$18 a month for heated seats: Car companies are adding monthly subscriptions

Bryce: [00:00:02] From Equity Mates media this is The Dive. I'm your host, Bryce Leske. Now, close your eyes and dream with me for a moment. You've just bought your dream car, a new BMW that you've been saving all your life for. It's set you back $80,000. The obvious first step is to take a long drive along the highway. It's the beginning of winter. The air is cool. You've got the roof down, life is feeling great. You start to feel a bit chilly. So naturally you go to turn on the in-built seat warmers for a little extra comfort. Then the daydream turns to a nightmare. The display screen flashes a sign saying, You are not subscribed to the seat warming package. You will be charged per minute to access this feature. It's not just a first world nightmare. This is the reality right now. Carmakers are adding subscription costs to access certain features in their cars. It is Monday, the 5th of December. And today I want to know why a car maker charges monthly subscriptions. And what does the future of buying a car look like? To do this, I'm joined by my equity buddy Ren. How you go?

Alec: [00:01:07] I'm very good. Bryce. This episode is going to get people angry.

Bryce: [00:01:10] It is. Well Ren. This year we've seen BMW and Mercedes introduce subscription only features in some of their cars. We've always had optional extras, but how is this different?

Alec: [00:01:23] Important distinction right from the top. You're right. Optional extras have always been a part of the car buying process. You walk into the dealership, you buy the car, and the dealer tries to upsell you. Tinted windows, leather seats. It's a decades old story rims. Yeah. You got some alloys, robes, meeting rims. But the 2010 Honda Jazz. Yeah, yeah, yeah. 

Bryce: [00:01:45] I've been all of it. Yeah, yeah. 

Alec: [00:01:47] But look, this story is different rather than a one off payment for an upsell. Carmakers are now embracing the software business model and they're looking to generate monthly revenues. Tesla really pioneered this model with their over-the-air software updates. You can update a Tesla like you update an iPhone, but if you can update software over the air A.K.A over the Internet, you can also sell software in the same way Tesla used to sell cars with battery packs that had their range limited by software and owners had to pay a fee to unlock the battery's full capacity. And this is really where this is different and this is really where people's blood starts to boil for many of the traditional upsells you're paying once for an additional feature. The 2010 Honda Jazz didn't have tinted windows. You pay extra. Now it does have tinted windows. But in the case of these monthly subscriptions, a lot of the time you're paying companies to remove a software block on functionality that already exists. It's already in the car and Tesla isn't alone. BMW, Mercedes, Volkswagen, Toyota, Audi, Cadillac and Porsche have all dabbled in this subscription model. 

Audio Clip: [00:03:01] Dave, if. This was the case, would you pay for a heated seat? 

Audio Clip: [00:03:03] All these hard? No, I was shocked by the story because I just always figured, look, heated seats are a luxury you pay for when you buy your car. You either have it or you do not. 

Bryce: [00:03:13] I hate to say it. Yeah, your blood's at about 60 degrees right now. I feel it's going to get to a hundred pretty soon.

Alec: [00:03:20] Now, Bryce, I want to boil your blood, okay? I want to say what you would pay. I want to play a bit of a game here. I'm going to rattle off some of these subscription offerings. You tell me how much you'd pay. Okay. All right, well, let's start with heated seats for your BMW. 

Bryce: [00:03:33] Should be free. 

Alec: [00:03:35] But what are you going to pay?

Bryce: [00:03:37] 12 bucks a month? 

Alec: [00:03:39] $18 a month is what they're charging. What about getting Apple CarPlay in your BMW? 

Bryce: [00:03:44] I mean, again, should be free, but hated seats 12. CarPlay should be six. 

Alec: [00:03:49] Well, they charge this yearly 80 bucks a year. 

Bryce: [00:03:52] You're kidding.

Alec: [00:03:53] I'm not kidding. Now, every Toyota up close 2018 comes with a default key. Yeah, but if you want to unlock the remote, start with your default key. 

Bryce: [00:04:02] Yeah. So if you're in the supermarket, you want to start your car before you get there? 

Alec: [00:04:05] Yeah, I guess so. Yeah. How much do you pay?

Bryce: [00:04:10] 200 a year. 

Alec: [00:04:11] 80 bucks a year. 

Bryce: [00:04:12] Okay. 

Alec: [00:04:13] Or you can pay $8 a month. Okay. What about this Mercedes? If you want to unlock faster acceleration on your new Mercedes. 

