"An obvious ambition for an operator is to earn a larger share of spend on IoT by moving along the value chain. However, the decision to provide more than connectivity is not as straightforward as it may seem"
If claims for the Internet of Things (IoT) are to be believed it will involve billions of new connections,1 generate trillions of dollars in economic value2 and have an impact on every vertical market. Against this expectation, telecoms operators looking at their existing IoT-related activities may feel underwhelmed. Operators’ base of machine-to-machine (M2M)/IoT-related connections is dwarfed by their core business,3 and each M2M SIM typically generates just a fraction of the ARPU of a handset.
The IoT market is only just beginning to emerge, and the telecoms industry (like many other sectors) is just beginning to understand how to address IoT. In this article, we provide an overview of three motives that are guiding the telecoms sector’s involvement in IoT.
Offering more than connectivity is likely to dilute margins
An obvious ambition for an operator is to earn a larger share of spend on IoT by moving along the value chain. However, the decision to provide more than connectivity is not as straightforward as it may seem. From estimates produced by Analysys Mason (see Figure 1), operators may well dilute their margins if they take on a wider role in IoT, for example by providing a complete solution that incorporates device, application, service provision and integration as well as connectivity.
Figure 1: Generic value chain for IoT services, including share of value and typical EBIT margin for each component4 [Source: Analysys Mason, 2015]
If operators take up a different position in the value chain they will also face new competitors, from starts-ups to Internet giants, against which they may have few unique assets.5 All of this means that operators are understandably cautious when deciding where to invest in IoT.
Despite this caution, operators are investing in IoT for three main reasons, as outlined below. They are moving up the value chain in all three cases, but they are not necessarily doing this to create incremental margin: their motivations are often more closely tied to the core connectivity business.
Motive 1: Use IoT to generate new connectivity revenue, especially in automotive
The connected-car market involves millions of new mobile connections, each of which could create demand for large quantities of data, making it one of the few M2M segments with high ARPUs.6 This makes it an attractive opportunity for operators, purely on the grounds of connectivity revenue. In Q3 2015 alone, AT&T added more than 1 million new cars to its network, taking the total to 5.8 million.7 By the end of 2020, Analysys Mason expects that more than 250 million passenger vehicles will have embedded connectivity.8
Operators’ aim is to win new connectivity contracts with car companies. They will do this by competing on the usual parameters (i.e. coverage and connectivity price) but also by providing the manufacturers with additional services such as security, and even providing apps from third parties, as AT&T is doing with Drive. Operators may generate some upside from these additional services, but their central motivation is to win (and defend) connectivity contracts, rather than earn incremental revenue or margin.
Motive 2: Use IoT to support and defend existing business
The second motive for exploring IoT is to protect existing connectivity revenue. Smart-home services are one area that operators like AT&T, Comcast, Deutsche Telekom (DT) and others are experimenting with. We do not believe that the central motive is, or should be, to generate significant incremental income or margin from these propositions.9 However, by offering a smart-home solution, an operator may be able to defend its core broadband revenue, protect against churn and help to justify price increases.
Motive 3: Use IoT to enter new vertical markets
In some sectors, potential connectivity revenue alone is not enough to attract the interest of operators. Consequently, they are exploring ways to generate revenue from deeper involvement in vertical market solutions.
An example of this is healthcare. As shown by Analysys Mason’s research,10 the volume of IoT connections from healthcare will be low – even by 2020, there will probably be fewer than 50 million health devices with a dedicated connection, and the average volume of data used by these devices will be relatively low. Purely in terms of connectivity revenue, healthcare does not warrant investment. However, Telstra, Telefónica, DT and others are attempting to move up the value chain by offering a platform of connectivity, hosting, security, BSS and analytics that can be opened up to healthcare companies. Most operators are not providing end-to-end health solutions, as this is typically left to healthcare specialists. Instead, they are trying to generate incremental revenue on top of connectivity by building on aspects where they already have scale.
We expect telecoms operator thinking on IoT to mature further in 2016
In 2016, we expect to see operators mature in their thinking regarding which aspects of IoT to address, and which to leave alone. Connectivity is likely to remain central to operator strategies, either as the main focus (as with the connected car) or as the entry point for providing a complete solution (as in healthcare). Despite their different motives, operators are broadly following a similar approach – by combining connectivity and other core capabilities (such as security and BSS) as part of a platform which can be open to third parties that can further enhance the offering.11
Analysys Mason helps clients in all geographies and parts of the value chain to develop their approach to IoT. Our assignments range from rapid reviews of existing plans to full strategy development.
1 For example, Huawei is predicting 100 billion connected devices by 2025; see www.huawei.com/minisite/gci/en/index.html.
2 For example, Cisco has predicted that USD14.4 trillion of value is at stake; see http://internetofeverything.cisco.com/sites/default/files/docs/en/ioe-value-index_FAQs.pdf.
3 Analysys Mason estimates that M2M accounted for fewer than 4% of mobile connections worldwide at the end of 2015, and just over 1% of total connectivity revenue.
4 The value chain, share of value and EBIT margin will all vary considerably by IoT service.
5 For discussion of an operator assets in M2M and IoT, see Operators’ strengths in M2M and IoT may lie beyond ownership of network or spectrum assets, atwww.analysysmason.com/About-Us/News/Insight/M2M-operator-strengths-Nov2014.
6 For example, Tesla’s over-the-air firmware upgrades are typically multiple gigabytes in size.
7 See www.att.com/Investor/Earnings/3q15/ib_final_3q15.pdf.
8 See www.analysysmason.com/connect-car-2014.
9 And, in any case, many of the underlying solutions (such as locks, heating or security) will be provided or supported by partners, which will limit operators’ share of the revenue.
10 See The outlook for telehealth: opportunities for CSPs, available atwww.analysysmason.com/telehealth-Sep2015.
11For further discussion on how platforms can form part of an operator’s approach to IoT and M2M, see www.analysysmason.com/M2M-IoT-operators-approaches-May2015.
2 For example, Cisco has predicted that USD14.4 trillion of value is at stake; see http://internetofeverything.cisco.com/sites/default/files/docs/en/ioe-value-index_FAQs.pdf.
3 Analysys Mason estimates that M2M accounted for fewer than 4% of mobile connections worldwide at the end of 2015, and just over 1% of total connectivity revenue.
4 The value chain, share of value and EBIT margin will all vary considerably by IoT service.
5 For discussion of an operator assets in M2M and IoT, see Operators’ strengths in M2M and IoT may lie beyond ownership of network or spectrum assets, atwww.analysysmason.com/About-Us/News/Insight/M2M-operator-strengths-Nov2014.
6 For example, Tesla’s over-the-air firmware upgrades are typically multiple gigabytes in size.
7 See www.att.com/Investor/Earnings/3q15/ib_final_3q15.pdf.
8 See www.analysysmason.com/connect-car-2014.
9 And, in any case, many of the underlying solutions (such as locks, heating or security) will be provided or supported by partners, which will limit operators’ share of the revenue.
10 See The outlook for telehealth: opportunities for CSPs, available atwww.analysysmason.com/telehealth-Sep2015.
11For further discussion on how platforms can form part of an operator’s approach to IoT and M2M, see www.analysysmason.com/M2M-IoT-operators-approaches-May2015.
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