Connectivity Is The Next Big Thing For Cars

Includes: AAPL, F, GM, MSFT, T, VZ
by: Jacob Steinberg

We live in a world of ecosystems. Everything is interconnected. We are connected to the rest of the world through our smart phones, tablets, computers and other devices. Indeed cars are no exception to this rule because they are becoming "connected" as well. In 2007, Ford (NYSE:F) took the first step towards connectivity of cars when it entered in a partnership with Microsoft (NASDAQ:MSFT) to build Sync. This was a good first-step in the right direction.

Compuware's Covisint recently conducted a study where the participants were asked about their most desired car connectivity feature. The top three features rated by the participants were: 1) automatically updating transportation information to the car including maps, traffic conditions and parking availabilities, 2) automatically updating all the car's software, 3) being able to transfer personal settings from one car to another (or from a non-car device to a car). These are some interesting ideas that can add a lot of value and competitive advantage to car companies.

Mary Chan is the VP of the Global Connected Consumer division at GM (NYSE:GM). This division is responsible for coming up with ideas regarding connectivity of cars. The fact that GM devoted an entire division to this goal demonstrates the importance of connectivity for the car companies. Mary Chan has some interesting ideas for the future connectivity of cars. For example, she believes that it is possible for the future cars to be able to notify outsiders about a car's estimated time of arrival. If you are trying to make it to a family dinner that's 450 miles away for a thanksgiving dinner, your family shouldn't be worried about whether you will make it or not; instead, they should be able to track your progress through an application and plan accordingly. Mary Chan also suggests that the future cars will have other features such as automatically adjusting music when kids are present in the car. She also talks about a built-in system within the car like a tablet. That way, people wouldn't have to carry their smart phones and tablets around when traveling in their car. Again, she acknowledges that when you rent a car, you should be able to login to the car and it should upload all your personal settings in the car, including the adjustment of the seat, mirrors and the temperature.

GM plans to add 4G LTE services in its cars starting with 2015 models. This way, cars will be able to update their software, applications and content (such as maps and traffic information) without needing an external device such as a tablet or smart phone. The service will be operated by AT&T (NYSE:T) who will probably charge people a fixed price for internet usage. This feature will be tested in the US and Canada before it gets to any other country.

Apple (NASDAQ:AAPL) is another company that is working on a related project. Apple's new operating system iOS 7 will make it possible for users to project all their applications to their car's dashboard display. For example, if a user wants to look at a mapping application through his or her iPhone, this image will be transferred to the display on the dashboard effortlessly. The users will be able to give voice commands to their phone, which should minimize the amount of distraction that could occur on the road. While several car companies like BMW, Volvo, Chevrolet and Hyundai have signed up for this project, some car companies like Ford, Toyota and Chrysler decided to stay away from this project. This could be because each company is working on their own similar project and no one wants Apple to steal the spotlight (for example, having this feature on Ford cars would mean that this feature would replace Ford's in-house infotainment system). Keep in mind that Ford is the first company that adopted the concept of connectivity between smart phones and car software.

The US government is also watching the developments in this area. The government's main concern in this concept is security. For example, what happens to a car if its software system is hacked or a virus penetrates into it? Would it cause disruptions big enough to cause accidents? Also, if someone is able to hack into another person's car software, would they get access to location of the hacked car, raising privacy issues? It is reported that 40% of modern cars' cost and 50% of the warranty claims are related to cars' software systems or electronic functions. Could this justify the government's concerns? These are interesting points to think about.

What Does It All Mean For The Investors?

Well since this is an investment website, it would be unfair for me not to talk about what this means for the investors. These developments can mean different things depending on which investors we are talking about. If we are talking about investors of companies like AT&T or Verizon (NYSE:VZ), we are looking at new revenue streams for these companies. These companies will be able to sell more internet packages and earn more money. For car companies, the results will depend on how well they can actually use these new systems. Having successful software that allows for seamless connectivity will bring car companies competitive advantage over those that do not. On the other hand, given that half of the warranty claims are related to software and electronics, there is a big risk here. If a car company's software is glitchy or dysfunctional, this could result in loss of market share. Companies like Microsoft and Apple are also likely to benefit from the new trends as they will be able to license more products. Microsoft has already been in the car business for a while and it's been making decent money (Nokia's mapping business "HERE" -also known as Navteq or Nokia Maps- has ongoing partnerships with many car companies which will only become bigger in scope as cars get more connected).

As you can see, the "connectivity revolution" in cars is a win-win situation for most parties unless someone manages to mess something up (which tends to happen a lot in this industry).

Disclosure: I am long F, MSFT, NOK, AAPL. 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.