Rochester, Kent -- On the 27th September, I visited Trafficmaster(LSE: TFC) to meet Bill McIntosh, the company's Finance Director. The appointment was well timed. Only a few weeks before, Trafficmaster had announced, on the face of it, seemingly disappointing interim figures. Both sales and profits had fallen. Cause for concern? Not from McIntosh's point of view.
As I later discovered, those interim results will mark a turning point for Trafficmaster. The aim of becoming a pure "content" company saw the loss of some hardware sales, while the advance into developing a pan-European operation held back profitability.
To recap: Trafficmaster was co-founded in 1988 by the group's present Chief Executive, David Martell. The company, through a network of fixed sensors, provides real-time traffic information to road users on a subscription basis.
In 1990, the group acquired a licence from the Government to operate its network, initially around the M25. After a successful two-year trial, the licence was gradually extended to cover all mainland UK motorways and trunk roads. The network expansion, throughout the UK and recently into Europe, was funded by money raised through the company's flotation in 1994 and by subsequent rights issues.
Licence
These days, whenever governmental licences come up for discussion, thoughts of the high costs of the recent 3G telecom auction are never too far away. McIntosh wasn't concerned by anything similar happening in the world of traffic information.
"The improvement of journey times and the reduction of congestion has a huge spin-off to government" he declared, adding that Trafficmaster's service made it "very different to 3G, arguably because there is no real benefit to government (with 3G)." Indeed, McIntosh "looked forward to the day when Trafficmaster were so profitable that it became an issue."
Although the licence is non-exclusive, nobody has yet to build a similar fixed network. McIntosh pointed to the Automobile Association as an example of an organisation who had considered building their own network, but then decided against it. The issue at hand for the AA wasn't perhaps the building of the network itself, but wider implications surrounding the hardware needed to receive the information.
McIntosh divulged: "From where we are today, getting into the market place is the least of a competitor's worries. It's actually getting to the motor manufacturers' [negotiating] table that's the problem." As McIntosh was to later explain, the motor industry holds most of the keys to success in the telematic industry.
But just what is the telematic industry? "To us, telematics is the provision of services and information into motor vehicles by means of mobile communication" explained McIntosh.
Hardware
Over the years, Trafficmaster has developed a variety of products that receive its proprietary traffic information. The gadgets include simple alert devices and both voice- and screen-based products. But Trafficmaster's development of its own hardware was a necessity before it could reach its longer-term goal -- that of purely becoming a provider of traffic "content".
The hardware side of the business, according to McIntosh, has "no long-term significance". McIntosh then asserted: "Trafficmaster isn't worth £800m-£900m because we manufacture and sell some little bits of plastic. That's not what our value is."
In terms of the receiver units, Trafficmaster's ongoing strategy can be broken down into two parts. Firstly, the company is encouraging the major suppliers of the motor industry to manufacture the necessary hardware instead. Suppliers such as Bosch, Motorola(NYSE: MOT) and Britax(LSE: BTX) have all developed products that can utilise Trafficmaster's information.
The second part of the hardware strategy is to get the large motor manufacturers to install the receiving hardware on the car production line. Overall, Trafficmaster should benefit on two counts -- no more hardware development costs and a wider audience to subscribe to its information.
McIntosh explained how the rather hard-nosed motor industry made the development of Trafficmaster's early in-car devices necessary. "If you want to get a motor manufacturer to take your product, you've got to have one working. You've got to have an existing service. We developed all of the hardware because we needed something to showcase our capability."
Unproven products and services, as McIntosh emphasised, just don't get to go on a car manufacturer's assembly line. "There are enough issues that the motor manufacturers have to face without them having to speculate about the future (of telematics)."
The time it can take to get a car manufacturer to fit, as standard, Trafficmaster-compatible hardware can be lengthy. McIntosh recounted the story of his company's relationship with BMW. Trafficmaster began co-operating with the German motor firm back in 1994 and in 1997, a traffic monitoring system was offered as an optional extra for the BMW 7 Series. A year later, the product became a standard on that particular model. Gradually, the system was installed on the BMW 5 and 3 Series cars as well. But McIntosh revealed that it would only be in 2001, seven years after the initial link-up, that BMW would install units in any significant volume.
Competition
But although Trafficmaster has no UK competition in terms of fixed sensor networks, other competing systems are being developed. McIntosh was keen to point out his company's association with several motor manufacturers, in relation to the ultimate success of other traffic information systems.
"We are the only people with relationships with the motor manufacturers," McIntosh declared. "Our perceived competitors don't have our contacts within the industry. They don't have relationships within the motor industry and that's where telematics is actually happening. And it's happening now."
On the subject of alternative systems, McIntosh discussed at length one of the more notable, that of Floating Car Data (FCD). In a nutshell, FCD is based on mobile sensors. Cars are installed with a device that, every so often, transmits the location of the car. Interpreting the accumulated data from enough slow-moving cars should lead to discovering where the traffic jams are.
Although the upcoming flotation of ITIS has recently brought FCD to investors' attention, the technology has been under development for a while. "FCD is not new. It's been debated for the last eight years that I know of," McIntosh explained.
The problems for FCD, as Trafficmaster see it, are two-fold. Firstly, there are the current costs of implementing the system. But perhaps more importantly, FCD carries "a classic conundrum". McIntosh asks: "How many vehicles do you need to have equipped [with FCD]?" For the proponents of FCD, McIntosh gives the impression that it's very much a venture into the unknown.
On the transmission side of FCD, McIntosh was quite critical: "Today, it's done by SMS and I have to say, the economics are suicidal." But won't the forthcoming technologies such as GPRS and UMTS reduce the transmission costs in time? McIntosh suggested that the immediate economics and pricing of such communication methods were "really up for question."
In terms of the installation of FCD devices, McIntosh took his ammunition from the broker of one his industry counterparts:
"Charles Stanley(LSE: CAY), broker of Minorplanet(LSE: MPS), says their hardware unit costs are £450. They say with volume that the hardware will come down by 20% to £360. Fitting that unit is going to cost you a minimum of £50 and up to £75 depending on the vehicle. Installation costs of hardware in a car of that nature is very, very expensive. The only way you slash that cost is to have motor manufacturers install it on the production line."
Unsurprisingly, McIntosh re-emphasised: "You will only get the motor manufacturers' attention once it's up and working. And nobody knows when that will be [for FCD]." McIntosh then outlined the main uncertainty surrounding the alternative system:
"Perceived industry wisdom is that FCD requires somewhere between 5-15% of the car parc. That is somewhere between 1.25m vehicles and nearly 4m in the UK. The problem is, nobody knows. The conundrum is that until you actually do it, and you find out what quality you are getting back... but whatever it is you need, you've got to have it."
McIntosh continued: "There will be no one who will have millions and millions of (FCD) units out there. There will be no way that these guys will be able to aggregate it and bring it all together. And so, because of that fragmentation, it's going to be difficult to get anything like [the] 1.25m vehicles [needed]."
On FCD, McIntosh concluded: "The cost of mobile sensors are infinitely higher and the operating costs are infinitely greater. Our view is that FCD is unlikely to work commercially, until the economics are right and critical mass can be achieved quickly. We don't see how that will happen without a support capability such as a fixed network... It's about commercial reality, not about technology."
In Part 2 -- Bill McIntosh talks about Trafficmaster's European plans, the relationshiip with Mannesmann, and the company's prospects.
