Automakers are taking the heat for their latest attempt to raise revenue: charging a subscription fee for using a car’s features. It’s a prospect that has Wall Street salivating at the amount of potential revenue, but it’s leaving motorists fuming. Nevertheless, it promises to deliver steady profits to a cyclical industry.

Bayerische Motoren Werke AG (BMWYY 2.02%) is just the latest company that hinted it would charge consumers a fee to use the heated seats in a vehicle buyers have already paid for. Reports suggest that owners would pay about $18 a month to activate them, or $415 for “unlimited” use. Although it’s already charging such fees in other countries, BMW says such fees will not be charged in the U.S. But the company will charge for services such as the BMW Drive Recorder, which uses the vehicle’s driver assist system cameras to double as driving event recorders. 

All of this grows out of automakers’ intentions to develop “software as a service,” which employs a vehicle’s electronics systems to deliver services or features via software for a monthly fee. But it’s far from a new concept.

The growth in an ongoing trend

Automakers already charge for telematics services. These wireless services consist of items like your navigation system, but can also includes concierge services, provide roadside assistance, call 911 in the event of a crash, or provide online streaming for any number of your favorite apps. The first such service, OnStar, debuted on 1997 Cadillacs, and since has been joined by BMW Assist, Ford Sync, Hyundai BlueLink, Mercedes-Benz mbrace, Toyota‘s Safety Connect, Lexus Link, and many others. 

Manufacturers are seeking an even greater number of microtransactions to increase this additional revenue, which General Motors (GM 3.06%) and Stellantis have forecast could reach $20 billion annually by the end of the decade. Management consultants McKinsey & Company predict that worldwide, such new revenues could reach $750 billion by 2030.

Governments can help drive increased telematic revenues by mandating services such as emergency call capabilities, a feature already required in the European Union and Russia. Consumers’ growing desire for increased connectivity and streaming is also driving automakers’ subscription revenue. 

Consumer adoption still low

While GM CEO Mary Barra recently cited internal research that motorists are willing to spend $135 a month on average for such services, less than one-third of American motorists welcome subscription services, according to an April 2022 Cox Automotive study. 

The number of consumers opting for in-car services remains low, according to McKinsey, even though the United States leading the world with a 20% adoption rate. It’s followed by Italy at 17% and South Africa at 12%. Other countries remain in the single digits.

But current consumer sentiment is expected to change, and one company’s 2021 numbers help explain why.

How much do subscriptions affect automakers’ revenue now?

While we have no idea how much subscription service revenue might move the needle for automakers in the short term, here’s what little we do know. 

According to company officials, GM generated nearly $2 billion in subscription services revenue and EBIT margins north of 70% in fiscal 2021. The automaker currently has more than 4 million subscribers. For 2021, GM’s global revenue was $127 billion, meaning that if forecast proved true, OnStar accounted for 1.6% of GM’s worldwide revenue. While that may seem like a minimal contribution to the bottom line, that figure should grow thanks to recent additions to OnStar.

GM recently announced a subscription plan for its SuperCruise self-driving feature, which is free for the first three years on new vehicles. It also opened OnStar to owners of non-GM vehicles through a smartphone app, which should bring additional subscribers – and income. 

Such recurring revenue streams from subscription services could shield automakers from the boom-and-bust profit cycles endemic in the automotive market.

And demographic trends are playing into automakers’ plans. As Millennials surpass Baby Boomers as the nation’s largest living adult generation, their willingness to use subscription services, already ahead of older generations, should provide the steady revenue for automakers.

Going forward, automotive stock investors should watch for automakers to announce new platforms and services such as GM’s recently announced Ultifi — offerings that can interact with smart homes or bring additional features to vehicles, such as starting a car using the vehicle’s camera and facial recognition software. These are the sorts of features automakers hope will deliver ongoing revenue. 

Fool contributor Larry Printz holds no financial position in any companies mentioned. The Motley Fool recommends BMW. The Motley Fool has a disclosure policy.