M2M margins can flow from the ‘smart pipe’

Ever passed the time on a plane journey trying to think of new objects that could conceivably join the growing Internet of Things? These days, the flight would be short for the game to be worthwhile – there aren’t so many devices left that someone, somewhere isn’t already connecting.

At Mobile World Congress in Barcelona this year, Informa heard about electric toothbrushes that test your saliva for disease, coffee machines that order their own parts, even vending machines that can ‘friend’ you on Facebook. As well as the more familiar smart meters and electric vehicles, an impressive range of household and commercial apparatus is getting connected.

More than one MWC attendee was heard to mutter about ‘M2M hype’ and some optimistic growth forecasts are clearly at odds with experience on the ground. Nonetheless, new applications are making genuine revenues and cellular still offers the best coverage for stand-alone, nomadic or moving devices.

But with so many ideas to choose from, operators need to assess carefully the margins they can achieve.

Informa’s recent survey of industry expectations for the connected devices market reveals that 75 per cent of operators expect to generate five per cent or more of their revenue from this source by 2015 – that’s over $65bn. At the same time, many are concerned they will be ‘relegated’ to a low-margin, bit pipe role.

Conversely, Informa believes operators should welcome managed connectivity opportunities that leverage their network-centric core competence – that is, the smart pipe. Even if ARPU is trivial, with sufficient scale and low-cost provisioning and maintenance, overall margins can be attractive. Even better if the particular application can be reused in other contexts.

Hospitality and retail are creating B2B opportunities. SMEs in these sectors are traditionally passed over by operators’ enterprise divisions as being too fragmented. However, they make up a large proportion of their markets and are served by large-scale suppliers that will benefit from connectivity.

For example, the aforementioned coffee makers and vending machines are serviced by just a few distributors and are located in practically every restaurant and hotel. Retailers large and small also have assets they need to track, such as perishable goods, crates and home deliveries. Another volume opportunity is the secure pick-up locker. Enterprises use these connected facilities for overnight delivery of goods or equipment to their customers and field force workers who collect during the day. Informa expects to see high volume deployments during 2012.

A connected devices opportunity certainly benefits from scale – plenty of endpoints needing direct connection (rather than mesh). Some other ideal characteristics are:

  • Simplicity – low-cost provisioning and maintenance
  • ‘Green field’ applications with steep growth projections and no legacy back end issues
  • Short value chain
  • Horizontal reuse potential

Things to avoid:

  • Complexity – great for systems integrators, poor for everyone else’s time to market
  • Mission-critical applications whereby a few failures, or even one, have serious consequences
  • Obligation to share revenue and encourage herds of third-party content developers
  • Political or regulatory uncertainty

By now, operators should have a unit dedicated to connected devices. This is a pre-requisite, both for credibility and to build presence in chosen verticals. But the goal is to transform the customer’s business, not the operator’s.

Low cost of delivery of ‘smart pipe’ connectivity can generate comfortable margins, even where customers operate in just one national market.  In comparison, a project like the Connected Car seems a much rougher road to profitability.

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