Editor’s Note: Tien Tzuo is the CEO and founder of Zuora and author of best-selling book, SUBSCRIBED: Why the Subscription Model Will be Your Company’s Future – and What to Do About It. This “guest editorial” is part of our continuing coverage of the leading-edge developments that are changing personal transportation. The opinions expressed are those of the author.
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. Alarming press coverage ensues.
I could be talking, of course, about 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.
Apple’s troubles must feel pretty familiar to auto executives
Apple just posted some mixed numbers — quarterly revenues declined 5 percent from the year-ago quarter, 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.
I suspect Apple’s troubles must feel pretty familiar to auto executives right now. 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.
Shift has been on the way for years
Apple executives, of course, have seen this shift coming for years (personally I think most of their recent negative press is way overblown). 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 last year, and now 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, I’m convinced that with every year, 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). Case in point: a major media streaming service is in the works, with Apple reportedly paying for over a billion dollars worth of new content in the coming year.
Digital services will transform the auto industry
And guess what? Digital services are going to transform the auto industry as well. 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. Here’s Ford CEO Jim Hackett on their last quarterly earnings call: “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.” FCA’s Uconnect system took center stage in their recent CES announcements. 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.
And perhaps more importantly, 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, I also predict that 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. But in order to manage this transition successfully, I think they need to learn three key lessons from Apple’s success:
3 key lessons to be learned from Apple
First, start communicating to analysts and investors early. Apple started emphasizing its service revenue way back in 2013. Apple CFO Lucca Maestri released a special non-GAAP supplement highlighting service revenue three years later. Today the company has a special section on its developer site offering best practices around creating subscription offerings.
Next, relentlessly tie your service business to your core hardware business. This helps analysts understand that you’re committed to services not as a nice “extra,” but as a fundamental part of your overall install base strategy. 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 are to embark on services that help that and become a part of the ecosystem.
Finally, 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 I outline in my 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.
Tien Tzuo is the world’s foremost authority on the “The Subscription Economy.” He is CEO and Founder of Zuora (NYSE: ZUO), the leading Subscription Economy SaaS provider. Born out of Tzuo’s experiences at Salesforce, a pioneer of the subscription model, Zuora was founded in 2007 following his roles as chief marketing officer and chief strategy officer. He is the author of the USA Today, LA Times and Amazon best selling book, “SUBSCRIBED: Why the Subscription Model Will be Your Company’s Future – and What to Do About It.”