Auto Service World
Feature   May 1, 2007   by Sandeep Kar, Senior Industry Analyst, Automotive & Transportation Frost & Sullivan

In-Car Entertainment, Taking Back Seat in Name Only

Infotainment is no longer a buzzword in the North American automotive industry–it’s just an attribute that has increasingly become an indispensable design component and a fundamental building block of the latest generation of light vehicles running on North American roads.

Drivers and passengers for several decades had to be content with audio-based entertainment consisting of AM/FM radios, cassette players, and more recently, CD players. However, the new millennium brought with it a range of highly innovative, effective, and incredibly content-rich infotainment solutions that have taken automotive entertainment and information delivery systems to dizzying heights.

Consumers have enthusiastically embraced and adopted infotainment solutions such as MP3 playback capability, navigation systems, satellite radio systems, and most noticeable of all, rear-seat entertainment systems. Having experienced and realized the value offered by several cutting edge high-quality audio-visual infotainment solutions and technologies emanating from the consumer electronics market, North American vehicle buyers and owners started demanding home-theatre-level audio-visual infotainment from their vehicles. This prompted automakers and infotainment systems suppliers on both the original equipment (OE) and the aftermarket sides to develop and introduce innovative solutions. The market promises to be extremely lucrative for companies that can offer intuitive and cost-effective systems to North American consumers.

Like other new automotive technologies, these systems penetrated the aftermarket first, resulting in rapidly rising consumer awareness and accelerated uptake. This caused automakers to follow suit, and the more progressive ones started offering systems as vehicle differentiators, a strategy that paid off handsomely for every automaker that did so.

In a span of just five years, beginning in 1999, concepts such as satellite radio, MP3 players, navigation systems, and most importantly rear-seat entertainment became household terms, and no automaker or major automotive infotainment system supplier could afford not to have at least one of these technologies in its product portfolio. In fact, the OE market has speedily overtaken the aftermarket in terms of revenues generated by market participants.

Although every infotainment technology mentioned thus far is experiencing remarkable growth and penetration rates in both the OE and the aftermarket, the adoption and growth of rear-seat entertainment (RSE) systems has been most phenomenal. Never before in the history of automotive infotainment systems has there been a product that has seen such rapid and robust growth in consumer awareness, demand, market adoption, and revenue growth as have RSE systems.

The value proposition of these systems has been so well understood and appreciated by North American consumers that market penetration occurred very swiftly, without much marketing and advertising effort on the part of suppliers.

This market segment, which was born with “video-in-a-bag” systems, transformed itself into a market represented by DVD-based systems featuring advanced LCD/TFT (liquid crystal display/thin-film transistor)-based screens featuring a range of installation options and high-definition audio-visual content delivery options.

Being new and emerging technologies in the OE market as well as the aftermarket, these systems were introduced at high prices.

However, their rapid market adoption, irrespective of high retail prices, was a unique example of a classical marketing theory that holds that to consumers, a product’s price is less important than its value. The rapid market penetration of these systems at prices that are much higher than the prices of most conventional and emerging infotainment solutions has amazed every market observer.

In the aftermarket, major market participants offer a range of systems featuring various functionalities, applications, and prices, targeting every consumer demographic.

The rapid market adoption and penetration of RSE systems has invigorated the automotive infotainment market, and underlines the emergence of infotainment applications as vehicle differentiators, offering positive revenue growth potential to aftermarket suppliers.

The RSE systems market, until recently, has been driven by growth in the number of SUVs, luxury vehicles, and minivans in operation, and continues to experience the highest take rates from owners and buyers of these vehicles.

However, to gain wider market penetration, market participants have been working feverishly to develop systems that can be integrated and installed in volume vehicle segments such as family sedans, station wagons, crossover utility vehicles, and even pickup trucks. This is expanding the market, paving the way for long-term sustainable growth.

The North American RSE systems market, counting both the OE and aftermarket sides, generated revenues of $1.9 billion in 2006. Frost & Sullivan projects that this market will post strong revenue growth from 2005 to 2012, demonstrating a compound annual growth rate of 12 percent for this period. In 2012, the market is expected to generate revenues worth $3.7 billion. Growth will be largely driven by the proliferation of RSE systems to greenfield vehicle segments such as family sedans, large sedans, and CUVs, in addition to attaining near-saturation in the conventional installation base of minivans and SUVs.

This will help market participants extract better margins, as proliferation of such systems in certain vehicle segments such as luxury sedans and SUVs will necessitate the installation of systems with headrest-mounted screens, which are higher-priced than overhead- and floor-console-mounted systems.

Moreover, significant consumer pull, product desirability, and acceptance of these systems, coupled with increasing awareness regarding the value proposition and declining system prices, are expected to sustain the market’s development as it gallops from the market development to the market growth phase.

While the OE market offers robust growth potential, it also presents very high entry barriers, whereas the aftermarket presents very different challenges. The most successful aftermarket participants have very well-distinguished products targeted at clearly defined consumer groups. Developing a system variant and configuration for every consumer demography or group might not necessarily be a good idea. For example, the leader in the aftermarket has consciously focused on the low end of the market, developing and offering systems that feature high performance-to-price ratios. This has enabled it to attract cost-conscious consumers who desire such infotainment solutions, but who hesitate because of high prices.

As the market matures further, pricing pressures from automakers and aftermarket consumers will only increase. It is therefore extremely vital to develop products that offer high degrees of consumer personalization options.

These systems, by definition, are targeted at rear-seat passengers, which severely limits their appeal to most North American drivers, as they normally use their vehicles for daily commuting.

However, as demand for such systems increases, price declines will not be a major detriment to market participants that can effectively gauge automaker and consumer preferences, and offer RSE systems that prompt rear-seat passengers to ask “Are we there already?” instead of “Are we there yet?”

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