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Sky The Limit for Hughes Growth

With Mercedes and Chrysler business in hand, Hughes Telematics expects one day to be bigger than OnStar. But for now, Hughes remains a bit player, kept afloat by deep-pocketed owners.

For a company that’s barely two years old and won’t produce its first telematics unit for production vehicles for at least a year, Hughes Telematics has a definite swagger as it prepares to enter a market that continues to emerge as potentially lucrative, while enhancing occupant safety.

General Motors Corp.’s wholly owned OnStar subsidiary is the giant in the telematics sector, linking some 5 million GM vehicle owners in the U.S. and Canada to security and communication services delivered automatically or by call-center operators.

But the privately owned Hughes Telematics has something OnStar doesn’t: non-GM business and the probability of winning a lot more of it. Hughes Telematics CEO Jeffrey Leddy estimates his company will provide telematics units for “tens of millions of vehicles in the next several years.”

While OnStar focuses on serving GM’s North American product portfolio – supported effectively with real-life commercials illustrating the value of OnStar – Hughes Telematics figures the remaining 75% of the vehicle fleet is up for grabs.

The telematics provider that meets this “very large, unaddressed market” with the best value, technology and service is bound to cash in, Leddy says.

Next year, Hughes Telematics will start filling that hole when it delivers the first telematics modules for Chrysler LLC vehicles in North America, followed later in the year by Mercedes-Benz.

Most important, the hardware unit will be installed as standard equipment on 100% of Chrysler and Mercedes vehicles sold in North America for the ’10 model year.

A huge variable in Hughes’ success is pricing. All Mercedes and Chrysler vehicles will be equipped for a range of services, but they will not be activated unless the vehicle owners pony up on a monthly basis.

Leddy says pricing will be announced closer to launch next year, and he recognizes the fees must be reasonable and easy for consumers to grasp.

“There’s always a balance between offering too many choices to the consumer and confusing them,” he says. “We’ll have a full suite of infotainment-type capabilities, as well as location-based services. Not just calling for a phone number but also actually getting directions through your navigation system or turn-by-turn directions, as well as other information about that destination – maybe the menu or other pertinent information.”

For comparison, OnStar charges $18.95 per month (or $199 per year) for its basic Safe & Sound plan, which provides remote diagnostics, roadside assistance and emergency services, such as alerting authorities when a vehicle’s airbag deploys. The service also can track stolen cars and remotely unlock doors.

Hands-free voice-activated calling costs between $39.99 for 100 minutes and $299.99 for 1,000 minutes. Likewise, OnStar’s Directions & Connections turn-by-turn navigation service costs $28.90 per month, or $299 per year.

Meanwhile, Hughes Telematics says its services will be competitively priced. The cost of the hardware module, for instance, is less than what most auto makers pay for basic radios, the supplier says.

Hughes’ embedded telematics control unit will include a global-positioning system, cellular modem and the necessary memory and processor. The device also will enable 2-way communication via satellite and connect with the vehicle’s CAN communication bus for monitoring vehicle status.

Integrated with the vehicle’s “nerve center,” Hughes says its telematics unit can support a range of driver-assistance services and messaging. The system enables “multicasting,” allowing Hughes to download new software for the ever-growing number of electronic controllers in vehicles.

By virtue of its earlier connection to Hughes Electronics (and eccentric aviation wizard Howard Hughes), the upstart telematics company figures its satellite communications expertise is a distinct advantage in ushering automobiles into an era of networked connectivity.

“Different OEMs have different perspectives on the value of satellite,” Leddy says. “Many of them are very intrigued by what that brings. From our perspective, it brings a more complete solution and better coverage and more redundancy and more flexibility in the kinds of things we can offer.”

And the enabling technology will be transparent to the consumer, Leddy says.

“We can operate more effectively during natural disasters,” he says. “We’ll have a broader coverage base throughout the U.S. because we will have satellite overlay to the terrestrial network. It will be a better quality, more robust service.”

A third player in the telematics mix is ATX Group of Dallas-Fort Worth, TX, which counts among its customers the Mercedes, BMW, Peugeot, Citroen, Maybach and Rolls-Royce brands.

ATX says its business is continuing to expand rapidly, although its ATX’s Mercedes business is bound to dry up. Beginning in November 2009, Hughes will be Mercedes’ preferred telematics supplier.

Mercedes customers will have the option of switching from ATX’s Tele-Aid system to the Hughes package. “That doesn’t prevent ATX from trying to sell theirs, but they will not be supported or authorized as a Mercedes service,” Leddy says.

He doesn’t expect the dual offerings to create confusion in the marketplace.

“We have a plan with Mercedes to make it very simple and straightforward for the consumer,” he says. “The Mercedes-supported service will be provided by Hughes Telematics.”

While ATX generally provides call-center support and billing services, Leddy says Hughes Telematics also will manufacture its own hardware and manage the carrier networks and communication channels. He describes it as a complete “turnkey” solution.

“What this allows us to do is drive the overall solution set and drive the innovation, because we are growing, in effect, all elements of the value chain,” he says.

Hughes’ first call center is located in Atlanta – its headquarters – and is slated to begin operation in December 2009. Another will be announced in the near future, Leddy says.

The company, majority owned by private-equity group Apollo Management LP, has 200 employees currently and will size up based on the volume of its customer base.

Leddy is confident Hughes Telematics can accommodate new customers beyond Mercedes and Chrysler. “We can scale up very easily,” he says.

Leddy says he does not consider OnStar a competitor, although the GM subsidiary dominates its sector.

“OnStar is, in effect, an enabler because they create a lot of consumer awareness as well as OEM awareness of safety and security, which is OnStar’s primary product,” he says. “And we have all the services OnStar offers.”

Leddy is optimistic about Hughes Telematics one day being bigger than OnStar. “We offer a broader range of services than OnStar does today,” he says. “That will potentially allow us to be much more of a force.”

But for now, Hughes Telematics remains a bit player, kept afloat by deep-pocketed owners and modest revenue from aftermarket fleet business. “We have significant cash on hand to support the business,” Leddy says.

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