March Of The Machines

Telematics does not feature prominently in the business plan of most mobile network operators. The margins can be small, but machines massively outnumber people and, in a world of increasingly saturated markets, machine to machine communications represents a growth opportunity for carriers.

Back in 2006, when the 3GSM World Congress had moved into its new home in Barcelona, pop star Craig David told delegates that he could send an SMS to his home saying “chill mode”. The fully connected residence, he said, automatically “dims its lights, adjusts the LEDs and puts on some chilled music,” before sending a text back with the message “the house is chilled”.

David’s fully connected, ‘chilled out’, world is the stuff of machine to machine dreamers everywhere. There was a time when industry experts and leaders alike told us that everything in our lives would be connected. Never mind turning the lights down low and popping on some mood music, we were told that our cars would be able to find their own way home and our fridges would be automatically ordering food from the supermarket when we started to run low. Not for the first or last time we were told that the mobile phone would become our remote control for life.

The truth of the matter when it comes to telematics, at least for now, is much more mundane: supply chain reporting, fleet management, electronic point of sales devices, remote metering for utilities, offender monitoring and security are all popular, if low key, machine to machine implementations.

“All can be successful in their own way,” explains Macario Namie, senior director of product marketing at M2M provider Jasper Wireless. “Remember that industries are not competing with each other over the M2M ‘crown’. There is very little in common between a point of sales terminal, an automobile and a electrical meter-except they all leverage M2M technologies to create a new business model.”

Businesses have been quick to see the benefits of telematics, but it’s been a much harder sell in the consumer space. “We all hear about pet trackers, and I suppose someone is interested, but the market has failed to go anywhere. Same for kid trackers too-they don’t want to be tracked.” says Alex Brisbourne president and COO Kore Telematics.”

Despite some flops, M2M generates substantial revenues. ABI Research estimates that nearly $3.5bn will be spent on cellular M2M services this year and over 20 million cellular M2M modules shipped in 2007.

In fact, industry analysts have long agreed that the M2M sector is on the verge of impressive growth. “By 2010, a minimum of 1.5 billion devices will be internet-connected worldwide” states Harbor Research. Forrester Research says: “By the year 2020 the number of mobile machine sessions will be 30 times higher than the number of mobile person sessions.” Juniper Research chips in with: “The market for wireless-enabled machine to machine applications is now entering a new growth phase with revenues set to grow to over $44bn by 2009 and $74bn by 2011.” And Berg Insight estimates that the EU market will reach 24.4 million units by 2011, with North America lagging only slightly at 22.6 million devices.

These relatively recent predictions, though, are down on earlier industry estimates. When telecoms.com last wrote about M2M in 2005, Orange UK’s head of telemetry dismissed suggestions that a recent flurry of interest around M2M was hype saying: “There’s no hype around it at all. It’s definitely going to be the next great growth area for mobile,” asking, “what else is growing at 100 per cent?” But fast growth from small beginnings is not necessarily a reliable metric on which to base a forecast. “This is a classic case of an industry being over-hyped,” says Jasper’s Namie. “We’re back down to reality and reality is very good. The market has been growing steadily at about 30 per cent and we believe we’re just now at the precipice of an increase in that rate. There are a few factors making a difference-the lower cost of modems in volume, the ubiquity of cellular networks around the world and the automation tools needed to scale operations. This combination eliminates much of the risk typically associated with leading edge technologies,” he says.

“I think the difficulty in implementing M2M projects from an organisational and cultural perspective may not have been fully accounted for in the growth curve analysis made some time ago,” adds Michael Freudmann, VP sales & business development at eDevice. “M2M today is still to a large extent nascent. However, this is beginning to change as business models, technologies, and M2M suppliers have matured resulting in easier implementation and lower costs.”

According to Freudmann one of the key challenges with M2M implementations stems from the fact that most large-scale projects require commitment from several stakeholders both within and outside the organisation. In most cases a project not only involves the technologists, but also marketing, sales and management. “Sometimes organisational culture gets in the way,” he says. “Other times the organisation does not have the technological know-how and is, to a large extent, dependent on the know-how of M2M suppliers.”

M2M projects are complex with regards the implementation of the full eco-system of end-devices, network services and back-end systems-and the complexities are often compounded by the involvement of the various stakeholder parties. “Many times projects either don’t get off the ground or get shelved half-way through. Other times, it takes years to complete the project. Whilst I would not mention company names, I have examples for each of these in large organisations worldwide,” says Freudmann.

