In this guide, originally published on DrivingToday.com, Zuora CEO Tien Tzuo shares the 3 lessons that Apple can teach auto manufacturers about how to transform.
A successful American hardware manufacturer is facing headwinds. Sales have been on a tear over the last several years, so some downturn is expected. But users are hanging onto their products longer, extending replacement cycles. The overseas market, particularly China, is facing increased pressure from tariffs as well as local competitors.
This could be referring to General Motors. Or Ford. Or Fiat Chrysler. Or, yes, a certain technology company based in Cupertino, California. These companies have more in common than you might think. So what can auto manufacturers learn from Apple?
In February of 2019, Apple posted some mixed numbers—quarterly revenues declined 5 percent from the previous year, and iPhone revenue in particular declined 15 percent from the previous year. It was their worst holiday results in a decade. Notably, however, they announced the size of their iPhone install base for the first time ever, a remarkable 900 million users. And why did they do this? In order to highlight the potential of all their service business.
Apple’s troubles must feel pretty familiar to auto executives. Until wide-scale autonomous driving ushers in the next boom in vehicle sales (all those cars traveling 100,000 miles a year will have their lifespans reduced to four years!), automakers are looking at technology companies like Apple (as well as IBM, HP and Dell) noticing a significant parallel: as unit sales plateau, the new focus is on user monetization.
Apple executives, of course, saw this shift coming. Tim Cook saw it coming early, prepared for it, and now sings the praises of his service business every chance he gets. Apple’s service revenue grew to almost $40 billion in 2018, and in 2019 represents roughly 15% of total sales (up from 11% in 2016). The company’s stated goal is to reach $50 billion in services by 2020. That would put its service business at roughly the same run rate as Lockheed Martin today, at 59 on the Fortune 500.
Though they haven’t admitted it outright, it’s possible that Apple’s management team cares less and less about how many iPhones it ships, and more and more about how much revenue it’s growing per customer (or individual Apple ID).
Takeaway: It’s okay to start small. Apple started with iTunes, then grew the portfolio. Shifting to a services and subscriptions not always the easiest process (and as Zuora’s Tien Tzuo outlines in his book Subscribed, entails some significant organizational challenges), but starting relatively small, with some new business units built around SaaS systems and usage metrics, seems like a smart bet.
Digital services are going to transform the auto industry. General Motors, Ford, and Fiat Chrysler, also known as The Big Three, are sitting on a huge opportunity. McKinsey estimates that automotive data could be worth $450 billion to $750 billion worldwide by 2030. UBS estimates that global revenues from self-driving technology by 2030 will be up to $2.8 trillion, with $472 billion of that coming solely from in-car monetization—in other words, selling services and experiences to passengers who used to spend all of their time driving.
Here’s a somewhat controversial prediction: we are heading to a point in the not-so-distant future where the data and services associated with a vehicle will be more valuable than the physical vehicle itself!
Clearly, the Big Three see an inflection point coming as well. Ford’s CEO Jim Hackett previously noted, “I want to be very clear: Mobility is all about wrapping software and services in new offerings to our customers.” GM CEO Mary Barra told Fast Company, ”We think we’re just scratching the surface of how we can really create value for consumers from a connected point of view.” Initially rolled out as “add-on” connected services for tech-savvy drivers, networks like FordPass, OnStar, and Uconnect are becoming foundational to the growth plans of automakers.
Takeaway: Think about how you can create value for consumers through connected services.
Here’s what Tim Cook said in 2016: “The most important thing for us… is that we want to have a great customer experience. So overwhelmingly the thing that drives us is to embark on services that help that and become a part of the ecosystem.”
New digital services are allowing auto manufacturers to connect directly with their drivers. In the past, dealerships essentially owned the customer relationships: sales, financing, maintenance. Connected services are changing that dynamic, while also empowering their reseller channels with all sorts of new usage metrics (this is not a zero sum game).
While regional vehicle sales are still the standard metric on earnings calls and analyst reports, we’re going to be hearing a lot more Tim Cook-like announcements around services from the Big Three. The industry is starting to look at miles driven and services consumed, not just cars sold.
Takeaway: Relentlessly tie your service business to your core hardware business, as a fundamental part of your overall install base strategy.