I have written before about Sirius XM's (NASDAQ:SIRI) connected car strategy to accelerate growth going forward. This article, which I published last week received some attention, but, in my opinion was largely overlooked by most Sirius XM investors. Agero's connected vehicle division was purchased by Sirius XM in order to expand the company's presence in the fast growing telematics industry. Telematics is the science behind the connected car concept, and while it is not a flashy subject, it is currently a huge industry, poised to grow at a massive rate over the next 5 to 10 years.
Standard "dumb" vehicles, which have been in existence for over 100 years, will become modern communication devices on wheels. The NHTSA is even expected to announce new mandates for the implementation of vehicle to vehicle communication technology by the end of the year (2013). This is seen as a first step in the connected vehicle revolution and should be considered a major milestone in the technological transformation which will change the industry.
Sirius XM is trying to break into this growing industry and will likely be successful, but the company will need to do more and is planning some strong new offerings in the future to capitalize on the growing desire for connected vehicles. The current leader in the telematics space is OnStar, and a fight might be brewing between the two in-vehicle service giants.
OnStar - A Growth Story
OnStar was founded in 1995 as a wholly owned subsidiary of General Motors (NYSE:GM). At the time it was a revolutionary concept, providing in-vehicle communication and services including emergency response, vehicle diagnostics, navigation and hands free calling. The company grew very slowly, amassing just 44 000 users by its third year, far short of GM's goal of 100 000. It was always marketed as a premium service. Given the intricate design and expensive testing process involved with integrating the service into a vehicle, roll out was slow and measured. This was likely a strategic decision by GM. Considering the underdeveloped cellular network of the late 90's and the massive degree of user interaction involved with the service, reducing the pricing plans in order to spread availability to a broader user base would have been cost prohibitive. Even after GM increased OEM installation rates and opened up the service to other vehicle manufacturers, OnStar never developed a true ubiquitous following within the vehicle market.
But OnStar is a huge company nonetheless, and has large growth plans. Currently it boasts a total of 6.6 million subscribers in the US, Canada and China. Indeed, OnStar is such a major part of GM's future growth plan that the company has developed a fast growing joint venture in China which already has more than 600 000 subscribers. The company also launched into the Mexican market in June 2013 and is actively promoting the service plan on many 2014 model vehicles.
OnStar's Future Plans
GM's future plans for OnStar involve migrating the service to utilize a new 4G LTE cellular network with nationwide coverage, with rollout starting in 2014. Furthermore the company plans to continue expanding into foreign markets with an ultimate goal of becoming a player on the global scene. The product offerings will also expand from simple diagnostic, navigation and emergency service, to include a suite of streaming vehicle entertainment services.
As we can see, OnStar is planning to broaden its service offerings and enter the vehicle entertainment market, in which Sirius XM is the dominant subscription based player. At the same time, with Sirius XM's purchase of Agero, the company is planning to enter the connected vehicle market, in which OnStar is the dominant subscription based player. From a superficial perspective, it would appear that the two companies are on a collision course as they scramble for the same customers in the same market. In reality, the situation is much more complicated.
The connected car represents the future of the automobile industry. All automakers offer at least some rudimentary services currently and most have plans for a broad expansion of offerings in the near future. Ford (NYSE:F) has been actively promoting its SYNC service for years and the technology is similar in many ways to OnStar. Ford also recently purchased an in-car connectivity startup named Livio in order to increase its smartphone connectivity offerings. Meanwhile, Toyota (NYSE:TM) has been working on promoting its Safety Connect service and integrating its Entune multimedia entertainment system into select vehicles. Sirius XM has a prominent, although non exclusive position in this service.
While the market is fragmented currently, with each automaker working to develop in house telematics technology, it is likely that only a few major players will dominate. Just like the smartphone market, where market share is centralized over a few technologies, the telematics market will be dominated by only a couple of key players. OnStar intends to be one of those dominant players and in recent years it has taken strong steps to ensure that will happen.
In 2011, Linda Marshall, a former telephony executive at Nextel Communications became CEO of OnStar. Her main goals were to open the service up to other automakers and expand the offerings by allowing independent software developers to make custom apps. The company also recently released a smartphone app which allows users to establish a direct secure link between their smartphone and any OnStar equipped vehicle. In focusing on the creation of apps by a community of software developers, it seems that OnStar is borrowing a page from the smartphone industry's playbook. It's likely a very wise move as technological standards often centralize around the systems with the greatest number of users and application choices.
Competition with Sirius XM
The quest to offer a broad range of communication services within the vehicle will only intensify in the future. Sirius XM will face stiff competition as OnStar offers more entertainment offerings and more connectivity via the modern cellular network which it expects to begin using in 2014. Whereas in-vehicle connectivity has been possible for that last few years by using smartphones, the future of the connected car, with fully integrated internet connectivity and vast media choices, will be a game changer. Sirius XM will be able to leverage its exclusive sports and events broadcasting deals to continue being a major player in the vehicle entertainment arena, but the company should expect competition to intensify dramatically.
Some investors will point out that smartphones and in-vehicle docking stations have had a limited impact so far on Sirius XM. I contend that these connectivity options were never really viable as mass market connectivity mediums within the vehicle. A fully integrated connectivity console within the vehicle will always have the upper hand and while the smartphone has provided a nice technological bridge for users over the last years, in the future it will have a limited role within the telematics and connected car market.
Sirius XM has recently made some strong moves to enter the telematics market, but in order to be a strong OEM player, it will likely have to form some strategic partnerships with the manufacturers to fully integrate their radio streaming and future telematics offerings into vehicles. Possibly the best option for the company would be to form a partnership with OnStar in order to solidify their dominant position within the industry and market the combined service to other auto manufacturers. I will write more about this in future articles, but fundamentally, this industry is looking for a major player who can offer a high quality, standard, technological platform which can be integrated into vehicles by all manufacturers. For a standard like this to work, it would have to be independent from all other automakers so as not to represent a conflict of interest.
OnStar is the largest telematics service provider, but since it operates as a subsidiary of GM, it is unlikely to be adopted by all other vehicle manufacturers. Sirius XM has the potential to become the technological leader in the space if it can dramatically increase its telematics offerings. But that would also entail competing directly with OnStar. As it stands, it's a bit of a catch-22 situation. But one thing is for sure, the telematics revolution represents a huge opportunity and will be a large part of Sirius XM's business going forward. Even if the company only grabs a small share of the pie, shareholders will be rewarded in a big way.
Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.