Microsoft tightens stranglehold on connected car cloud with VW deal

Microsoft Azure has strengthened its dominance of the connected car cloud market with a worldwide deal to convert future Volkswagen cars into mobile Internet of Things (IoT) hubs. For Microsoft, this is vindication of its long-standing focus on the connected car, initiated by Bill Gates over 20 years ago, leading to Azure mopping up most of the world’s leading car makers. The latest collaboration with Volkswagen looks like the biggest so far since it is global and with the world’s second biggest car maker, but some of our peers are wrong to suggest it goes deeper than any other such partnership between Microsoft and car makers.

That may have been true until March 2017 but then Microsoft announced it was licensing its intellectual property (IP) associated with connected cars to Toyota, its first partner in the launch its auto licensing program. This followed Toyota almost a year earlier in April 2016 becoming the biggest auto customer of Azure Cloud, when it announced a new company in collaboration with Microsoft to develop connected car technology. This consolidated Toyota initiatives in data analytics and services management into this joint venture, so the relationship became pretty deep.

Since then Toyota has played down the role of Microsoft, but Azure Cloud has underpinned the global expansion of its mobility services platform, which entered the European market in April 2018 with the launch of a new startup company in London – employing 50 data scientists and software developers.  This has a similar focus to Volkswagen’s partnership with Microsoft, being to support the launch of mobility and fleet management services, including ride sharing, car sharing and remote delivery.

Toyota’s European expansion could have ramifications for Uber given the car maker’s aggressive expansion in ride sharing, marked by a $1 billion investment in Grab in June 2018. This was in addition to an undisclosed sum, probably around $100mn, invested almost a year earlier in Grab by Toyota’s Next Technology Fund targeting AI-related start-ups.

Grab was Uber’s biggest competitor in the Asian region until March 2018, when Uber was forced out and sold its South East Asian assets to Grab, which also engaged in food delivery. As part of the deal, Uber took a 27.5% stake in Grab. Now Toyota is set to employ Grab’s platform in Europe, hooked up to the Azure cloud in competition with Uber there in those areas where the latter operates.

Among other auto makers partnering to varying degrees with Azure is Ford, for technology delivering over-the-air updates to its Sync in-car infotainment systems. Another is BMW for its Connected app running on the Azure-based BMW Open Mobility Cloud to deliver information on driving conditions in 29 countries. The Renault-Nissan Alliance also has a partnership with Microsoft which has involved joint development of services including navigation, predictive maintenance, remote monitoring and support for coupled mobile devices.

However, Honda is taking a different route through an intriguing partnership with China’s Alibaba announced in January 2018 for a variety of cloud based connected car services, including incorporation of the latter’s Autonavi mapping services into the Japanese carmaker’s future vehicles. Customers can make online payments via Alibaba’s Alipay platform. This extended a relationship first struck in 2015 with Autonavi when it was an independent company before its $1.5bn acquisition by Alibaba.

This was Alibaba’s first significant auto deal involving vehicles outside China. For the auto industry, it highlights the potential for generating revenues from connected services.

That is certainly a Volkswagen ambition over the Microsoft deal, which embraces all its car markets with a single platform. That deal can be seen as another major step in the car maker’s recuperation from the emissions scandal that almost destroyed its reputation, especially in the US where it was competing unfairly in the diesel market.

Yet now just three years after the scandal broke in September 2015, Volkswagen is investing in a major new automotive cloud development center near Microsoft’s headquarters in Redmond, US. Here the two companies have started collaborating on the “Volkswagen Automotive Cloud”, which will underpin all future digital services and mobility offerings for the car maker. This will incorporate Microsoft’s IoT Edge platform as its technology foundation, bringing a variety of tools and software components including analytics and machine learning algorithms optimized for in-vehicle applications.

The deal has been cited as evidence that external IT providers are not being shut out of IoT as car makers build their own data hosting platforms. However, if all the business goes to Microsoft this is scant consolation for the rest of the IT provider industry. Car makers though just want the most effective platform for entering the world of SaaS (Software as a Service), so that they can start enjoying recurring as well as one-off revenues, exploiting their position of control over the user’s hardware.

There is also another factor drawing car makers to Azure, which is that the platform is best placed to help them rationalize and simplify their connected car platforms which had threatened to get out of hand with proliferation in control units run by software written in different programming languages. Part of the partnership with Microsoft involves shrinking this platform down to a few control units using a common programming language running on a software platform VW has dubbed vw.OS.