Bryce: [00:04:20] I mean, this is getting a bit ridiculous. 120 a month. [00:04:23][3.4]

Alec: [00:04:24] 1200 dollars a year. 

Bryce: [00:04:26] Thereabouts. Yeah, yeah, yeah. 

Alec: [00:04:28] So what about this BMW high beam assist where the front facing cameras on the car recognise the cars coming the other way? [00:04:37][9.0]

Bryce: [00:04:37] I have been in the car that does this and it is good. Okay, but I know he didn't pay for it. So again, it's like it was in a mercedes though. BMW high beam assist. Ten bucks a month.

Alec: [00:04:48] $259 a year. 

Bryce: [00:04:50] Oh, you're kidding. Kidding. 

Alec: [00:04:53] Last but not least, Tesla self-driving. There's an upfront payment and then a monthly subscription. 

Bryce: [00:04:58] Yes, I thought Tesla would come with self-driving. But I mean, it's got to be. It's got to be $200 a month. 

Alec: [00:05:05] You nailed it. There's an upfront payment. I think it's about 15 grand and then $200 a month. 

Bryce: [00:05:11] Geez to unlock a feature of what is meant to be their competitive advantage and selling. Point. 

Alec: [00:05:16] Yeah. And the last one that I want to say and this one really boils my blood. 

Bryce: [00:05:21] Yes. So you're at 80 degrees right now.

Alec: [00:05:23] Toyota Safety Connect. 

Bryce: [00:05:25] You want me to pay for a safety feature? 

Alec: [00:05:28] An already in-built safety feature? 

Bryce: [00:05:30] Surely, like it's a lot and a dollar a month. 

Alec: [00:05:34] $8 a month or $80. 

Bryce: [00:05:35] A year. Oh, my goodness. Unbelievable. So we've got BMW heated seats, we've got Mercedes acceleration and Tesla self-driving. What is how this actually works? It's just like Netflix sort of. 

Alec: [00:05:48] It's delivered over the Internet. Yeah, yeah, yeah. Its over-the-air updates is the term of art here, but it's an Internet update that then unlocks features for hardware that's often already installed. It means that these cars already come with the ability to warm seats and auto accelerate to their full potential. But the car maker is restricting that and then they will only unlock it and let us use that feature if we are paying our monthly subscription. 

Bryce: [00:06:15] Yeah, it's an interesting one. It seems it's happening to a lot of the more premium car manufacturers as well and certainly a bit of a trend emerging. But then the question is why? Why isn't buying what are already pretty premium cars enough? 

Alec: [00:06:29] Yeah, so there's really two answers to this. The first is to do with the technology in the car. In the past few years, the amount of silicon, the amount of semiconductors, and microchips in the car has greatly increased. They're now all Internet connected. And software enables, which means a business model like this has become technically feasible. My 2006 Mazda three that I sold earlier this year couldn't download or unlock additional features over the Internet, and it couldn't check if I'd been paying my monthly subscription. So the first answer to the question of why is because now they can. The second answer is financial. That's the lifetime value of a car sold is a lot higher if Mercedes or BMW or whoever can get the upfront car payment and then collect 1020 years worth of monthly subscriptions for seat warmers and acceleration and high bags. This means more revenue in the door each year, a steady stream of revenue each year, and it diversifies reliance away from selling a new model each year. And that's really important because electric cars don't have as many moving parts in the engine. They don't break down as frequently, and they should last longer than traditional internal combustion engine cars. So finding ways to create ongoing revenue streams should help carmakers soften the blow of electric vehicles lasting longer and people not needing to buy new ones as frequently. [00:07:57][87.8]

Bryce: [00:07:57] Well, the cynic in me, Ren, says that anything with electrical parts opens the door to planned obsolescence. So whilst. 

Alec: [00:08:03] That is. 

Bryce: [00:08:04] So, whilst your toy, your Tesla may be able to last a long, longer period of time than a traditional combustion engine, time will only tell. But you mentioned their revenue and you mentioned their upfront costs. The big question, I guess for me is will we see the upfront cost of a car reduced because I'm now going to be paying a monthly subscription ongoing price.

Alec: [00:08:24] You know the answer to this no, no. 

Bryce: [00:08:26] Which is even more annoying, because now I know I'm going to be paying a monthly cost for a depreciating asset. 

Alec: [00:08:31] Yeah, it's pretty annoying. 

Bryce: [00:08:33] Yes.

Alec: [00:08:33] And it's not just that cars aren't getting cheaper. They're in fact getting more expensive. 

