The 5 software markets of the SDV

There are going to be 5 different software markets around the software-defined vehicle. Two traditional ones that will undergo a great transformation and three emerging ones. Let’s dive into this and put my recent doubts about a smartphone-style ecosystem of apps for vehicles in perspective.

When I look at the classic automotive software market, I see essentially two markets. The market for in-vehicle software and the market for software tools. Naturally, the variety in either of these markets is tremendous. There is infrastructure software such as operating systems and middleware and there is actual functionality. The software is generic, like Autosar, or domain-specific, like Android Auto and Car Play. There are generic software products and there is custom made software development in-house or as engineering service. Likewise, this holds true for many software tools.

In either case, the software is developed for professionals to be used to develop vehicles and vehicle functions. We are talking about a pure business-to-business market within the automotive domain. ?Virtually the only revenue stream to finance this market are vehicle sales.

Exactly this market has come under immense pressure. Whereas previously this market could adopt the development cycles of the underlying product to be sold, i.e. the vehicle, customer expectations are shifting. New value needs to be delivered quicker - independent of buying a new vehicle. Not only the lifetime of vehicles is too long for this, but even the time between two vehicle generations does not meet these market expectations. All while in-vehicle software complexity is increasing.

The idea is to deliver value through software independent of vehicle sales. To achieve this, an OEM must achieve three key transformations:

1.?????Decouple the software lifecycle from the hardware lifecycle

In order to be able to deliver software independent of vehicle sales, the software must be updateable. Naturally, also the individual software aspects cannot all be coupled in their lifecycles. Obviously partial updates of e.g. individual functions are needed, and updates are to be delivered remotely. To address the complexity issue of updating this distributed system of ECUs and networks, OEMs thrive for harmonization of the software platform and centralization. This is the transformation towards Automotive OSes and zonal architectures that we see today.

2.?????Deliver new value through software

OEMs must deliver value through software, such that customers are willing to pay for it. Unlocking existing hardware features (e.g. the infamous heated seats subscription) is not achieving this. Providing e.g. the next generation of an ADAS function to a vehicle is. So far Tesla is the only OEM to accomplish this. The problem is a transformation within the OEM. Overallocation of hardware resources to allow for future updates requires to change the way business cases are calculated. A bill-of-materials focused view cannot enable this step. It requires software functions to be thought of as products rather than a feature of a device to be sold.

3.?????Capture value

Once an OEM is able to separate the lifecycle of software and hardware, and to actually deliver value to customers, he needs to be able to actually capture value, i.e. to monetize on the software functions. If new software functions are no longer bound to vehicle sales, the investment needs to be monetized in another way.

All three skills go hand in hand. Apple would likely not be able to maintain the ecosystem of iOS apps, if each were bound to a specific iPhone generation. A new iPhone today would not achieve market success if it dropped the app store as the capability for value delivery would be missing. Google would have certainly not developed Android if it couldn’t monetize the investment via data or the app store.

Achieving these three key capabilities are essential to create a truly software-defined vehicle. The need for the first two capabilities has tremendous impact on the existing markets of in-vehicle software and software tools. Harmonization towards Automotive OS platforms causes a shift in the supply chain, letting OEMs take ownership of software platforms and sourcing software directly rather than ECUs. The need for fast development is changing the way of collaboration, is fostering the push for open-source, and fueling the drive to shift to cloud-based development. They require OEMs, Tier 1s, Tier 2s to undergo a challenging change process – in terms of offering as well as internal organization and business models. Still both markets (in-vehicle software as well as software tools) still must serve automotive-specific requirements. Safety, security, and homologation are all still relevant. While pressure from new entries into this market is immense, the capabilities of incumbents are still important. This is a great catalyst for new cooperation among companies. Proof points are initiatives such as Eclipse SDV, SOAFEE or Covesa, but also a multitude of partnerships among individual companies.

It is the third key capability of capturing value that is creating opportunity for new markets and ecosystems. In-vehicle software and software tools remain a business-to-business market among largely automotive companies – highly contested and undergoing a big change process, still not creating a new market but transforming it.

The new markets or ecosystems that form are those of in-vehicle app stores, of connected services around vehicles, and of vehicle fleet ecosystems.

The goal for in-vehicle app stores is to sell new or upgraded functionality to end customers without selling new vehicles. It is the attempt to replicate the success of smartphone app stores for a vehicle. So far, this part has been mainly limited to infotainment systems (except for Tesla). In infotainment it has not been a big commercial success. As outlined in my previous article, I doubt this will become a success unless OEMs recognize the fact that the vehicle is a mobility device and as such the added value must differ from that of a smartphone, which still essentially is a communications device. Software upgrades should not be an installation of TikTok in the vehicle but improving the perception of the mobility device. In any case, this trend introduces a business-to-consumer market for software, which is likely operated by OEMs.

The second new market is emerging from services around a vehicle. Connecting data or functions to other services outside the vehicle. Prominent examples currently are e.g. pay-per-use insurances, delivery to trunk services, or connecting a vehicle to home energy management to control charging. Plenty other opportunities exist. This requires a shift of OEMs to not only target end customers with vehicle sales but partners from other industries to build an ecosystem of services around the APIs of a vehicle. Fragmentation of the automotive market will become a major hurdle as it currently is for the home automation market. In the end, it will be a question of whether, e.g. the fleet of one OEM is sufficiently large for an insurance company to invest into the pay-per-use insurance service for it. This market is a two-sided business to connect service providers on one side and consumers on the other via the vehicle as platform. Ecosystem size is essential to success and first open-source initiatives and standards are forming to overcome the fragmentation.

The third new market is centered around managing vehicle fleets and monetizing on fleet data. This market is hugely attractive in the commercial sector as it may have a significant cost lever for e.g. rental car companies or delivery services. Typical examples include predictive maintenance, fleet routing, or collection of rode condition data. Again, to address this market OEMs need to transform their business to target different customers with new business models. The market is again a business to business relation, however, with OEMs not necessarily being the dominant party.

So while the established two markets of in-vehicle software and software tools are highly contested and undergoing tremendous change, the three emerging markets offer new opportunities while their success can still be questioned – after all no OEM was able thus far to create a relevant revenue stream out of them.

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