THE BLOG

Apple and Google Want to Turn the Motoring Industry Into Another 'Dumb Pipe'

21/09/2015 13:26 BST | Updated 18/09/2016 10:12 BST

At this year's annual Apple love-in in California, the world's biggest tech company announced that for the first time, it was allowing users to lease its phones directly. While this was a minor footnote in a two-hour epic, it's a massive shot across the bow of the carriers that allow us to make calls on our smartphones.

Previously, the service providers subsidised the cost of a brand new iPhone by signing up customers to two-year contracts. However, Apple wants to stop that by reducing the upfront cost to its very expensive devices directly. What this does is convert users from "carrier customers" to "Apple customers", making what phone you buy more important than what network you're on.

By selling unlocked phones directly, it marginalizes the value of carriers, pushing them into a "dump pipe" position, or merely a service that only provides secondary value. They want to do the same thing with the auto industry, as does Google.

At this year's Frankfurt Motor Show the usual flutters of excitement over the power and speed of the new cars has been quietly replaced with concern. With the news that Apple has several hundred people working on a car and Google doing the same, albeit a lot less secretly the world's biggest car companies have every right to be worried.

The first cause for concern is the release of Apple's CarPlay and Google's Android Auto. These two pieces of software work inside cars by pushing indigenous operating systems to one side, putting your smartphone at the heart of how driver's interact with their vehicles.

At Frankfurt, Ferrari unveiled its 488 Spider supercar, which runs Apple CarPlay - making it the flagship of Apple's foray into motoring.

What the tech companies bring with them is a level of expertise in software - not to mention the legions of app developers looking for new revenue streams - that car companies simply do not have.

The highlights from Frankfurt this week included Porsche's Mission E Concept Car, Mercedes showed off its driverless answer to Uber with its car2go and Thunder Power, a new Chinese manufacturer unveiled its answer to Tesla's wildly successful Model S. What do these cars all have in common? They all require more software than mechanics to keep them working.

This is a new era of telematics, where telecoms and raw data collide. In an industry where products cost billions to design, develop, make and deploy, cash is king. However, Volkswagen, the world's biggest car manufacturer is worth five times less on the stock market than Google. Apple is worth eight times as much. That is an unparalleled advantage that isn't sitting well with car companies.

"We do not plan to become the Foxconn of Apple," said Dieter Zetsche, the chief executive of Daimler, the maker of Mercedes. The reference to the Chinese company that makes Apple's iPhones puts into perspective the fear that cars will simply become the hardware to Apple and Google's software.

Tesla offers up a useful case in point. In August this year, Elon Musk announced that by simply releasing a new software update, the Model S cars will miraculously be able to autosteer on motorways and parallel park automatically. Making cars better won't just be about releasing new hardware. The software, the brains of the car will start to become the fastest, and cheapest way to give a company a competitive advantage.

Your car will be able to tell you where the nearest free car parking space is, avoid traffic jams, and save fuel through software, not in how much horsepower it has. Both Google and Apple have already met with German car companies as well as suppliers. Tim Cook, Apple's CEO has a keen interest in BMW's electric car facility in Leipzig.

"The Apple style is the ability to do software and hardware at the same time," said Luca de Meo, head of sales and marketing at Audi. Google meanwhile is reportedly working with ZF, a large German components supplier to the motoring industry.

But while Google has explicitly come out and said it does not want to become a car manufacturer, that does not rule out that it doesn't want to become a car software manufacturer. "We created the automobile," says Dieter Zetsche, "and we will not be a hardware provider to somebody else."

But if Apple and Google really want to turn the auto industry into another 'dumb pipe' for them to reach greater audiences - and profit margins - there's not a great deal people like Zetsche can do about it.