Credit: Sergeant Motor Verso | Flickr
What are Subscription-Based Car Features?
Auto manufacturers are experimenting with a subscription model for access to pre-installed features, such as heated seats or a parking assist system. Tesla limits the capacity of its batteries based on price point through software controls, even though all the batteries have the same physical capabilities. However, its attempts at recurring revenues from subscriptions have faced opposition from consumers.
Subscription-based features have not gained traction because they are an unnerving prospect for many consumers. Furthermore, there may be limits to feature locking depending on whether the feature is essential. BMW has experimented with an $18 monthly subscription for heated seats in a number of countries as well after a failed attempt at charging its drivers $80 for access to Apple Carplay. Ford, Cadillac, and Mercedes-Benz have also halted their vehicle subscription services.
Traditionally, consumers assume car ownership entitles them to take full advantage of the physical capabilities of their vehicles. However, feature subscription is only one of the latest trends in the automotive industry that challenge the traditional notion of ownership. In typical commercial practice under the subscription model, when consumers buy a car, they only acquire the ownership of the tangible article of the car and the license to use software installed in the car. The distinction between ownership of tangible hardware and license of software seems clear, but more and more physical features of a vehicle are controlled by software. By leaving a backdoor to the software installed in cars, auto manufacturers essentially retain some control over the physical parts of the vehicle. Their access challenges the notion of car owners’ exclusive control over the tangible car. With feature subscriptions, automakers exercise their control over the car at all times to turn on and off some physical features.
Legal Implications
Interfering with an essential feature of a car via software may be legally untenable, but non-essential features are fair games to different marketing schemes. However, what distinguishes essential and non-essential can be a legal battle itself.
The option to restrict features in a vehicle is tied to intellectual property rights. The vehicle owner may need a copyright license from the manufacturer to access locked software features, which are frequently associated with patented physical features. Trying to get around these restrictions could present a number of issues for the vehicle owner. For example, the vehicle owner may accidentally infringe on the manufacturer’s intellectual property rights, or inadvertently void warranties and insurance coverage. If the owner’s insurance were to be canceled, they could risk losing the car, especially if it’s financed.
The subscription model also poses issues for the second-hand market. What if a car is sold with an unlapsed subscription? Generally, vehicle warranties are transferable, but it may depend on whether the car is a certified pre-owned vehicle, which is generally only sold through dealerships. In this case, subscription features may be available based on mileage or for a certain period, as is generally the case with warranties. Assuming that vehicle feature subscriptions will also be based on mileage or a period of time, there may likely be a similar transfer available for the subscription-based economy. However, what if the feature is billed monthly or annually? There could be issues with rolling over subscription charges to the new owner or canceling unwanted features that the previous owner paid for, especially if the car is sold from one individual to another.
Subscription packages cover a variety of features. However, auto manufacturers may face additional legal liability when subscriptions extend beyond infotainment and climate control systems
Credit: PickPik
and reach into safety features. Safety technologies, such as lane keeping assist and automatic emergency brake assist, have become more widespread. If automakers put these features behind a subscription paywall that may cause these features to malfunction due to non-technical reasons, they may face severe product liability consequences.
The law remains stagnant with regard to vehicle feature subscriptions. Legal gray areas may allow the potentially lucrative operation to expand until regulators step in. The Consumer Leasing Act, for instance, requires that auto lessors provide a full disclosure, including a detailed description of the property for lease and a payment schedule, to consumers before entering into a lease agreement. This requirement at least compels dealerships to disclose subscription-based features and their related payment before the time of the transaction. Dealerships have already begun lobbying against subscription-based features. New Jersey has also proposed legislation to limit subscription-based car features. The Biden administration has prioritized expanding consumer protections at the federal level.
Despite the pushback on feature subscriptions, automakers will face legal and business challenges if they continue to evolve in that direction. Feature subscriptions only reveal some undercurrents in the automotive industry. Feature subscriptions allow automakers to build hardware and software features into every car rolling off the production line. This approach would dispense with different trim levels and simplify the supply chain. Automakers can then differentiate products to different price levels by activating different features. They don’t have to implement a subscription scheme, but the concept of payment flexibility in reflection of varied consumer needs still applies.
The subscription model also creates a steady stream of cash flow during a turbulent time in the industry. Facing labor actions, rapid development in self-driving and battery technologies, and fierce global competition, auto manufacturers could weather the storm more safely with a steady stream of income.
Feature subscriptions allow automakers to directly target sales at end consumers, skipping over brick-and-mortar dealerships. The trend towards direct-to-consumer sales in the form of feature subscriptions allows original manufacturers to capture a larger share of the profit in the auto industry, especially in the after-market segment when consumer needs vary with the actual usage of the car. Therefore, in the latest legislative effort to curb feature subscriptions, dealerships have been a vocal opponent, and an unlikely ally to consumers, because such direct sales effort harms their interests.
Concluding Thoughts
Ultimately, the question is whether charging for access to a service that is readily available in the product owned by the consumer is both legal and viable from a business perspective. Under the Uniform Commercial Code, a party’s property rights are typically terminated upon sale of the tangible good; however, digital products are not governed by this general rule. For example, when a consumer buys an iPhone, it comes with the Apple Music app, but accessing Apple Music requires a subscription. Many smart TVs come with remotes with Netflix or Amazon Prime buttons, but this does not mean the TV comes with subscriptions. Even in the auto industry, it has been well established that just because a car comes with satellite radio does not mean it is accessible without paying a premium. It’s unlikely, then, that property rights protections could expand to prohibit subscription features altogether, and it will be for regulators to decide where to draw the line between subscription service and junk fees.
The good news for consumers is that manufacturers seem to be easing off the gas. Suppose automakers determine that their margins are shrinking due to the lack of subscriptions purchased by consumers. In that case, they may stop sinking money into manufacturing cars preloaded with costly features that may never be used. Overall, the rapidly changing landscape of the auto industry is cause for excitement, not concern. The prospect of new technology that can improve safety and reduce environmental harm seems to be the driving force behind the auto industry. However, in order for advancements to be made, manufacturers must find new ways to be profitable, and the consumer often bears the growing pains associated with it.
*The views expressed in this article do not represent the views of Santa Clara University.