The fast-growing market for machine-to-machine (M2M) communications presents exciting new opportunities for service providers…
Service providers are becoming increasingly aware of the value of supporting M2M traffic and applications, and want to join or move up the M2M value chain. Service providers can reap M2M rewards by entering the market early, pursuing deep involvement and building vibrant partner ecosystems that span many vertical industries.
A burgeoning opportunity
Challenging market conditions are forcing service providers to look for new ways to reduce churn, cut operating costs and increase return on investment (ROI).
As they seek out new opportunities, many service providers are encouraged by positive predictions about M2M market growth. An October 2011 GSMA press release indicated that the M2M communications market will offer service providers’ addressable revenue of nearly US$1.2 trillion by 20201. This is a huge opportunity for service providers to foster growth and build value.
Industries have had M2M capabilities for nearly two decades. The question that arises is: Why M2M — and why now? The answer is: The growing influence of the Internet. It opens the door for billions of smart sensors and connected devices — 24 billion by 2020,2 according to GSMA — to interact and help harvest useful intelligence. As network operators and suppliers of connectivity, service providers are poised to play a significant role in building this Internet of Things.
Finding a role in the M2M market
Service providers have the flexibility to choose their role in the M2M value chain. Small providers may be happy to make money from carrying M2M traffic while Tier 1 providers may want to move up the value chain and generate services revenue. Service providers can typically opt for one of three basic M2M operating models:
- M2M Transport: The service provider sells bandwidth to M2M application providers at a wholesale rate. Commitment is typically limited to offering network bandwidth and guaranteeing quality of service (QoS). An M2M transport offer can be a natural entry point, but service providers will eventually need to adapt and expand their networks to support M2M traffic growth.
- M2M Platform: The service provider adds connectivity support and invests in an M2M server to support traffic and device management capabilities. Other essential capabilities are covered through outsourcing and partnerships. In general, M2M platform providers aim to offer QoS support to enterprises, large verticals and, eventually, individual subscribers.
- M2M Suite: Building on transport and platform capabilities, the service provider increases its M2M focus by offering targeted customer care, billing and provisioning capabilities. To date, few service providers have succeeded in developing and customizing hardware and applications without partner support. But these are realistic options that can be addressed by an appropriate business case.
The M2M market is immense and valuable, but only part of it is accessible to service providers. Alcatel-Lucent estimates that service providers can reach about 15% of the value chain with pure transport offerings. Some service providers think that this number could increase to 30% in a business model that provides M2M platform capabilities and value-added M2M services.
The good news for service providers is that business modeling undertaken by Bell Labs indicates that the M2M business case yields positive results for every operating model. In fact, the results become more positive — in the form of increased net present value (NPV), better ROI and more revenue — with each step further into the value chain. Getting more involved in the M2M market is a smart growth strategy for service providers.
Growing the business
Current business cases and projections point to explosive M2M market growth over the next 10–15 years. With M2M, service providers have an opportunity to achieve positive short-term results and join a revolution that could create a safer, greener and healthier society.
Two key tactics can help service providers use M2M as a springboard for long-term growth:
- Early participation: A quick start is key to building M2M market share and ROI. Average revenue per user (ARPU) and connection will decline as the M2M market matures and becomes commoditized. Early market entrants can target and capture opportunities with high margin and volume. They can also capitalize on the fact that it’s hard to roam between M2M providers.
- Deeper involvement: Greater value chain participation produces more successful M2M business cases. Service providers that offer a full suite of M2M capabilities — traffic and device management, customer care, billing, developer ecosystems — will have even healthier business cases than those offering transport services only.
Overcoming challenges
The M2M market presents a number of new challenges to service providers. For example, M2M connections bring low average monthly revenues compared to those generated by service providers’ traditional high-value subscribers. Volume will be key in determining how this new business model works. Service providers will need to consider infrastructure and organizational adjustments to take on millions of M2M connections and optimize the business model.
One of the big challenges will be to build a vibrant partner ecosystem capable of developing and delivering service concepts that work across industries, markets and borders. The M2M industry is evolving rapidly, and its many players are still working out how to contribute and split effort and revenue. Service providers’ ability to build and manage partnerships will help drive their success.
Investing for the future
Collaboration is essential, but it’s not the only key to M2M success. Service providers must make smart investments that match their M2M ambitions.
Service providers’ capital investments typically focus on 2 key areas:
- Increasing network capacity: Service providers may need to invest to handle the signaling traffic growth generated by M2M services.
- Developing M2M capabilities: Service providers with ambitions beyond transport need platforms that can manage M2M solutions. These platforms may require hardware and software that can support traffic and device management, provisioning, billing and orchestration.
Operating expenses for M2M may be harder to predict, because they are low and don’t increase significantly as service providers extend their capabilities. Providers who develop M2M platform and suite capabilities may have proportionally lower OPEX than those who support transport only.
Collaborating for success
Service providers can help drive M2M market evolution by leveraging their capacity to handle complex communications challenges. Organizations in every industry value a partner with the ability to manage large numbers of connections, high traffic volumes and intricate billing needs. Many are already working with service providers to create new and better M2M applications. For example:
- Power utilities and service providers are working together to develop networks that can support smart metering services.
- Healthcare providers are collaborating with service providers to connect devices that can improve telehealth services.
- Rail companies are using service provider networks and services to link assets and ensure on-time, safe and connected journeys.
The success of M2M depends on this kind of cross-industry collaboration. To earn and maintain a strong M2M value chain position, service providers need business models that can reach across and into many vertical industries. This means developing working relationships — pooling strengths and resources — with new kinds of organizations and partners.
[2] Ibid.
