As we move into 2017, the Internet of Things (IoT) is already a reality. M2M is no longer just another techie acronym; all businesses now know about machine-to-machine. The CES 2016 consumer technology show confirmed that the general public is adopting more and more connected objects. Berg Insight reports that IoT generated more than $11 billion in revenues for telcos worldwide in 2016.
Connectivity still the preponderant component of operators' value propositions
The new low-power wide area networks (LPWA) specifically designed for IoT and M2M and the evolution of the removable SIM card towards the integrated eSIM chip are identified as key growth drivers of the IoT market.
As regards networks, it is clear that several "Mobile IoT" technologies, either cellular or alternate (LoRa, Sigfox), will have to coexist while awaiting the arrival of 5G. At this stage, the choice of technology strongly depends on the existing national network (coverage, ability to migrate to Mobile IoT solutions, 2G network durability) and on market competition, for example the presence of alternate players such as Sigfox. Later, it will mainly be determined by the availability and cost of modules and therefore the adoption of these technologies.
Machina Research forecasts that by the year 2020 a quarter of all new cellular subscribers will be using an eSIM chip, and this will rise to half by 2024. The vertical applications most likely to adopt this type of solution are those requiring regional or international connectivity, for example automobile, transport and logistics. In fact, the eSIM comes just at the right time for migrating the consumer Internet of Things market into the cellular ecosystem. Samsung recently announced the launch of the world's first wearable eSIM-enabled device, a smart watch compliant with GSMA eSIM standards. To collaborate on this new type of connectivity, operators have formed three leading alliances (M2M World Alliance, Global M2M Association and Bridge M2M Alliance) all of which continue to attract new members.
Enterprise services are the principal source of IoT revenues
In the IoT market operators cannot limit themselves to providing connectivity alone which will account for only 5% of the total market value by the year 2020 (source: Gartner). Proposing enterprise services will necessitate positioning on new parts of the value chain. Yet today most legacy operators remain positioned on service bricks corresponding to a horizontal approach, although some do serve a small number of vertical segments for which they have developed dedicated platforms or end-to-end offers.
One IoT approach is to use a set of generic tools or systems aimed at developers or integrators (of security or cloud solutions, for example), which allows the operator to enter vertical segments through partnerships with specialists. ATT has done this for industry in partnership with General Electrics and its Predix platform.
A second approach is to create platforms dedicated to one or more vertical applications. AT&T, Deutsche Telekom and Telefonica have done this respectively for the automobile, healthcare and smart cities. This approach allows the operator to focus on application development, security, hosting and data management and analytics.
General industry is a priority segment for telcos, since it alone is expected to generate over 40% of IoT service revenues worldwide by 2020. This is hardly a surprise, for IoT can play an invaluable role notably in optimizing production tools and logistics. For industrial clients, IoT can engender radical changes in their business models, since by incorporating connectivity in their products they become service providers for their end-users. This new situation spurs them to speed the digitization of their processes and to take onboard expertise that has not historically been part of their core business, for example data management, CRM and billing. Like these companies, operators too can position as connectivity PaaS providers and also procure the back-end infrastructure necessary to develop sector-specific applications and to assist industrial companies to develop new services for end-users.
Operators can also position on consumer market connected objects
In the B2C market, the prime challenge facing operator will be to convince people of the benefits of home automation services such as security, comfort and energy management, and the appeal of well-being and entertainment solutions. To differentiate themselves from international players, telcos must play on their ability to guarantee interoperability between objects and also customer data security and confidentiality. In addition, the actual sale of connected objects could not only generate non-negligible revenues but also attract people into operators' stores and embellish their reputation as an innovator. However, it will be necessary to rethink the distribution networks, develop cross-channel strategies and adapt the merchandizing and in-store experience. This is one reason why Orange has evolved its high-street boutiques into "Smart Stores" since 2015 (20% of its stores in Europe will have adopted this concept by next year).
The IoT market is also an organizational challenge
While IoT clearly presents many opportunities for operators, it also raises organizational difficulties. A decision to move into new businesses such as software or to go for low-margin services implies a significant change in the business model.
All operators today face this substantive question and a few have already created dedicated structures or have made their internal organization more transversal. These new, more agile organizations aim to break down the former silos in the company and drive open innovation and enable numerous pilot projects. They also enable new sales models to be tested, such as revenue sharing with partners and participative financing of start-ups. To date there are few examples of such distinct structures for IoT, and we shall see whether past experience with the digital entities of a number of telcos (Telefonica, Telenor,…) will discourage operators from exploring this path. However, the announced growth in revenues for this market and the need for the operator to transform its business model in consequence, could see this trend increase.