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Cars That Let You Cruise--and Surf

Detroit puts the voice-activated PC in the car

You may still think of your car as a handy way to get from Point A to Point B or maybe as a reflection of your awesome status in the world. But Detroit wants to bring you up to date: "We will do nothing short of transforming our cars into portals to the Internet," Ford Motor Co. Chief Executive Jacques A. Nasser told reporters at the North American International Auto Show in Detroit on Jan. 9.

That's right--by this time next year, in many Ford and General Motors Corp. cars, you will be able to send and receive e-mail, check stock quotes, find out what's playing at the cineplex, shop the Web, make dinner reservations, and of course make those incredibly vital phone calls--all with built-in systems. How can a driver do all that and still be able to steer and watch the road, you might ask yourself. The carmakers have a solution: hands-free, voice-activated technology. People will talk to their dashboards instead of veering across lanes while dialing phones or playing with PalmPilots. This approach, the Detroit giants are boasting, will give people all sorts of digital services with no more distraction than they get from talking to a passenger.

Even better, it will give the auto companies a nice new source of recurring revenue as the seller of car-based communications services. By inking deals with some of the biggest names in the Internet world, Ford and General Motors hope to make billions by purchasing wireless capacity wholesale and then reselling it to motorists.

By keeping hardware to a minimum, the auto makers hope to avoid sticker shock. Ford says its hardware will cost just a few hundred dollars. Instead, the real revenue will come from charging subscribers about $10 a month for basic service and potentially far more for add-ons. On many models, GM provides for free its OnStar navigation and safety system, which it uses to bring in wireless and satellite signals. The hardware will be standard in 2001 Cadillac DeVilles and Sevilles. However, it hopes to boost the current $17-to-$37 OnStar monthly fees by adding e-mail and Internet and wireless phone services--pulling in $10 billion in annual revenues in a decade.

That would be welcome news to Wall Street: Auto stocks are already under pressure because investors doubt that sales in 2000 can match 1999's record. Says President Mark T. Hogan, head of the e-GM group: "Wall Street likes the subscription model, so we're pushing OnStar."FRIEND OR FOE? Auto analysts, though, worry that high-technology and telecom companies may bypass Detroit and deliver services directly to motorists. Says Merrill Lynch & Co. analyst John A. Casesa: "It's unclear whether the auto companies will be able to capture the value of it."

The solution for Detroit would seem to be to partner up. Hence, the rush of deals unveiled at the Detroit auto show. General Motors, for instance, announced that it would eventually be using America Online Inc.'s browser and that it had struck a deal for free Internet access with NetZero Inc. Says General Motors Vice-Chairman Harry J. Pearce: "We're trying to decide who are friends and who are foes."

Not every auto maker in the world is rushing to wire its cars. Executives at rivals such as DaimlerChrysler, Toyota Motor, and Honda say that they aren't pinning their futures to Net-cars. In fact, Richard Colliver, sales chief at American Honda Motor Co., says that he prefers to keep his company focused on the core business: making cars. Remember?By David Welch, with Kathleen Kerwin in DetroitReturn to top

ONLINE ORIGINAL

GM's Ron Zarrella: Putting the Net on Wheels via AOL

The carmaker had a deal with AOL for delivering its OnStar service and now wants to pursue other pacts with the new AOL Time Warner

Sometimes big announcements get drowned out by even bigger news. That was the case for General Motors Corp. on Jan 11. Just as America Online and Time Warner were unveiling their monumental deal, GM announced a joint venture to beam its OnStar service to automobiles through AOL. That's only the beginning of GM's strategy to bring Internet services to cars. Ronald L. Zarrella, head of GM's North American operations, talked with Business Week Correspondent David Welch, New York-based Associate Editor Dan Beucke, and Business Week Online Contributing Editor Thane Peterson about the company's Internet strategy. Here are edited excerpts of their conversation:Q: What does the AOL deal bring to GM?

A: We think it gives us an enormous opportunity. We've talked to them about building a "My Garage" space for the GM owners among their subscribers. It has fairly broad-based implications.Q: How will your deal be affected by the proposed AOL-Time Warner merger?

A: The AOL-Time Warner merger was a surprise to us. [But] having done the deal with AOL and having an arrangement with Warner Bros., I kind of like where we're sitting. You've got one of the world's largest Internet portals combining with one of the world's largest media and communications companies.Q: What does that mean to you in terms of selling cars?

