Commonly defined, telematics is an automobile network system that uses wireless communications, Global Positioning System (GPS) tracking and call centers to give drivers better access to information and services.

Through the use of Internet and multimedia technologies, telematics enables drivers and passengers to receive audio-visual driving instructions, live traffic reports, information about emergency services and roadside assistance.

In Cologne, Germany for example, Ford is using telematics in a pilot program to provide up-to-date information on more than 16,000 public parking places. This service guides drivers to the nearest parking spot by broadcasting text over the telematics system.

The Players

In the future, vehicles will either come bundled with telematics equipment, or consumers will have to subscribe to telematics services. There could be a total of 40 million telematics-enabled vehicles in the U.S. by 2006, and 25 million in Europe, according to research done by The Kelsey Group. At the height of the e-commerce boom, many companies poured millions of dollars into developing and raising awareness of telematics, hoping it would pay off some day.

After the initial hype, major players are now rethinking their strategies. While many players have come and gone, GM’s OnStar telematics service was a pioneer and is currently the only player of its kind in the market.

GM has equipped 40 percent of its cars—or three million vehicles—with OnStar equipment, says Thilo Koslowski, GartnerG2’s automotive industry lead analyst. Though initial services are free, customers could pay renewal fees ranging from $200 to $400. The renewal rate is very low—around 30 percent—he says, adding that GM has to “offer a more compelling suite of [telematics] applications” to justify the high renewal charge.

OnStar was purported to have received competition from Wingcast LLC, a joint venture between Ford and Qualcomm developing telematics products and services. But Ford recently decided to sell its stake Wingcast. “Pockets are tight right now and Ford decided to focus on its core business [of manufacturing cars],” says Koslowski.

Car rental companies are already using telematics technology to boost their services. Hertz has installed the NeverLost navigation system on 40,000 vehicles in its rental fleet. Developed in conjunction with Thales Navigation, the system gives drivers precise route directions with the help of audio-visual instructions issued by a computer and corrects those who stray off course. Each Hertz car is equipped with a hard drive that interfaces with GPS to guide a driver to tourist attractions, hotels and ATMs.

GM’s OnStar telematics technology is being touted as a premium service on rental cars offered by Avis. In addition to providing GPS-based navigation, the service allows drivers to contact a live person at an emergency control center at the touch of a button.

Telematics can also be valuable as an add-on service. For example, AAA has created a full telematics system to help service its members.

Consumer Concerns

Consumers are aware of the existence of telematics but still think of it as a roadside assistance service, not a powerful technology, says Mark Plakias. He is the vice president of communications for The Kelsey Group and the author of numerous research reports on telematics. “There has been a mass media advertising campaign by GM for OnStar for at least a year, and the whole concept [of telematics] is explained using a high-tech Batman,” he says, adding that a high-tech image of the Batmobile conveys the powerful technology behind telematics.

Though telematics may have benefits, there are mounting concerns that it could increase accidents and violate a consumer’s right to privacy. High subscription costs could also keep consumers away from telematics systems.

A consumer’s key interest is in safety and security, says Plakias, so if telematics effectively uses emergency roadside assistance to provide better safety and security, consumers may pony up subscription money. Emergency roadside assistance is not a “sticky application,” he says, so telematics service providers will have to go beyond that.

Early adopters might take telematics for a test drive, but other consumers would rather wait for the price of the services to fall, says Koslowski, as demonstrated by the relative failure of GM’s OnStar service.

But the high price may not bother consumers as much as privacy issues. On one side, telematics gives car manufacturers real-time access to the location of a vehicle, helping authorities track stolen cars.

On the flipside, critics of the service complain that this amounts to invasion of privacy. If a car manufacturer uses telematics to provide a valuable service, the consumer won’t mind being tracked, says Koslowski. But companies that misuse the service are sure to be reprimanded.

Last year, Acme, a rental car company in Connecticut, used a tracking device to ascertain that one customer had violated the speed limit set by the company. Acme said the customer had infracted the speed limit policy three times and that each violation carried a fine of $150. According to the company, the policy was put in place to ensure safe driving. Acme also said that customers who signed the rental agreement stipulated that their speed could be tracked via an on-board device linked to satellites and that each violation would result in a fine. Connecticut’s Department of Consumer Protection tried to cease that practice by filing a complaint against Acme. The court slapped Acme’s wrist.

Sector Outlook

The telematics sector operates at three levels, says Plakias. At the top tier are the Original Equipment Manufacturers (OEMs) who are well positioned to integrate telematics equipment into vehicles manufactured by companies like GM, Ford or DaimlerChrysler. The car manufacturers form the second tier. At the third level are telematics service providers, wh0 provide third-party services to in-vehicle telematics users.

Koslowski elucidates the layering further by citing the example of Johnson Controls Inc., an OEM that will supply telematics equipment to DaimlerChrysler. Johnson will make money from the device it installs in DaimlerChrysler’s car, DaimlerChrysler will make money by selling the car with the device, and AT&T Wireless will make money off the hands-free cell phone service it bundles with DaimlerChrysler’s telematics service.

As a standalone, Koslowski believes the viability of telematics in the consumer segment may be questionable. Subscription fees alone will not generate revenues for the sector, he says, unless car manufacturers introduce applications that interest consumers. As a result, the focus is on developing applications that make telematics a logical extension of what an automaker provides today—mobility.

The telematics application most demanded by consumers is the ability to use cell phones in a voice-activated manner, says Koslowski.

Remote service diagnostics—or the ability to sense a problem in a car before it happens—is demanded by car manufacturers. This helps not only the consumer, but also car manufacturers and dealerships, he says.

“The [in-vehicle] applications need to save time and money and make driving a valuable experience for the consumer,” says Koslowski. A high subscription fee for applications like GPS navigation, dynamic traffic information and remote vehicle diagnostics may be justifiable to some consumers, but not many.

While the bottom lines could be low, the future of telematics in the consumer segment depends on economies of scale and customer acceptance, says Plakias. “The profitability has yet to be proven,” he says.

Profits won’t come through subscriptions, but through customer relationship management and vehicle relationship management, he says.

Telematics can be a viable business model if applied within the commercial sector, says Koslowski, adding that the technology has a bright future in commercial applications such as fleet-tracking and asset management.