Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
The “Internet of things” promises to usher in a new wave of technological evolution. In a few years’ time, billions of things – cars, utility meters, TVs and even furniture – will be linked via the Internet and sending information about their status and condition. Operators need to determine what role they will play in this ecosystem.
The threat of decreasing connectivity revenue, which mobile network operators have been confronting on the consumer retail side of their businesses in the past few years, is beginning to emerge in the machine-to-machine sector as it matures and competition intensifies. Operators are moving up the M2M value chain and delivering end-to-end solutions, rather than just simple connectivity, in an effort to combat this trend.
Connectivity margins could stagnate or shrink in the increasingly competitive M2M market
Many verticals and industries are undergoing a digital transformation, adopting M2M technology to connect many different devices and machines. As a result, M2M has gained significant traction as a new business area for MNOs. Operators are well placed to provide the near-ubiquitous connectivity needed to maintain links between modules and sensors and to help drive business transformation for their clients.
The M2M connectivity sector is maturing. Enterprises have had only a few choices when procuring an M2M solution, but more and more MNOs are launching services for this market. Competition for connectivity is also coming from dedicated M2M mobile virtual network operators, satellite connectivity providers and other connectivity service providers using dedicated, non-cellular spectrum.
The margins associated with connectivity will be squeezed as competition increases. The proliferation of new M2M applications that utilize 3G and 4G networks and generate high data usage, such as video surveillance or connected car services, could offset declines in connectivity revenue. Nevertheless, MNOs will face the challenge of remaining competitive while M2M connectivity is becoming commoditised and connectivity margins threaten to stagnate or shrink.
Non-connectivity services are expected to account for an increasing share of M2M revenue in 3 years’ time
MNOs need to develop their M2M business models to expand their role beyond that of a connectivity provider. Most operators have recognised this, and are moving up the value chain by offering M2M solutions that combine connectivity with partners’ hardware or software, according to the results of a recent Analysys Mason survey.
Ten leading global operators indicated that they expect non-connectivity services to account for more than half of the average revenue per connection from M2M services by 2016 (see Fig. 1). Connectivity is expected to remain the largest single component of M2M revenue because it is the cornerstone of MNOs’ M2M businesses, but its share will decline from an average of 79% during the third quarter of 2013, to just 47% in Q3 2016.
Fig. 1: M2M average revenue per connection by service type, Q3 2013, and Q3 2016. [Source: Analysys Mason, 2014]
Operators’ transition from pure connectivity providers to end-to-end M2M solution providers is one of the primary drivers behind this evolution in the M2M service revenue. This is already underway: operators are increasingly partnering with M2M service providers in various verticals to provide E2E M2M solutions, so that they can exploit all possible value opportunities. Many operators have assembled E2E product portfolios that will enable them to generate more value-added-services revenue. They will continue to develop new collaborations and launch new strategic partnerships models – including those with application developers and systems integrators, which are often essential partners for delivering E2E services.
Morgan Mullooly is part of Analysys Mason’s Enterprise team. His primary area of focus is on the machine-to-machine and the “Internet of things” (IoT) sector. This includes analysis on a variety of topics including IoT enterprise requirements, forecasting, vendor profiles and service provider scorecards. Mullooly was previously the lead analyst for Analysys Mason’s Spectrum research program, focusing on spectrum valuation, LTE strategies and white space technologies. Mullooly has a Master’s degree in Philosophy and Public Policy from the London School of Economics.
