Will Apple's over-the-air business model work in cars?

Apple’s profits margins are legendary, but topping them all are its margins for 'services'. These software-based features run at around 70% – roughly double those for hardware like iPhones.

Car makers, used to working on margins of up to 10% if they’re really focused, slaver at the thought of profits like that.

Now they think they can lift margins to tech-company levels with the same strategy: offering software-based services that car drivers will be happy to buy regularly.

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“A regular subscription income is like gold dust to any business,” says Richard Peberdy, UK head of automotive at consultantcy KPMG.

Stellantis was the latest car maker to spell out exactly how much money it thinks it can make from so-called ‘software-defined’ vehicles at an event dubbed Software Day in December. It predicted revenues of €20bn (£16.7bn) by 2030, at which time it reckons it’ll have 34 million data-connected vehicles (essentially, 34 million smartphones on wheels), up from around 12 million now.

It already reckons it collects around €400 million (£333m) anually from 400,000 people subscribing to connected services, but it anticipates that it will make the leap once it starts introducing cars with its super-fast new STLA Brain hardware-software combination from 2024.

Features and subscriptions based services will “increase notably”, said Stellantis’ chief financial officer Richard Palmer in the presentation.

Palmer spelled out in vague terms what they will be, including updates and add-ons to improve safety, security, entertainment, navigation and remote options.

There will also be features-on-demand operations that wouldn’t need subscriptions, plus usage-based insurance and telematics services for fleets to better manage their operations.

However, in the questions session, Patrick Hummel, a financial analyst at the bank UBS, raised an objection. “The more I hear car companies talk about tech-like margins, basically everybody, the less likely it seems to materialise,” he said as a prelude to a question. His point was that while companies like Apple have unique digital ecosystems that customers are prepared to pay extra to get the most out of, car companies don’t.

In a low-margin, cost-focused business like the car industry, everyone shares suppliers to increase economies of scale, the upshot of which is that everyone has the same features. Then it becomes a race to the bottom as they tempt customers by offering more of those than competitors.