Speaker 3: [00:08:39] If you're in search of a new car, buckle up for sticker shock. 

Alec: [00:08:43] Sam Ables Ahmed, an analyst at Guidehouse Insights, which is an industry consulting firm, noted that cars are more expensive than ever right now, with the average car price for a new car breaking 48,000 USD for the first time ever this year. Wow. 

Bryce: [00:09:00] Well, then, so many questions. Still in my mind. It's enough to get your blood boiling. I feel like you're at about 100 degrees right now. So let's take a break and then talk about the future of this trend. 

Bryce: [00:09:25] Welcome back to The Dive to be reminded to subscribe wherever you are listening. Today we're talking about the trend of monthly subscriptions in luxury cars. We want to turn to the future of this trend. But first, Ren, I've got to ask, how have people responded to this? I mean, surely people out there are kicking up a stink that they've got to pay for safety features, warm seats, foster acceleration. 

Alec: [00:09:47] Yeah, they are. And judging by our Instagram posts, because we've done a couple on this topic, if you're not following the diet business news, judging by the response, it's not popular. Earlier this year, Cox Automotive did a survey of people intending to buy a new car over the next two years. 25% said they would be willing to pay a monthly or annual fee to unlock a new feature in their vehicle. So three quarters basically said no. Of the 25% that would pay for a subscription, you can really bucket what they'd be willing to pay for into three buckets. The first vehicle performance features like extra torque or horsepower like Mercedes advanced acceleration. So silly. The second bucket creature comfort heated or cooled seats. Heated steering wheels like the BMW, heated seats we've been seeing. Yeah, that's both. 

Bryce: [00:10:39] Buckets I wouldn't be paying for at this. 

Alec: [00:10:40] Stage. Okay, the third bucket and the bucket that has got my blood steaming hot. Safety features like Lane keep assist or automatic emergency braking. Can we just say that making customers pay for extra safety features that are already in the car? That's messed up. 

Bryce: [00:11:02] Up. It is messed around. You can say that. 

Alec: [00:11:05] Now, look, it's not only us that are getting hot about this issue. Legislators in New Jersey are considering a ban on automakers charging subscription fees for new features where the hardware is already installed in the vehicle. 

Bryce: [00:11:19] All right. Well, let's turn to the other side of this debate, though, because there is an argument that you could say makes sense for some car owners. 

Alec: [00:11:28] Yeah, to be fair, there is another side of this debate, and it is that you only pay for what you need. For instance, heated seats would likely not get used in the summer, so you could cancel your monthly subscription. And then when winter rolls around, you pay for it. Likewise, maybe adaptive cruise control would see less use in the city, so you don't pay for that during the normal course of the year when you're just doing the school run and driving to work. But then when you go on your holidays at the end of the year, you pay for it for a month. It also, I guess, lets you test drive some features for a few bucks and then you can decide if you want to keep the subscription or get rid of it. But I think this argument falls down because it's not like you're only paying for what you need and you save money. Yeah. You don't want it. Yeah. Because this is all in addition. 

Bryce: [00:12:14] Yeah. Yeah. And you'd be absolutely paying if you paid for premium windscreen wiper access and you pay and your payment details weren't updated and it didn't fire.

Alec: [00:12:24] Well, imagine if they get to the point where it's like you get 25 windscreen wipers for a month and then you have to pay for an additional. I could see that. 

Bryce: [00:12:33] Yeah. Not maximum volume on the stereo systems. I can say that I can see this going too far. It's going too far. But then what does the future look like? Where can this go?

Alec: [00:12:43] That's going to be more of this. But now that the technology is there, because that's the big unlock, the technology is there. It makes too much financial sense not to keep doing this. 

Bryce: [00:12:53] Yeah, but let me just jump in there. What about the flip side for cars that car companies that don't currently have it? Is this a competitive advantage for them to say, hey, Toyota Yaris, we don't have subscription features. It's all in, baby?

Alec: [00:13:06] Yeah. I mean, potentially there's an argument to say that you could really advertise that like $20,000 drive away means drive away. No more to pay, like you could say, a marketing campaign working that. But over time, Mazda, if they're doing it and Toyota than not, Mazda are just going to have more revenue. They're going to have to invest more. They're going to have to spend more. It's just it's going to make too much financial sense not to do. 

Bryce: [00:13:30] This is going to be a classic case of what happened to Apple, how their revenue mix has changed from hardware only to now subscription services. And you can start to see these car manufacturers doing the same. 