These complexities differ greatly from the MNOs’ traditional consumer offerings, which could go some way to explain why the carrier community prefers to work with M2M application providers or MVNOs.

“M2M revenue, and even more simplistically, data revenue, is still dwarfed by voice revenue,” points out Rami Avidan, CEO, Wyless Group. “The tools and competencies required to support M2M applications are different from those required by customers in the voice arena. Increasingly, MNOs see the importance of M2M and are putting more resources in place to work with their partners who have the necessary skills.”

Avidan singles out O2 UK as an example of a carrier with an appreciation for telematics. M2M SIM deployment represents one per cent of O2’s total SIM deployment, whereas the M2M generated revenue is close to five per cent of total revenue. “This data is important as it shows an increased awareness by the larger players that you can make the same amount of revenue by deploying fewer SIMs,” he says.

EDevice’s Freudmann agrees that carriers’ interest in M2M is on the rise. “Mobile operators are coming to the realisation that M2M is strategic insofar as in the long term M2M is expected to be a significant money maker. Furthermore, M2M applications in the most part utilise data channels which are not at full capacity because operators have yet to find a way to fully use the data channels for broadband and mobile phone multimedia applications.”

However, as Freudmann also points out, M2M requires the servicing and billing of large numbers of low revenue generating ‘users’ and MNOs find this challenging due to their traditional phone business structure, billing systems, and operations. “MVNOs and M2M application partners are specialists in this business and have designed their operations and billing systems from scratch to manage M2M customers and their end-users and thus add value to both the MNO as a partner and the M2M corporate customer as a user,” he says.

According to Kore’s Brisbourne the role of specialised partners or MVNOs was not a strategic MNO decision: “The very unusual needs of software vendors and application providers in M2M were directly addressed by these specialised providers. In particular, technical integration platforms, 24/7 support capabilities and unique use and billing management was pioneered by these players.”

“Some operators do view M2M as strategic in the long-term and others don’t,” reckons Jasper’s Namie. “The biggest challenge with M2M is that, to serve the market well, it requires a model that is quite different than the traditional consumer user.”

MNOs are designed to service people primarily with voice plans and some large data plans, while M2M is about machines that use very little data, but exist in very high volume. “The operational processes, support requirements and APRU are vastly different across each industry. This is why MNOs look to partners who can deliver the specialised requirements while allowing them to capitalise on the market opportunity,” says Namie.

Traditional carriers have also shied away from M2M’s ARPU dilution effect. M2M ‘users’ on average generate much less revenue than mobile phone and wireless broadband users. To help deal with this the MNO works with MVNOs and can then conceivably treat the revenue generated from an MVNO as one large business account ignoring the per-SIM ARPU.

“Whilst this may also help keep the MNOs’ shares buoyant in the stock market, it truly does have economic benefits because the ARPU for users serviced by MVNOs is not really important since the operator only supports the MVNO and does not have a service cost per user,” says eDevice’s Freudmann.

Kore Telematics’ Brisbourne concurs: “One very useful role these MVNOs play is that typically the revenues they generate are regarded as wholesale services, and those subscribers are not counted-so are not dilutive to the MNO numbers. But, the real questions are: are M2M subscribers accretive? Answer: yes; and are M2M subscribers profitable? Answer: only if the true cost to service them is identified and MNO costs properly dis-aggregated.”

But falling APRU is something that carriers have been reluctantly getting used to for some time. Perhaps they’ve been misguided to turn their collective backs on revenue generating M2M services in favour of pursuing rich data services.

According to Kore’s Brisbourne the world wireless market has an ROI on its total data investment (infrastructure, handset subsidies, content platforms) of less than 15 cents on every dollar invested to date. And even that number belies the fact that text messaging still makes up a high proportion of all data service revenue. Data, he reckons, has not been valued by itself, but more as an “ARPU saver” to get the blended consumer revenues back up.

“If you look at it today, all that has happened is that data and content has picked up slack of voice price erosion. But, it’s easy to be distracted like this. Convincing a few million subscribers to go browsing can yield more than loading tens of thousands of M2M devices generating $4 a month ARPU,” says Brisbourne. “Is that the right strategy? It’s one leg. But lasting low cost of acquisition in M2M as that market comes of age, can be the next logical growth point-especially as it is accretive: you don’t have to steal another provider’s customer at a high subsidy to get the business.”

