M2M is seen as an area with growth potential for operators. But the difficulty is to identify business models that offer attractive returns. Can telcos offer anything beyond simple connectivity services with low ARPU?
There is little doubt in the…
M2M is seen as an area with growth potential for operators. But the difficulty is to identify business models that offer attractive returns. Can telcos offer anything beyond simple connectivity services with low ARPU?
There is little doubt in the technology and telecoms sectors that so-called Machine-to-Machine (M2M) technology, which allows machines to communicate with one another in multiple ways, is set to become ubiquitous in the coming years.
According to data from Machina Research, the number of M2M connections is set to mushroom from 1 billion in 2010 to 12 billion in 2020, while total revenue from M2M will rise from €91bn to €714bn over the same period.
The potential technological developments could have a dramatic impact on businesses and consumers: mobile health devices that keep patients and doctors constantly in contact; buildings that continuously assess their own energy usage; entire cities with integrated transport networks.
Yet much doubt remains over whether telcos will be able to secure a significant slice of the M2M pie.
There is a broad consensus that telecoms operators will be able to gain a relatively small income from providing basic connectivity for M2M devices, but when it comes to the more lucrative vertical markets that takes M2M technology to the end user, there is much less certainty about how telcos can make the most of the future growth of the technology.
Different strategies from different telcos
The head of market strategy at Telenor Connexion, Robert Brunback, argues that the best approach for telcos is to focus on providing a strong “Managed Connectivity” offering, rather than trying to sell M2M services through to the end-user.
“It’s going to be really hard to move into the verticals, in the sense of delivering an M2M vertical solution,” he says. Telcos simply lack the necessary sales channels to provide a full eHealth solution, for example, he says.
“What we can do is build a much better horizontal platform that serves a purpose with these verticals.”
Following this strategy, the telco adapts its offering in terms of service and price to suit particular verticals and makes it easier for other companies to build applications on top of its platform.
In effect, it’s not just handling the traffic in M2M connections. According to Brunback, it is aiming to integrate connectivity into “business critical solutions”, such as security systems or fleet management.
Such integrated connectivity services that the company could provide include, Brunsback says, service level agreements (SLAs), automated provisioning and a “24/7 service desk”
“All of this is vital and also possible to charge for beyond the basic traffic service,” Brunback said.
Furthermore, Telenor Connexion also provides data management through a cloud-based service, capturing and storing data before making it available to customers through application program interfaces (APIs).
“This is another example whereby we provide a horizontal service making it easier and cheaper for our customers, but we let them (or partners) build the actual vertical application on top of the more generic functions,” Brunback says.
Telenor Connexion is part of the Norwegian Telenor group. The separate entity was created in 2008 to specialise on M2M, because the company realised that M2M requires a different business model that can not be built easily on top of a traditional telco structure.
Other operators wish to go further and move into at least some vertical markets.
Telefonica’s head of strategy and alliance for Global M2M, Angel David Garcia Barrio, argues that that connectivity is the company’s core offering in the M2M, but adds that, “depending on the sector, we can provide the whole solution.”
He admits that in some areas, like the automotive sector, telcos will not be able to provide all the services to the end-user. But Garcia Barrio also says that in others, for instance in eHealth and the “smart home” environment, there is an opportunity for the operator to provide solutions directly to the consumer.
Taking the step into the verticals promises much more attractive returns. If Telefonica was able to provide the whole M2M solution to the customer – including connectivity, application, customer service, rental of the device, etc –ARPU could jump from approximately €1-2 to €20-30.
Barrio positions M2M as an “enabler for our customers” that would allow Telefonica to provide new services, develop new businesses and reduce their costs.
Yet even if Telefonica’s vision of providing the whole solution in certain verticals does come to fruition, it would still need to partner with various companies to provide M2M services in other areas.
Partnerships – key for M2M success?
Indeed in many areas partnerships will remain key in the emerging M2M ecosystem, but there are a number of different scenarios.
Such partnerships could potentially cover the whole M2M value-chain, including device/hardware manufacturers, other operators, systems integrators and application developers.
Speaking at a recent industry event, Vodafone’s head of global business development for M2M, Marc Sautier, described partnerships as essential going forward.
As certain ecosystems develop within the diverse M2M area, he expects leaders in those fields to grow, and to become “key partners” in their respective areas of expertise.
There are a range of potential business models open to operators and their partners.
Deutsche Telekom’s Stephan Keuneke, speaking at the same event, outlined four different business models involving operators, partners and customers, each of them suited to particular situations, but also offering different levels of return for the operator.
- “Sell to” sees operators straightforwardly selling services directly to the customer. This works well where Deutsche Telekom (or any other operator) has a strong M2M relationship with the customer and there is a large sales volume per deal, Keuneke says.
- “Sell with”, where operator and M2M partner sell together to the end customer. This scenario is attractive if both companies have a strong relationship with the customer.
- In the “sell through” model, the partner sells the M2M service to the customer, which makes sense where the partner has the strong customer relationship and there is relatively low sales volume per deal.
- Finally, in the “DT as supplier” model, the operator supplies services and connectivity on a wholesale basis to the partner, who then resells to the end-consumer.
In terms of ARPU that stays in the hands of operators, the first model is most attractive as it provides the most revenue, followed by “Sell with”, “Sell through” and then the wholesale model.
Keuneke says that the most popular models so far are the two “classical” models: the direct sale (“Sell to”) and the wholesale model, adding that creating value for end-users depends on a complex ecosystem of partnerships.
“Therefore we’d have to expect a significantly growing share of the business being conducted in sell-with and sell-through partnerships,” he says.
A whole range of other factors – including required data volume, predictability of data volume and life-span of the service – also have to be factored in the model.
In the meantime operators and vendors try to position themselves in the M2M market.
In August, Swedish telecoms vendor Ericsson acquired Telenor Connexion’s M2M technology platform for an undisclosed price.
In return Telenor Connexion agreed to become the first customer on Ericsson’s own M2M platform, the Device Connection Platform.
Ericsson said at the time that it was aiming to grow the M2M market and offer customers a service that they could use quickly for a low initial investment.
Telenor Connexion’s Robert Brunback says that in the long run, the company did not feel that this platform would be “a differentiator for us”.
He added that acquisitions could be interesting for Telenor Connexion, provided the target company could complement its present offering.
M2M: Return of the dumb pipe?
With M2M, there is a risk for operators to be left to provide the basic, relatively low-profit connectivity service and watch rivals from other sectors swoop down and take the bulk of the dollars from value-adds of various kinds.
Industry experts certainly see this as a threat on the horizon.
Faisal Ahmed, partner at Trova Consulting, asserts: “The first challenge we see for MNOs targeting the M2M market is the mismatch between the cost to serve M2M connections and the revenue they generate.”
Machina Research’s Matt Hatton goes even further, saying that “there is really not very much money to be made purely from the carriage of traffic”.
According to research from his company, only 10% of the revenue opportunities for mobile network operators in M2M lie in this part of the M2M value chain.
Hatton says the operators should look at the “service wrap” around any M2M application to be delivered, with the exact contents of this depending on the particular application.
This could involve the sale of devices and end-to-management of the M2M service, but with more complex applications a systems integrator, potentially in-house, would also have to be involved.
The present industry consensus is that telcos can be successful in the M2M space, as long as they find their niche in what is clearly a complex value chain. This niche is likely to vary with each telco, according to their particular strategy, technological expertise and the partnerships/acquisitions they make.
For those telcos that are successful in this market, a major part of their future business could come from M2M.
