We are on the verge of in-car entertainment (ICE) going mainstream. Apple (NASDAQ:AAPL) recently announced the release of CarPlay, its iOS vehicle integration at the Geneva International Motor Show, which allows an iPhone to take over the in-dash display of the car, providing Siri voice controlled access to aspects such as navigation, phone functions, messages and music. CarPlay will be first accessible from manufacturers such as Ferrari, Mercedes-Benz and Volvo (OTCPK:VOLVY), and is slated to release for other car manufacturers later this year.
Google (NASDAQ:GOOG) has announced that it is forming partnership with Audi (OTCPK:AUDVF), GM (NYSE:GM), Honda (NYSE:HMC), Hyundai and chipmaker Nvidia (NASDAQ:NVDA) called an Open Automotive Alliance. The alliance is aimed at developing ways of integrating the search engine giant's Android operating system into cars to make driving "safer, easier and more enjoyable for everyone."
Clearly Apple and Google have identified the car as the next growth area. The handheld mobile device has started to see some saturation - with smartphones now owned by 22% of the world's population, and tablets owned by 5.8%. Citi analyst Glen Yeung noted, "The desktop computer market took a little more than 12 years to mature, reaching a saturation point in 2008, the laptop computer market took 10 years, maturing by 2012. When you get into smartphones and tablets, those markets are expected to mature in 2015, giving smartphones a product lifecycle of 7 years and tablets one of 5 years."
According to one report, the in-car entertainment market is expected to grow to $14.4B by 2016 at a CAGR of 12.1% from 2011 to 2016. According to reports, traditionally, sale of auto products are done via OEM and aftermarket. Even though the aftermarket plays a significant role in the sale of infotainment solutions, it is anticipated that the sale of infotainment products are likely to improve through the OEM channel than the aftermarket.
So, who are the players?
- Car Manufacturers: Car manufacturers obviously stand to benefit from these features. Car manufacturers will be pushing these features that allow drivers more Internet connectivity providing accessibility to online content while on the move. This provides car makers with plenty of marketing power to attract customers.
- Apple came out with guns blazing at the motor show with the CarPlay announcement this year. While industry watchers were focused on Apple's next smartphone development, or announcement of the rumored iWatch or a smart TV, Apple surprised everyone with the big push for ICE.
- Google is doing the same with its Android system. Google may also be able to provide better user-experience with its powerful maps engine. More importantly, the ICE ecosystem will open up a whole new advertising playing field for Google to exploit.
- The two other major phone makers Microsoft (NASDAQ:MSFT) and BlackBerry (NASDAQ:BBRY) will have a go as well. BlackBerry's real-time operating system - QNX, is already a standard in a lot of the car manufacturer's software systems, which will provide BlackBerry with some advantages.
- Speech interaction software solution companies such as Nuance Communications (NASDAQ:NUAN) could see some positive impact as part of this movement, although Google and Apple have their own speech interaction solutions.
- Hardware/communication chipsets: The communication chipsets that allow the cars to communicate and connect will stand to benefit.
- Qualcomm (NASDAQ:QCOM) has probably the most to gain with its dominance in digital communication chipsets and patent portfolio. Recall that Qualcomm gets royalties for each smartphone or tablet sold that uses the CDMA or OFDMA technology, no matter which manufacturer. Whether the consumer buys an Android, Apple iOS, BlackBerry or Windows phone, Qualcomm gets a cut for either using the chipsets or as a licensing fee. Qualcomm is also targeting the ICE market with its Snapdragon 602A processor.
- Other chipset manufacturers that are Qualcomm's competitors will also influence the market such as Broadcom (BRCM), Nvidia, Mediatek, etc. But the biggest threat to Qualcomm comes from Intel (NASDAQ:INTC), which is spending a lot of its R&D money on its in-vehicle infotainment division.
- Telecom: Telecom service providers will be one of the big winners with all new subscribers added to their customer base. AT&T (NYSE:T) has already announced data plans to be released with 2015 Audi A3 sedans starting from $16/month. A similar deal from Verizon (NYSE:VZ) with other car manufacturers cannot be too far behind.
- Other: The connectivity of the car will provide Big Data for various other companies to build their aftermarket products and services providing with an enriched experience for the driver.
Every new technology/progress comes with its own challenges and roadblocks that it needs to overcome for widespread adoption.
- Safety concerns - With more pervasive Internet connectivity, there will be more driver distractions in the car although Apple has confirmed that it will not be putting the apps on the dashboard. The driver will be able to talk to Siri, but going onto the screen and manipulating things can only be performed when parked. Despite such limitations, the presence of new toys will add to driver distraction.
- Security concerns - Can malicious software or hackers control the car now that these cars are connected?
- Regulatory concerns - Safety and security concerns could lead to regulatory roadblocks, which could be debilitating for the industry. A lot of states and countries have rules and regulations in place to ban drivers from using cellphones - but now that the cellphone interaction is moving to the dashboard, this will require tweaks to the rules and could potentially cause roadblocks.
- Will having Apple iOS or Google Android or Microsoft Windows or BlackBerry as the system software in a particular car manufacturer/model affect the buyer's decisions? The car manufacturers could face this as a challenge as potential drivers may prefer one over the other. Can they somehow support any operating systems and let the driver choose?
Conclusion: The car is now the next frontier. With smartphones reaching saturation levels, the tech giants have now set their eyes on the car. With ICE systems, the tech giants want to do to cars what they did with the phones a decade ago. The companies identified above are some of the major players driving this movement, but keeping an eye on the overall trends will provide investors plenty of opportunities to capitalize and realize profits.
Disclosure: I am long QCOM. My full list of holdings can be found here.
Disclosure: I am long QCOM. 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.