Another development that might help focus operators’ minds on steady revenue stream M2M offerings is the move in the consumer space to all you can eat data tariffs. A bit pipe future scares carriers, but it need not signal the end of growth.

“They should have done this long ago-and recognised that the ‘pipe’ is a highly valuable utility that they price accordingly,” says Brisbourne. “It would have saved countless tens of millions of wasted dollars on content and platforms. Think of the internet: lots of money in pipes there, driven by ubiquitous connectivity and no responsibility for content management. As they come to grips with the ‘smart utility’ function of the network, so they recognise open access, complex applications and integration is best done by others and they benefit from the traffic.”

If the carriers do decide to move more aggressively into the telematics space it’s more than likely that we’ll see a round of acquisitions as network operators seek to snap up M2M application providers and MVNOs. “The sentiment at carriers will change over time and they will begin to see M2M as strategic to their growth,” says eDevice’s Freudmann. “I expect at that point they will be poised to take over their partner MVNOs by buying them out or taking ownership of their users in another way.”

Some MNOs, though, will believe that they can be the provider of integrated solutions in their quest to ‘own the customer’ and believe their brand stretches. “This is almost certainly a recipe for failure,” warns Brisbourne. “It says that the MNO knows how to choose the best application, keep it current, support and sell it. In reality, the M2M market is multitudes of micro segments, with domain understanding and integration paramount.”

Others will attempt to build platforms and presence in the market, to greater or lesser success thinks Brisbourne. “The real fear here is that they revert to the game they know best, pile it high and sell them cheap-rather than recognise the complex, critical integration needed here.”

In all likelihood, there will be consolidation both in specialised providers as they seek to extend geographic reach, and potentially by MNOs finding quick entries to market. Brisbourne predicts that in five years, the market will be dominated by these latter two activities.

He’s not alone, Macario Namie at Jasper Wireless: “The M2M ecosystem is fragmented today and a key driver of any bourgeoning industry is consolidation-not just in terms of mergers and acquisitions, but also in development of common standards and adopted technologies.

Namie believes that the industry will develop according to subscribers’ demands. “If carriers need to quickly bring new services to market, they are more likely to look at acquisitions and white labelling. The M2M business is very different from the traditional voice business, making it difficult for carries to grow organically if that is not their core business,” he says.

The margins on M2M need not necessarily be as slim as operators’ fear. In terms of earned revenue per KB, or per message, margins can be better than in consumer services. The devices use low levels of data, so where a consumer could buy 1Gb of data today for under $50 per month, an M2M ‘user’ might pay something in the region of $4 per Mb-but then only use 350KB to 1Mb monthly. So profitability per subscriber becomes more relevant.

“Revenue per subscription is lower, so costs must be lower. With automation tools and operational software built for specific vertical industries, costs can be easily managed out of the process. This is what can make M2M highly profitable for both MNOs and enterprises alike,” says Jasper’s Namie.

The telematics industry could be boosted further as M2M providers and their enterprise customers realise the cost benefits of more affordable 3G technology. Although, at present, M2M is still largely based on GPRS networks, Namie believes that over the next five years there will be a transition to 3G. “Consumers are willing to pay $600 for the latest iPhone. In the M2M world, companies are looking to deploy hundreds of thousands of these devices and they need to control costs,” he says. “3G modems can be two to three times more expensive than a GRPS modem and data costs can add up quickly. Eventually this will change and M2M devices will mature and require more bandwidth.”

Rami Avidan of Wyless thinks next generation technologies will help drive the business in new and innovative ways, however, this is a long term view: “I strongly believe that these new technical developments are very good for the industry as new technologies drive new thinking. Having said that it is very unlikely that broader connectivity is going to have a massive implication for the M2M segment in the next three to five years simply because there are very few applications or customer requests that demand the existing high speed connectivity.”

Avidan estimates that 95 per cent of the applications and customers are very happy with GPRS/EDGE/3G today. This does not mean that the future will not require the new technologies but the impact of them is some time away.

It’s unlikely that Craig David’s ‘chilled’ lifestyle will become commonplace, even with next generation networks, but the march of the machines is well underway and in time will prove to be a rich source of MNOs’ data revenues.