Alec: [00:13:42] But Bryce, you asked about the future of this industry. Most carmakers, Kate, are pretty quiet about this show that is testing it and they're charging people, but they don't really like to talk about it. General Motors have been quite public about their ambitions. So let's use them as a case study. 

Speaker 3: [00:13:56] Old device, GM software platform that will usher in a new era of software defined vehicle experiences and services.

Alec: [00:14:03] So GM has approximately 16 million cars on the road in America at the moment, about a quarter of which include features for which customers are paying subscriptions for. Alan Wexler, senior vice president of innovation and growth at GM, has recently said, quote, Our research indicates that with the right mix of. Compelling offerings, customers are willing to spend $135 per month on average for products and services now. Last year, General Motors said it earned over 2 billion in in-car subscription service revenue by the end of the decade. GM expects that to grow to $25 billion a year, which essentially makes them as big as Netflix. Netflix makes $30 billion in subscription revenue a year, and it makes them twice the size of Spotify, who earned $12 billion in revenue a year. 

Bryce: [00:14:54] Wow. That is truly fascinating. And if it does play out, as I said, it's going to be interesting to see what happens to the share price for some of these companies. So then the second question regarding the future then is will it get to a point where there's no upfront cost and everything is just an add on subscription? 

Alec: [00:15:12] So, I mean, we should be clear, we have cost subscriptions today. It's called a licence. 

Bryce: [00:15:16] Go get.

Alec: [00:15:18] Well, you can lease Mercedes or BMW. A number of automakers thought they would put a little bit of a tweak on that model and that they would charge people a monthly fee to access a variety of different models as an alternative to owning a car or leasing one particular car. So rather than leasing, what are you driving these days? 

Bryce: [00:15:39] BMW i3 in my dreams. Yeah. 

Alec: [00:15:43] You subscribe to BMW as an automaker and you get access to all of their cars this weekend.

Bryce: [00:15:48] I need an SUV next weekend and then a sports car. 

Alec: [00:15:51] Yeah. Turns out the people weren't really into that model. Ford, BMW, Cadillac and Mercedes have all pulled the plug on their vehicle subscription service. 

Bryce: [00:15:59] I imagine the administration of that from the person who's leasing the car, it would be incredibly frustrating, constantly having to go to the dealership to return the car. But then finally, we've been talking about cars a lot today, but are we going to see this trend of subscriptions go beyond Spotify and the media that we're consuming and cars into other aspects of our life? 

Alec: [00:16:20] Yeah, we wanted to include this question to close it out because it just gives you an insight into the dystopian nightmare that appliance makers might be cooking up for us. Because this car unlock that we've been speaking about here, the technology, the silicon in cars that allows them to have software installed and be Internet enabled. It's not just limited to cars. We've seen the Internet of Things roll out across appliances and so many other products that we say in our homes. We've got Internet enabled fridges and ovens and microwaves and toasters and the rest. You have to not be a toaster yet. 

Bryce: [00:16:55] No. 

Alec: [00:16:55] It's coming. But that makes us think about what the future could look like. A fridge where you have an ice machine installed, but you've got to pay a monthly subscription to be able to use it. Washing machine you want to use Spin Cycle. Have you paid eight bucks a month to host the Laundromat Toaster? If you want toast assisted techno. If you want the perfect cook technology, you have to pay for a subscription microwave. You want to use defrost mode ovens. Maybe if you want a clear screen. 

Bryce: [00:17:26] Oh, my God. Well, let's hope that this dystopian nightmare doesn't happen. But the final question I have around is, what does this mean? Remember the days where you could jailbreak your iPhone? Yeah. What does this mean for those that have the ability to to code and understand what's going on under the hood? Our car is going to be hacked. Could this be overridden or Bryce. 

Alec: [00:17:47] We don't encourage people stealing from their car. Make no laws here. But I would say if you were to Google jailbreak Tesla, there are definitely people that have done nice. 

Bryce: [00:17:58] Well, let's leave it there. Let's just leave that as a thought starter. If you have enjoyed this episode, please tell a friend about it. Is it really the best way for our podcast to grow and if you've just joined us a massive welcome, make sure you go and check out that catalogue and Ren particularly interested in the investment outcomes for some of these companies. Remember, you can follow us on Instagram at the Dive Business News. You can contact us by email thedive@equitymates.com And you subscribe wherever you're listening right now so you never miss an episode. But Ren, thanks for joining me today. 

Alec: [00:18:28] Thanks, Bryce. 

Bryce: [00:18:29] Until next time.