Backseat video, gadgets that automatically notify the authorities of a crash or help drivers navigate, sophisticated diagnostics, and their kin—in the mid-1990s all this was expected to bolster the stagnant car industry by offering a flood of new revenues. But telematics, a suite of technologies centered on communications systems within cars, now seems less likely to alter the economics of the automotive industry so radically.

Telematics technologies might indeed deliver an enticing variety of in-car services, which may still revolutionize the experience of driving. But carmakers aren’t likely to capture a huge windfall from them. First, the total market won’t be as big as predicted in some of the more optimistic forecasts. Second, the vehicle itself won’t be critical to every application. Automakers should therefore shift their strategies and focus on dominating a few core telematics applications—not all of them. In the long run, investing primarily in the development of great cars while selectively pursuing telematics will have a much better payoff than pouring funds and management effort into a full offering.

Deflating the $40 billion promise

Some analysts and executives, eyeing the fees and valuations cable television operators netted by offering information and entertainment services to a ready-made...