Operators: green lights for the connected car

As it stands today, six car brands (namely Ford, GM, Peugeot Citroën, BMW, Renault Nissan and Volkswagen) make up 70% of the connected car market (Analysis Mason). They’ve struck connectivity deals with leading operators to make sure their cars stay connected on the road. AT&T has taken the lion’s share of car contracts in the US, holding agreements with 10 major carmakers, and Vodafone is a popular choice in the European market. Of course, other operators are in the space too – Tesla has partnered with Telefónica to provide connectivity in Germany, the UK and Spain, and Telia for Sweden – but the fact remains that it is a very concentrated market. A handful of operators are converging on the connected car contracts, one of the most lucrative verticals in IoT due to the high ARPU it provides.

It raises the question: what about the other operators?

It’s no secret that operators are searching for ways to make IoT activities contribute more significantly to overall revenues, and the connected car vertical provides a prime opportunity to do just that. Currently, Tier-1 operators are dominating it and while it’s unlikely that many Tier-2 operators are going to become the primary contract holders with carmakers, I believe that they may still get a decent share of connectivity revenue through global alliances and the use of eUICC.

The eUICC, as specified by the GSMA, allows for remote SIM provisioning and connection management. It’s poised to accelerate the growth of the connected car market, but it also reduces a vehicle’s dependency on a single operator. This creates new opportunities for smaller operators to leverage their strong local presence and individual assets. Combined with global partnerships, for instance the IoT World Alliance or the Global M2M Association, the eUICC may yet make it possible for small operators to play a role in the connected car market.

Carmakers look for specific capabilities in the operators they partner with for connected car services. They may prioritize technical specifications (e.g. coverage, latency) as well as more practical measurements (e.g. global footprint, IoT division maturity). These put large operators at an advantage; some of the larger ones’ extensive footprint is undoubtedly one of the reasons they have scooped up so many car deals. Smaller operators tend to have a more local presence and simply can’t compete with the global footprint of large operators on an individual level. As members of an alliance with counterparts in different markets, they’re able to meet the mobility needs of carmakers. Through successful commercial agreements with each other, these operators will be able to strike profitable connected car deals where the car’s embedded SIM is remotely switched between alliance members, depending on location.

When choosing a suitable partner, carmakers also consider less tangible factors such as brand awareness, customer relationship and trust in terms of consumer data and privacy. A smaller operator’s strong local presence and relationship with their customers may appeal to carmakers seeking to appease consumer privacy concerns in certain geographical areas. If Tier-2 operators can overcome barriers associated with cross-border coverage, they can leverage their relationship with existing customers to grow their presence in the connected car vertical in the coming years.

The connected future looks bright

In-car connectivity and the associated services are still considered somewhat of a luxury model offering. However, I believe that every car will eventually become connected through a cellular network, and thus the automotive market will naturally converge towards embedded telematics. In the next few years, cheaper brands and models will catch up to the connectivity trend and a lot more connectivity deals will be struck in the connected car space, providing opportunities for those operators who have yet to enter the game. What’s more, carmakers who have already established partnerships with operators may even consider switching services, the same way Audi shifted from T-Mobile’s network to AT&T for post-2015 models.

Carmakers who are only now bringing connected services to their models are benefitting from second-mover advantages. Geely’s upcoming launch of Lynk & co in the Chinese market exemplifies this trend; the ‘world’s most connected car’ is aimed at more price-conscious consumers, however it remains to be seen who they chose to partner up with for connectivity when they launch in the European market.

Today, there are approximately 112 million connected cars on our roads, and we’re likely to see that jump to 380 million in the next five years (Business Insider) – that’s at least one in every five cars connected. Everyone who’s anyone in both the automotive and telecommunications sector is jumping into the connected car ‘express lane’ as the opportunity it presents is huge. The industry is predicted to be worth a whopping $152 billion by 2020, according to Machina Research. If they play their cards right, Tier-2 operators can convince carmakers of the benefits of their relationships with customers in local markets, and use a combination of the eUICC and alliances to meet the needs of the carmakers on a global scale. The race is on!

/Fiona

Fiona is an Analyst at Northstream

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