to validate its Android OS for automotive applications is another stumbling block. Nokia has discrete elements of a solution in place but so far lacks the commitment and execution to challenge either Google or RIM. Apple is a wild card player in a market that remains fragmented with the door open to new entrants. Microsoft's Bing search engine is another contender gaining traction, but, in the end, Microsoft is more of an arms supplier to the contesting parties. Winners in the battle for the back end will be those companies able to bring security and state-of-the-art analytics and commerce management to the automotive industry. Google knows analytics. RIM knows security and network management. It remains to be seen whether Nokia or some dark horse will step forward to challenge these two dominant players, but the race is on. Additional Insight: 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/aGJHDj - Smartphone Market Evolution and the Automotive Opportunity Implications -Fitzgerald - Automotive Multimedia & Communications

Audiovox Corporation reported a profitable fourth quarter and fiscal year today suggesting a significant turnaround fueled by the resurgent automotive industry generally and recovering satellite radio and rearseat entertainment categories specifically. The report was terrific news for Audiovox, which held its earnings call this morning, but the good news seemed somewhat empty in view of a lack of innovative new solutions or even a stated vision of vehicle connectivity from the normally creative electronics supplier.The company built upon the good earnings news by announcing that it foresees developing a $100M OE portfolio for fiscal 2011 thanks to the addition of Qualcomm’s in-vehicle Flo-TV business and the acquisition of RSE supplier Invision and remote start/vehicle security player Omega. Invision’s existing RSE deals with GM and Toyota represented a solid shot in the arm to Audiovox’s own aftermarket business. The electronics segment of Audiovox’s business saw a revenue decline in fiscal 2010 due to reductions in inventory and the exit from several product lines including flat panel televisions and portable navigation devices. Combining the Invision RSE line with its own aftermarket RSE business, Audiovox now boasts relationships with GM, Ford, Chrysler, Nissan, Hyundai, Porsche, Kia, BMW, Toyota, Subaru and Mazda. With expectations of 11M cars being sold in calendar 2010 in the U.S., Audiovox expects the current boost in its fortunes to continue. The electronics segment’s sales were $375M for fiscal 2010, down 16.6% vs. the year-ago period due mainly to the decline in automobile sales and the recessionary economic environment. The company pointed to the positive impact from new programs with Sirius XM, Sony (PS3 integration with RSE system) and Flo-TV and noted that the acquisition of Invision has been instrumental in positioning the company to build on its existing OE relationships. Many of Audiovox’s existing relationships derive from the support of its own expeditor network, one of the largest and most effective installer networks in the industry. In its earnings call, Audiovox said mobile sales were up over the fiscal 2009 fourth quarter due primarily to increases in satellite radio, security and multi-media products, and the addition of new sales from Invision, Omega and Flo-TV. As a percentage of net sales, Electronics represented 71.4 percent of sales for the fiscal 2010 fourth quarter as compared to 62.3 percent for the comparable period in fiscal 2009 - demonstrating the increased importance of mobile electronics sales.

Audiovox is uniquely positioned for a range of significant automotive business opportunities including remote vehicle connectivity and security and video distribution within the car. The company does offer a range of head unit products that provide for multiple connectivity options and continues to offer non-desktop computing platforms suitable to automotive applications. The onset of connectivity and social networking present a range of potentially profitable opportunities awaiting a solution from Audiovox..

 

If there was anything missing from the earnings call it was a statement of strategy vis a vis social networking applications and Audiovox’s plans to capitalize on the trend. The partnership with Qualcomm for Flo-TV represents one avenue for Audiovox to connect with the rapidly growing smartphone market. The company introduced the Jensen Anyware Ultra-Mobile PC last fall, but there was no mention of the product on today’s earnings call, nor was their mention of Audiovox’s range of head unit offerings under multiple brands. Perhaps the next earnings call will bring news of more creative mobile initiatives and a vision of future vehicle connectivity.