“Roadkill.” That’s what ATX North America’s irreverent president and CEO Steve Millstein calls the now-defunct telematics companies (most notably Ford’s WingSpan) that litter the automotive landscape. ATX, it should be noted, claims to be the “industry’s largest independent telematics service provider.” A few years ago, telematics was touted as the next big thing for the automotive industry. What went wrong? Hubris, for starters. “One of the fallacies of the early TSPs [telematics service providers] was that they thought they could do everything and define everything but they quickly found that that’s an impossible task,” says Gonzalo Bustillos, the director of business development and marketing in Microsoft’s Emerging Technologies group. Another problem was the lack of an installed base–there just weren’t enough vehicles with telematics capabilities on the road to take advantage of the elaborate services that were envisioned. The upshot was a failed business model and a slew of bankrupt companies.

Toyota’s G-Book telematics service which enables functions like wireless music downloads and hands free phone use is offered in a $10,000 car and aimed at Japan’s young customers who have overwhelmingly embraced wireless devices for entertainment as well as communication. Some see the growth of smart communication devices in the U.S. leading to a similar market opportunity.

The surprising thing is that all of those failed visionaries were right, mostly. Telematics will be the next big thing in automotive. In fact, it will be huge. Real-time two-way data transmission will bring myriad useful services into the car that may soon seem as necessary as a home Internet connection. But, in order to grow quickly, it will have to turn a profit. Figuring out a business model that can achieve that elusive goal is driving most of the activity in automotive telematics today.

The New Pragmatism. ATX’s Millstein considers himself a pragmatist when it comes to telematics. He is perhaps the most vocal adherent to the view that business-to-business services will provide the profit model that will compel automakers to make telematics standard equipment. He places particular emphasis on “prognostics” that gather information about vehicle performance from sensors throughout the car, and wirelessly relay it to car companies. Millstein thinks that automakers have the potential to greatly reduce warranty costs by using this early warning system. “It takes car companies as long as 15 weeks from the time a bad part is brought into the dealer to the time that the car company sits down with the Tier 1 supplier to fix it,” he explains. “In the meantime they have been building cars with bad parts for 15 weeks. How much is that going to cost? Telematics can tell them about the problem before it even comes into the dealership.” It also can tell customers when to come in for oil changes or new tires based on real and unique data, not owner manual recommendations. This could lure them into dealerships for servicing and away from the local Jiffy Lube, thus increasing the customer “touch points” car companies desperately want to keep.

Millstein sees prognostics and “front seat services” like automatic emergency notification and real-time traffic reports, as the automakers’ legitimate telematics scope. He says “backseat services”—receiving stock quotes or sports scores—are ancillary benefits that will be handled by the wireless carriers that already provide those kinds of services to cell phone users. The advantage of structuring automotive telematics this way: carriers don’t have to compete with car companies, so they will be more willing to provide customer-pleasing niceties like consolidated billing. He says carriers are not fully committed because they do not yet see a compelling business model, but that once the potential of 200 million vehicles providing incremental wireless minutes begins to be realized they will “bend over backwards.”

Building an Ecosystem. The growing consensus within the industry is that the way telematics will move forward is through individual companies focusing on a core technology and then forming strategic alliances to create an “ecosystem” that provides customizable suites of profitable services. “There is not going to be a specific application that is going to make telematics happen. Giving options and the ability to choose services is what will make it happen,” says Microsoft’s Bustillos. He agrees that under hood applications will play a big role, but emphasizes a wider view of in-car telematics. “Diagnostics and entertainment are not distinctly separate,” he says, “People care about what is going on with their cars, but they also want to be entertained.” He points to the G-Book telematics system that Microsoft helped Toyota develop for the Japanese market as a possible precursor for the future. Directed at Japan’s digital youth, the system provides safety and security features as well as some level of vehicle diagnostics. However, its chief role seems to be to keep people within the “connected community” while in their cars through such functions as hands-free phone and wireless music downloads. And, significantly, it is featured on a car that sells for around $10,000.

The “connected community” view smacks of just the kind of overreaching that got telematics in trouble in the first place, but supporters say it isn’t. That’s because the ecosystem spreads risk across many companies, each of which is doing what it knows best, instead of concentrating most of the risk in one entity. Also, the proliferation of smart phones and PDAs in the U.S. is beginning to provide the infrastructure needed to make telematics work on a large, profitable scale. Bustillos calls these devices “the perfect receptors for the services that telematics had envisioned in the past.”

Who Pays? Those involved with the development of automotive telematics agree that once widely installed, it will offer companies and customers tremendous benefits. But who pays to get telematics in vehicles? Three main alternatives have emerged: (1) customers (through monthly subscription fees), (2) automakers, or (3) third parties who want to mine data from vehicles. The customer subscription model is the most dominant because it is used by industry leader OnStar. But Millstein (who as the head of the number two TSP in North America is a major OnStar competitor) thinks that model is deeply flawed. “No rational CEO would put a $500 telematics system in a vehicle in the hope they will get enough subscribers to stay on long enough to get some kind of payback,” he says. (His response to OnStar’s recent announcement that it has finally become profitable: “I don’t believe they’re making a dime. And if they are making money they’re doing it by shifting costs back to the car brand.”) He thinks that convincing automakers to foot the bill for installing telematics hardware based on prognostic benefits is the best way to get the high installation rates that will drive the industry.

The third option of having data-hungry companies like radio ratings services pick up the tab will probably not come to fruition until the market matures. Though variations on that theme are already in testing. (See box: “Insure as You Go.”) Indeed, even talking about that eventuality makes many telematics experts uneasy since it conjures a Big Brother image that car owners may find uncomfortable.

Of course, the dominant model could end up being a mixture of all three, with customers paying a minimal fee, automakers subsidizing some of the costs for competitive reasons, and third parties picking up the rest. Julian Styles, business and technology mana-ger at Pi Technology even suggests, “We will reach a cost breakeven point on telematics a lot quicker if legislation drives it.” Since a universal government mandate (most likely designed to enhance public safety by making emergency and accident avoidance services available to every driver) would mean soaring volumes and plummeting per unit costs.