11:04am EST 16-Feb-00 Merrill Lynch
(J.Casesa (1) 212 449-8431) GM GTE BEL MOT
GENL MOTORS:OnStar: GM's Bid to Lead Telematics
ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML
GENERAL MOTORS CORP (GM/NYSE)
OnStar: GM's Bid to Lead Telematics
John Casesa (1) 212 449-8431
ACCUMULATE*
Long Term
ACCUMULATE
Reason for Report: To Acquaint Investors with a
New High Growth Business
Price: $75
Estimates (Dec) 1999A 2000E 2001E
EPS: $8.53 $8.30 NA
P/E: 8.8x 9.0x NM
EPS Change (YoY): -2.7% NM
Consensus EPS: $9.17 $10.99
(First Call: 03-Feb-2000)
Cash Flow/Share: $20.00 $19.70 NA
Price/Cash Flow: 3.8x 3.8x NM
Dividend Rate: $2.00 $2.00 $2.00
Dividend Yield: 2.7% 2.7% 2.7%
Opinion & Financial Data
Investment Opinion: C-2-2-7
Mkt. Value / Shares Outstanding (mn): $47,250 / 630
Book Value/Share (Dec-1999): $31.84
Price/Book Ratio: 2.4x
ROE 2000E Average: 25.5%
LT Liability % of Capital: 25.2%
Stock Data
52-Week Range: $94 7/8-$59 3/4
Symbol / Exchange: GM / NYSE
Options: Chicago
Institutional Ownership-Spectrum: 52.9%
Brokers Covering (First Call): 14
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: Overweight (07-Mar-1995)
Growth: In Line (07-Mar-1995)
Income & Growth: Overweight (07-Mar-1995)
Capital Appreciation: In Line (03-Oct-1995)
Market Analysis; Technical Rating: Average (25-Oct-1999)
*Intermediate term opinion last changed on 01-Jun-1999.
**The views expressed are those of the macro department and do not necessarily
coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes.
Investment Highlights:
o We estimate OnStar revenue growth to average 33% over the next ten years,
providing a visible source of downstream revenue to GM.
o The business is valuable both as a source of recurring service revenue to
GM and as a potential IPO candidate.
Fundamental Highlights:
o OnStar is GM's in-vehicle communication service. It connects drivers to a
call center, and soon, the Internet, to provide personalized emergency,
convenience and entertainment information.
o The service represents GM's bid to establish a first entrant advantage in
telematics.
o GM's strategy is to build a large subscriber-based fee business rather
than just add another feature to its vehicles.
o OnStar's subscriber base will expand ten fold in 2000, and quadruple again
in the next three years.
o OnStar is tangible evidence of the coming telematics revolution in the
car.
What is OnStar & why is it Important?
OnStar is GM's in-vehicle communication service. It connects drivers to a call
center, and soon, the Internet, to provide personalized emergency, convenience
and entertainment information 24 hours a day. The service uses the GPS
satellite network to track the vehicle's location, and currently, a cellular
phone connection for communication. Soon it will offer user-friendly Internet
access and be compatible with other electronic devices. We're interested in
OnStar now because its subscriber base is likely to surge from 120,000 in 1999
to about 1,000,000 by year-end 2000. GM estimates OnStar will have an
estimated 4,000,000 subscribers in 3 years. Its rollout is an important part
of GM's strategy to capture revenues downstream from the vehicle sale.
Key Features & Benefits
Essentially a built-in, dedicated cellular phone, OnStar is accessed by drivers
through a simple three button system which can be located on the vehicle's
instrument panel, overhead console or rear view mirror, among other places.
Current Service Offerings
OnStar currently offers customers two levels of service: $199/a year for the
"Safety and Security" package and $399/a year for the "Premium" service
package. Dealers charge $695 for the hardware, but hardware and one year of
service are included in the price 29 GM, 2000 models on which the system will
be factory-installed.
Coming Services: the Internet is Next
Later this year, OnStar will greatly expand the appeal of its system with its
Internet connection called Virtual Advisor which uses voice recognition and
text-to-speech technology to relay information. To launch Virtual Advisor,
OnStar has signed a deal with Bell Atlantic and GTE , which together will
provide a nationwide wireless network to support the system. Since OnStar will
buy time from Bell Atlantic and GTE in bulk, it will be able to re-sell minutes
to subscribers at a profit and will become one of the largest cellular phone
providers in the U.S. in short order. To promote its expanding range of
services, OnStar isl launching a new advertising campaign using Batman.
OnStar's Business Prospects
Become the Telematics Standard
GM has conceived OnStar as not simply a value-added feature to sell more GM
vehicles, but as a subscription-based service business utilizing GM's volume
base to make the system a de facto industry standard for telematics, aimed at
all automakers.
Working with Partners
The unit views itself as strictly a branded service provider and thus has
chosen partners to contribute key elements. It is hardware neutral, but
currently uses a consortium of Delphi and Motorola. Key software partners
include Rosemont, Illinois-based Navigation Technologies and Sony's Etak, which
provide digital maps. General Magic (GMGC) provides voice recognition
software.
Competition
Currently, OnStar's leading competitor is San Antonio-based telematics service
provider ATX Technologies, Inc. The company was formed through the merger last
year of ATX and Protection One Mobile Systems, a former division of
Westinghouse. In 1996 Protection One launched Lincoln's RESCU, which was the
first in-vehicle emergency response system. ATX is currently the telematics
service provider for Mercedes-Benz's Tele Aid system and for selected Ford,
Jaguar and Infiniti brand vehicles.
OnStar's Revenue Outlook
We have pieced together a crude picture of OnStar's revenue outlook based on
OnStar's limited public comments. Using our assumptions, OnStar revenues
should explode by more than 20x from an estimated $43 million last year to over
$900 million by 2002. Looking further ahead, and making further assumptions
our model suggests a business that can achieve revenue growth of 33% annually
from 1999 to 2009.
Should OnStar be Independent?
The case for independence rests upon the view that OnStar's GM ownership could
be an impediment in winning non-GM business. Indeed, OnStar appears to be
following a customer neutral strategy, not promoting its GM ownership in its
advertising. In addition, the multiples awarded to a fast-growing, non-cyclical
service business, and one very much connected to the Internet and telecomm
revolutions, are likely to be far in excess of GM's multiples. On the other
hand, OnStar is closely related to GM's core automotive business. In
conclusion, we have no clear view on the path GM should take to maximize the
value of OnStar to GM shareholders, but we believe that substantial yet-
undiscovered value in OnStar exists.
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