[Editor’s note: The following is an op-ed piece by Dev Khare, vice president of VC firm Venrock in Palo Alto. Dev frequently blogs on this topic at http://www.nextwala.com.]

In parallel to the Web and mobile devices, a new marketplace for applications and services is becoming accessible to entrepreneurs and developers — the Digital Car.

Over the last five years, consumers around the world have started bringing their own “off-deck” communications and infotainment solutions into their cars, including mobile phones, personal navigation devices, iPods, satellite radios, DVD players and more. The market for in-car electronics and services has surged to $27 billion over an installed base of 210 million cars, according to the Consumer Electronics Association.

As a result, a whole industry has sprung up around selling car-related technologies through dealerships, retailers (such as Best Buy and Circuit City), and online vendors (such as Amazon and Walmart.com). In addition, media companies such as Clear Channel and XM/Sirius have emerged, delivering audio entertainment and text data such as traffic to drivers.

Yet, despite this barrage of new devices and services coming into the car, automobile manufacturers (OEMs) continue to turn out vehicles equipped with 3-5 year-old navigation products; tightly control human-machine interfaces (HMIs) including in-dash touchscreens, voice interfaces, side-controls and telematics offerings; and they still tediously vet new technologies through their Tier 1 and Tier 2 suppliers. Meanwhile, their margins and bottom lines have been sustained through relentless supply chain management, aggressive branding, channel control and jealous protection of high-margin components such as air-conditioning, stereo systems and navigation. Most consumers would point to only a few major innovations in the auto OEM market in the past several years, namely, Bluetooth, iPod integration and hybrid electric cars.

Consequently, early-stage venture investors have historically stayed away from investing in automobile information technologies. But today’s “closed-garden” automobile eco-system is now opening up to application developers. While there is no dominant computing platform to build to for cars, automotive OEMs are feeling the pressure from consumer electronics devices and are slowly adopting third-party technologies – witness Ford’s successful introduction of the Sync, the recent awarding of telematics and connected services contracts by Chrysler and Mercedes to Hughes Telematics, and BMW’s collaboration with Google.

Entrepreneurs and developers aren’t waiting for the OEMs to lead the way, of course. With the large-scale consumer adoption of electronics devices in the car and wireless connectivity for CE devices, they’re starting to build new companies for this Digital Car marketplace. These application companies (some of which are mentioned below) are combining cloud computing resources with cheap wireless connectivity, access to any information or services on the Web, GPS location technology and new ad-supported and subscription business models. As a result, applications built around location, social media, communications, entertainment and a greener lifestyle are now all possible.

And finally, in terms of channels available to reach the consumer, application developers have an increasing number of options:

  • Mobile applications vendors — mobile applications (whether server-based or device-resident) can be used on mobile devices in the car but with a greater emphasis on voice interaction and location. Interesting areas to target include the iPhone and GPS-enabled phones. While this is a fairly well understood ecosystem, mobile user interfaces are not well suited for the driver, and it’s still a challenge to work with mobile operators for on-deck distribution and monetization or to market directly to consumers through mobile ads, the iPhone App Store or GetJar. Still, we’re seeing some successes. Telenav, Yelp, uLocate’s Where(a Venrock company), and Google Maps Mobile are good examples of driver-friendly applications.
  • Voice applications providers — dialing by voice is something all drivers are used to and several new server-side voice applications are now coming to drivers’ aid. Extending beyond hands-free dialing, these services cover access to email, news, podcasts, voice texting, music, etc. Some vendors such as TellMe, Free411, Dial2Do, and DialDirections could start distributing third-party voice applications.

  • Personal navigation device vendors — Connected GPS devices running Win CE and Linux are being launched, with Dash and TomTom being prime examples. Garmin, Magellan, Mio, Navigon and other OEMs are also going to be launching connected PNDs in the next 12 months and are looking for innovative applications. One Venrock company, INRIX, for example, is developing an application in this category to supply traffic data to PND vendors.

  • Telematics service providers — vendors such as Hughes Telematics, ATX, OnStar and Wireless Car are signing up automotive OEMs. You could include Microsoft in this category as well with its Ford Sync launch. While this revival in telematics is still new, there’s a chance for developers to distribute through these vendors.

  • Original Design Manufacturers (ODMs) — ODMs in Asia such as Foxconn and Inventec are producing function-specific devices for use in the car. A developer could partner with these to go to market. Vendors such as PLX and Slacker are in this market. The downside is that entrepreneurs have to get their own distribution through retail chains, dealer networks and online retailers.

  • Electric car companies — new auto OEMs including Think, Reva, Tesla, Better Place and Fisker are entering the market and are willing to make much faster decisions, so developers may want to target these companies. The downside is that volumes are small and uncertain currently. VentureBeat listed a whole set of these companies here.

  • Automotive OEMs — developers could target auto OEMs as a horizon 2 strategy — computing platforms are getting better with 400-500 Mhz processors, 100+ GB hard-drives, etc. For example, BMW, Intel and WindRiver are working together on a Linux solution for the car through Moblin.org. Expect three- to seven-year decision and deployment cycles, although connected services strategies will enable automotive OEMs to iterate and deliver new applications over-the-air much faster in the next few years.

Dev Khare is vice president of VC firm Venrock in Palo Alto, Calif. He has a background in product management, marketing and international finance.


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