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GM’s OnStar is looking a lot like a stand-alone business

December 5, 2011, 11:36 PM UTC

General Motors is nearing its long-term goal of making OnStar, its high-tech telematics service, a compelling reason for consumers to buy its cars. That means OnStar is also quickly becoming a valuable asset that could help the auto maker raise capital.

Founded in 1995, OnStar was GM’s (GM) bid to bring mobile communications to the driver’s seat. Unlike traditional in-dash GPS units, OnStar relies on a cellular network that drivers can use to contact representatives for emergency services or directions. Over the years, the company added features such as the ability to open locked doors remotely and even track stolen vehicles.

Now, a raft of new ways to use the service has strengthened the financial case for spinning off the subsidiary as a public company. While GM isn’t yet ready to talk about such a move publicly, the automaker is laying the groundwork. Steve Girsky, GM’s vice chairman, has discussed the idea with GM and OnStar executives.

Under the direction of Linda Marshall, who was appointed chief executive in February, OnStar is accelerating initiatives to be more “open and agnostic” to other technologies rather than maintain a closed system that only worked in GM models like Cadillacs and Chevrolets. Marshall is a former telephony executive who knew GM CEO Dan Akerson when they both worked at Nextel Communications. “As our business has grown, technology has changed,” she wrote in an email. “We know that we need to give customers the choice of how they want to connect with the world around them.”

GM has opened OnStar to application development much like Apple’s (AAPL) iPhone or Google’s (GOOG) Android. For example, RelayRides is a peer-to-peer car sharing venture. RelayRides will use OnStar to power a smartphone app that allows customers to check for available cars, make a reservation, locate a reserved vehicle via GPS and unlock the doors. Earlier versions of OnStar didn’t integrate particularly well with customer smartphones, music lists, addresses and other applications.

In October, GM began selling a $299 OnStar rear view mirror that can be installed in non-GM models. (GM sent reviewers cars from rival Toyota (TM) outfitted with the device.) The automaker says it’s too early to disclose how the product is selling. GM also is testing an OnStar-based device that can pair a smartphone with its Chevrolet Volt gas-electric car, communicating with utilities to determine the best times to recharge the vehicle for instance.

GM executives are particularly optimistic about OnStar’s potential in China, where about 370,000 customers are already using it.

GM pushes the safety and security aspect of OnStar harder than any of its other attributes, though. In the event of an accident, emergency medical services are automatically summoned, something which happens about 2,800 times a month in the U.S. according to the company. Police officers use OnStar an average of 460 times a month to locate or disable a GM car that’s been stolen. Marshall said “putting additional safety and monitoring measures in place” to enhance OnStar’s core business is her most important accomplishment to date.

So how much could a more open and useful OnStar really be worth? OnStar’s approximately 5 million paying customers generate about $1.5 billion in revenue and enough profit to justify a market capitalization of at least $7 billion, according to one former GM executive that declined to be named. During its 2009 bankruptcy, GM explored selling the subsidiary and discovered it might fetch $2 billion to $4 billion.

The GM service in its early days was the only service that, for a monthly fee, could link the driver with a live operator who could provide various services. But that exclusivity has been matched by others like Lexus, which equips its newest models with a service that more or less matches OnStar. Says one Toyota executive, “We see the system as something to please our customers, not as a moneymaker that might stand one day on its own.” Like OnStar.