Magazine

GM Pushes Hard with OnStar


It wants the on-board communications service to be a kind of in-car smartphone and is offering it to retailers and other carmakers

When General Motors (GM) launched its OnStar telecommunications business in 1996, management planned to put the safety, navigation, and communication service in all GM cars, enabling motorists to plan travel, make phone calls, or even track stocks from behind the wheel. GM figured subscription and fee revenue from electronic services could get so big that OnStar's profits might surpass those of its car business. That proved true: OnStar was modestly profitable while GM's car business lost $101 billion from 2005 until the company's 2009 bankruptcy.

Now, with former telecom executive Daniel F. Akerson in the chief executive officer's seat at GM, the automaker once again has big ambitions for OnStar. Akerson hopes to expand the communications service by both increasing the number of GM car owners who continue to subscribe after their six months of free service ends, and by selling the system to owners of rival auto brands. He named former Revol Wireless executive Linda Marshall in January to run the unit, which has set out to transform cars into 2-ton smartphones. GM will also rollout this year a separate in-car entertainment system called Chevrolet MyLink for its biggest brand. "What's happening is a crashing of technologies between consumer electronics and the automobile," says Micky Bly, GM's executive director of global electrical systems. "Our research says that infotainment is one of the top five reasons to buy a car."

This spring OnStar will begin selling its signature hardware, at a cost of $299 plus installation, through retailers such as Best Buy (BBY) to get systems into cars sold by rivals. GM has even debated selling off part of OnStar to outside shareholders to create some distance from its corporate parent and make competitors comfortable with installing OnStar in their new cars.

GM may have waited too long to press its first-mover advantage, however. Although OnStar has earned a reputation for safety and security, thanks to features that alert police if a connected car is stolen or involved in a crash, newcomer Ford (F) has jumped ahead of it in the hot market for in-car entertainment content. Ford's Sync system plays music on voice command and even reads tweets to drivers. Meanwhile, this summer Hyundai Motor will launch a competing system called Blue Link to go toe-to-toe with OnStar for safety and security features. "It's almost like Rip Van Winkle," said Roger Lanctot, an analyst with technology consultant Strategy Analytics. "[GM] woke up and realized they could do other things. But it's kind of late."

For now, OnStar is the leader. It has 6 million users, more than 4 million of whom pay an average of $240 a year. Add in the mobile-phone minutes from Verizon (VZ) that OnStar resells, and the GM unit logs more than $1 billion a year in revenue, with double-digit profit margins. Its staff of 2,200 agents answers 99.7 percent of emergency calls within a second, faster than police 911 agents, OnStar says. During GM's bankruptcy, OnStar was valued between $2 billion and $4 billion.

OnStar hopes its lead in safety technology will lure buyers of non-GM cars to buy it at retail. That was a controversial move within GM, where some executives thought that selling OnStar to anyone just gives away a competitive advantage. Others argue that going retail gives GM a pipeline to more customers who one day might buy GM cars. The mission, says GM Vice-Chairman Stephen J. Girsky, is to aggressively expand OnStar. "There's a huge opportunity there," he says.

Also, consumers who buy OnStar at a retailer don't get the full range of features that owners of GM cars enjoy. OnStar can alert GM's car buyers to most malfunctions in the vehicle and schedule repairs at a dealership. The system currently can't do that for cars made by other companies, nor will it be able to unlock their doors remotely or slow down those cars if they've been stolen. GM is working to add such features, says Nick Pudar, OnStar's vice-president of planning and business development. Yet GM will have to engineer OnStar to tap into every other carmaker's electronic systems, which will take time, he says.

By late March, OnStar will launch an ad campaign targeting drivers who have the system equipment installed in their car but don't subscribe. (After a six-month free trial about 57 percent of buyers continue their service at an average of $20 a month.) The campaign will tell GM owners to push their car's OnStar button on the rearview mirror and they will get a free year of the service and qualify to win a new car, say two people with knowledge of the plan. GM also has launched OnStar for its vehicles in China, complete with Mandarin-speaking agents. The subscriber base there hit 200,000 in February and is growing by 40,000 a month.

Egil Juliussen, an analyst with research firm iSuppli, forecasts that OnStar could sell 1 million units annually through retailers in a few years. But getting rival carmakers to offer the system is less certain. In the 2000s, GM had various deals with seven other automakers including Acura, Audi, Lexus, and Volkswagen to install OnStar in their cars. The arrangements fizzled when those companies, always uneasy about sharing customers with a rival, decided either to develop their own systems or go without. Michael Deitz, Hyundai North America's national manager for connected cars, says that using OnStar wasn't even considered before Hyundai decided to roll out its own Blue Link system. It offers many of the same safety and security features and even has a blue button on the rearview mirror like OnStar's. "It's about forming a more intimate relationship with our customers," Deitz says. "We like to have control over our technology. Having our information go outside the company is not the best solution."

The bottom line: General Motors will soon sell its OnStar system through retailers. Marketing it to rival automakers will be a big challenge.


The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus