May 13 (Bloomberg) -- One of the first things Dan Akerson did as chief executive officer of General Motors Co. in 2010 was dive into the automaker’s telecommunications business to get more profit from that in-car connection.
The former telecom executive wanted to know when GM could boost the speed of data services into its vehicles to 4G. More than 6 million customers in the U.S., Canada and China subscribe to OnStar, which provides diagnostic, directional and safety services through a 2G cellular service. He saw the chance for far more services than giving directions to lost drivers.
“They told him 2018,” recalled Steve Girsky, GM vice chairman, who was part of those early discussions. “After I got done peeling Dan off the ceiling, I said, ‘We need to move this along a little faster.”’
What Akerson envisions makes plain old GPS seem as outdated as a horse and buggy. While not revealing most of his thinking, his idea would be to make cars much smarter than they are now, like a high-tech infotainment system in a living room. Akerson suggested that a faster connection can create new possibilities for engaging passengers -- and for making money.
On the other end of the spectrum are companies such as Ford Motor Co. pushing tethered systems, said Brian Johnson, an industry analyst with Barclays. They’re using the argument that “people don’t want to carry around extra processors, people are already paying for one data plan.”
In February, OnStar announced a partnership with AT&T Inc. to offer 4G LTE service next year in most 2015 model-year vehicles in the U.S. and Canada. Akerson, this month during a conference call with analysts, gave his most candid comments yet about what Detroit-based GM is considering for the new relationship and how it might change the automaker’s business.
Long-term evolution, or LTE, is a higher speed, fourth-generation wireless technology compared with third-generation, or 3G, which itself is faster than OnStar’s current 2G connection. AT&T, Verizon Communications Inc., Sprint Nextel Corp. and T-Mobile USA Inc. are adding LTE to their networks. LTE allows mobile users to load videos and stream music as much as 10 times faster than 3G, GM said in February.
“The bigger the pipe, the more you’re rewarded into the future,” Akerson said. “So, when we look at what we can do with a 4G pipe into a car, you can change the business model almost entirely. You may be able to have a real revenue-generating opportunity.”
Akerson suggested the faster cellular data connection could allow for advertising in the vehicle or live-streaming media, such as watching the “same show that was on television.”
A debate within the auto industry is how such service will be provided. While GM is embedding 4G in vehicles, Ford is providing an infrastructure to connect cars to the Internet through a user’s smartphone.
“This is going to be the next battleground in options,” Johnson said in a telephone interview.
One of the reasons for the push is interest from young consumers who’ve grown accustomed to accessing Facebook Inc.’s social-networking site and other Internet connections anywhere.
“The new generation of buyers wants connectivity in their vehicles,” Johnson said. “People basically want to seamlessly access things they’re used to on their smartphones in the vehicle.”
Akerson said that his grandchildren have “grown up in a world with smartphones” only.
“Instead of waiting for trends to overwhelm us,” GM is trying “to look over the horizon,” he said.
After Akerson became CEO, he oversaw the company’s initial public offering and push to rebuild itself after the 2009 bankruptcy reorganization. Akerson, who joined GM’s board in 2009, spent a previous career in the telecommunication industry, including time as president of MCI Communications Corp. and CEO of Nextel Communications Inc., General Instrument Corp. and NextLink Communications Inc., which became XO Communications Inc.
His predecessor, Ed Whitacre, had been chairman and CEO of Dallas-based AT&T after he reassembled it with acquisitions to SBC Communications Inc., formerly Southwestern Bell, which he ran. Bob Ferguson, whom Akerson promoted to run the Cadillac brand globally, is a former telecommunications executive who spent more than 10 years at AT&T.
The automaker on May 2 reported its 13th straight profitable quarter. Net income slipped 11 percent to $1.18 billion. The results beat expectations, with European operations losing less than the average of three analysts’ estimates.
Akerson is pushing GM toward several mid-decade goals, including boosting North America operating margin to 10 percent, stemming loses in Europe and increasing sales in China to 5 million from 2.84 million last year.
“You can just imagine Dan showing up and saying, ‘2G? Where are you guys?”’ Johnson of Barclays said. “He must’ve showed up and said, ‘OK guys, get out of the cave here.”’
Pushing to bring 4G faster to vehicles is an example of a culture change under way at GM, Girsky said during an interview at his Detroit office in March.
“That’s a huge win around here,” Girsky said. “That’s a case where left on its own, it would’ve sort of drifted, and we would’ve been left behind.”
While remaining coy about how GM will use the technology, Girsky said it’s a “wide open space” that could be “disruptive.”
“What came first: broadband or YouTube?” Girksy said. “We’re going to build a big pipe and then we’ll figure out what to do with it.”
The service will improve OnStar and allow for dealer-to-car communication, usage-based insurance and in-vehicle advertising, Itay Michaeli, an industry analyst with Citigroup Inc., said in a note April 14.
GM having 4G is a big step in the “ongoing union of telematics and infotainment,” Michaeli said.
OnStar generates about $1.5 billion in revenue annually, with as much as 35 percent profit margin, according to an estimate by Citi. GM’s companywide first-quarter margin on earnings before interest and taxes was 4.8 percent, the company said May 2.
GM was ahead of its time when it began placing OnStar in vehicles in 1996, Thilo Koslowski, an auto-industry analyst with Gartner Inc. based in San Jose, California, said in a telephone interview.
“That was during the time when we didn’t even have the mobile Internet or smartphones,” he said. “Not only were they a pioneer in this space, but they were trying to cover new ground. The problem was consumers weren’t quite ready for it because how would you embrace the idea of a mobile Internet if you can only be exposed to it when you’re sitting in your vehicle?”
By the time Akerson arrived at GM, OnStar had settled into a service seen as providing safety and security at the simple push of a button. The restaurant chain Jimmy Johns even paid homage to the service with TV ads that showed a driver in an accident pushing a button to get a quickly delivered sandwich.
GM has “never been properly compensated” for the service OnStar provides for cellular-phone carriers, Akerson told analysts this month. The AT&T arrangement changes that, he said.
“With the new contracts, when it kicks in, every time we implement, we get $20” from the carrier, he said. GM will also get revenue-sharing from the service, he said.
“There is a whole new frontier for us” with margins that will exceed what “you typically see in a manufacturing business,” Akerson said.
GM later issued a statement that said Akerson “did not disclose the entirety of both sides of our agreement with AT&T and we are not prepared to discuss those particulars at this time.”
While unclear exactly what new revenue opportunities exist, Mark Boyadjis, an industry analyst with IHS Automotive, interpreted Akerson’s comments as indicating that GM may capture a share, perhaps $20, each month from whatever subscription AT&T charges for 4G connection.
“We really think $20 per car revenue opportunity is significant,” he said.
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