A: I think it may allow us to leverage those channels more easily. When combinations come together, people tend to have fairly innovative ways of using them. We're going to be fairly aggressive with AOL, and now Time Warner, to try to find ways to gain exclusivity for their properties.Q: Ford has been saying that there are many ways to push Internet technology into cars...

A: We're going to have Internet access in our cars by the spring. We've got cars running right now that do that: voice-data interchange, access to the Internet through voice [commands]. And as the technology for broader bandwidth gets better, that capability is going to expand.Q: Is it going to be mainly in the higher-priced models to start with?

A: No. Our intention is to have the OnStar platform enable that capability eventually in all of our vehicles. We first started with premium [models]. But the initial product positioning of OnStar was as a safety and security [service]. That's more important to minivan owners than it is to the owners of luxury vehicles. Our intention is to get it into all of our vehicles, hopefully including all of our partners, such as Saab, Isuzu, Suzuki, and other manufacturers, as soon as we can. [OnStar subscribers] will go up geometrically from there.Q: Do that many people really want to sit in front of a computer screen in their car? Or are they getting into their cars to get away from that sort of thing?

A: [We did] focus groups out in California. People out in L.A. spend enormous amounts of time sitting on highways. They're looking [for ways to use] that time to do work, and we think eventually we can provide that capability. Those people who don't want to work want to be entertained in unique ways. Satellite radio is one vehicle to provide them a much broader array of entertainment possibilities. We've already had one guy who called us with a program for playing blackjack as you're driving along over OnStar. You would bet real money using credit cards. That's not something we'd do, but it shows that you can expand this in pretty wide directions.

Is it for everybody? No. But there is such an array of services and capabilities that can be provided that it's going to be desirable for a significant number of people who drive cars and trucks. We've been talking to commercial fleet customers. And the capability OnStar provides them is very interesting to them. First of all, they would know where their fleet is as a result of the Global Positioning System. We could provide specific routing information to the fleet. There are just lots of capabilities we could offer them.

We've talked to insurance companies about variable insurance. When you're driving in [upscale] Bloomfield Hills, Mich., you'd have a different rate than when you're driving somewhere else. This gives the insurance company the capability to know where the vehicle is and have a true variable rate.Q: You've also said you'll have 5 million OnStar subscribers...

A: We'll get there. We'll have sold 5 million cumulative within three or four years. When we provide the OnStar hardware, either as standard equipment in our high-end products or as high-running options in our other products, there's a year's service that goes with that. The re-up rates for subscribers once their contract runs out are very high. We're basically packaging the first year with a belief that a very high percentage of those folks are going to re-up and sign a new contract.... One of the things we've got to deal with is leased cars. How do you keep the subscriber once the lease vehicle turns over? We've got a whole marketing campaign on the used-car side.Q: Is this a key strategy for GM to build revenue in a mature auto market?

A: Yeah. There are two ways to build revenues. One of our strategies is to be a product innovation leader. We need to get a lot better at that, and we are getting a lot better. I'm talking about innovation in cars and trucks. The second thing is to build downstream revenues. And this subscriber [base] we're building with OnStar allows us to do that.Q: How big a business can this be?

A: About 10 years out, all the OnStar service can be a $10 billion business. Now that's a pretty amorphous number. To the degree we can get other manufacturers to sign up, it can go up. To the degree we can invent new services, it can go up. But to the degree somebody preempts the technology, it may never materialize.Q: GM Vice-Chairman Harry Pierce has confirmed that part of GM's strategy will be to resell cellular-phone capacity to its customers. How does that figure in?

A: It is not the main thrust of the strategy. It's an easy byproduct. We'll already have a subscriber base we'll own. The technology platform to deliver OnStar services is a cellular network. You can easily combine selling your services with selling basic cellular [phone service] and send the customer one bill. It's more convenient for the customer.Q: But many customers already have cellular-phone service. They don't need two. How do you get them to choose yours?

A: You convince them that it's more convenient to do so. I don't even know what cellular service I use. Once you make the OnStar sale, we're betting it will be easy to tack on cellular-phone service.Q: If you can buy a lot of airtime in bulk, can you make cell-phone service cheaper for consumers?

A: Maybe only marginally. The selling point is the combination with services you've already got and the consumer convenience of paying only one bill. We think we've got a pretty nice lead in this whole area. Now we've got to work real hard to keep it.EDITED BY DOUGLAS HARBRECHT Return to top


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