Friday, December 30, 2016

Why Aren’t Automakers Embracing Digital Business Models?

Below is my most recent post on Harvard Business Review:
BMW is one of the best car makers on the planet. It is also thinking seriously about what digital transformation means for the car business.
Its cars now have Connected Drive, a platform that allows drivers to purchase apps for traffic, messaging, and for starting the the engine from a distance. The new BMW is also packed with electronics that allow the user to experience different driving modes, from sporty to gas-saving, substantially changing the feeling of driving the car.
And yet BMW is still not making full use of digital business strategy – nor are any other car makers.
Consider: BMW charges €360 to unlock the ability to access the apps on the Connected Drive. Some apps (e.g. Remote Services) cost €80 and others (e.g. Real Time Traffic Information) can be rented for €45 over 6 months. If one spends a hefty amount of money on a new car, paying €80 or €45 for an app doesn’t seem too expensive, but needing to pay €360 to just activate the ability to download the apps seems totally wrong.
Contrast this with the approach taken by Apple. Making money on complementary products is one of the features of Apple’s business model. How does the model work? You sell the hardware and then you sell low priced apps (some of them are even free) to increase the value of the hardware. The apps represent a complement to a car and the Connected Drive is a store to sell complements, but why does the user need to pay to enter the store?
Imagine buying an iPad (especially in the early days of this product) and then having to pay €100 (or even €50) to access the App Store. This would have been a serious barrier. Following Apple’s logic would encourage BMW to make Connected Drive free, something that would make sense given the low marginal cost to BMW of doing so. The bigger lesson here is that you should always allow the customer a free entry into your digital store and then charge small amounts for the products sold there.
Here’s another way digital business principles might play out differently for BMW and other carmakers: renting engine capacity.
If you look under the hood of BMW’s Series-3 vehicles, for example, you can get horse power of either 110, 150, or 190, depending on whether you’ve purchased a 316, a 318, or a 320. However, you might be surprised to learn that BMW uses the same 4-cylinder engine in all 3 models, except the electronic components don’t allow the engine that is sold in the less expensive model to get to the higher levels of horse power.
Why couldn’t the company make a car that allows a driver to either upgrade or rent the engine power? Say you buy a 318 model with 150 horsepower for casual driving, but then you rent the 190 HP to go on a road trip? Alternatively, could you buy a car with 150 HP but after a 3-year period pay to unlock additional horsepower permanently? If the hardware is an issue, this unlocking could happen in a dealership.
We see these free-premium-rent models all the time in other digital businesses. When you download a fitness app, for example, you can try a free version first, and then can pay to unlock premium functionality later on. Or you can rent some functionality, such as a €9.99 a month subscription to an app that gives you a personalized training program.
When I talk to auto industry executives, the reason why they don’t want to systematically offer engine upgrades is that they want the customers to sell their old car and buy a new, more powerful car. Fair enough. But they may be missing out on both new customers and new revenue opportunities. Clearly, when commuting to work or driving in the French countryside, one doesn’t need 190 horsepower engine (not only because of the high fuel consumption, but because of the high probability of getting a speeding ticket). But on a vacation to Germany, where there are no speed limits on the autobahns, 190 horsepower could come in handy. As the car already has the different driving modes that are controlled electronically, it seems that the HP control is also possible.
There are also possibilities for automakers like BMW to combine user data, software upgrades, and digital business models to “nudge” customers to try new features they’ve not used before. Consider that your Connected Drive apps might know that you’re planning an upcoming trip to Cote d’Azur, where the speed limit is 130 kilometres per hour. The car itself could ask you if you’d like to implement a temporary, over-the-air engine upgrade.  Perhaps automakers could even offer a “vacation bundle” – additional traffic, weather, and events information along with an engine upgrade that lasts the length of your trip.
Tesla does now offer a self-proclaimed “ludicrous” mode upgrade to Model S that allows reducing the acceleration time of your car by 10%, and you don’t need to sell your old Tesla to get this upgrade. However, Tesla still asks you to buy the upgrade (about $10,000), not to rent it, although the rental of additional power should be at least technologically feasible.
Clearly, the makers of physical products (like cars or home appliances) understand that digital convergence is the next frontier. However, they often don’t look carefully or creatively at the business models this might inspire. The physical asset itself is just the beginning

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