M2M: dazed and confused?
Caroline Chappell looks at how the value chain of machine-to-machine communications is likely to be distributed and where carriers can benefit as the market takes off.
Machine-to-machine (M2M) communications have long been associated with industrial applications, such as telemetry sensors in processing plants and along pipelines, or RFID (radio frequency identification) tags used in warehouses and across supply chains. Such M2M applications relied on private and/or special purpose radio data networks, although over the past 10 years, they have been migrating to the increasingly robust, general-purpose cellular networks that have been rolled out globally.
Ask Vodafone, Telenor or Sprint – emerging movers and shakers in the next phase of the M2M market – how long they have been in the M2M business and they will claim around 10 years. But it is only in the past six months that US mobile operators have started to report the number of M2M devices they have been adding to their networks, Andy Zimmerman, global managing director of mobility services at Accenture, points out, while the rest of the world is beginning to follow suit.
“M2M is the next new growth story for mobile operators,” Zimmerman explains. “Voice is a commodity service that’s already a zero sum game. Mobile data is an interesting story with some room for business model flexibility round smartphones and packages. Operators are making strategic moves here, but with Apple in the equation, we’re starting to see the end game for mobile data revenues in two to three years’ time. M2M, on the other hand, has the potential to be far bigger than the current telco market.”
Break out of the niche
This is because M2M capabilities are about to break out of their previously unexciting niches to infiltrate any and every type of device on the planet. Ubiquitous, low-cost mobile connectivity is coinciding with the decreasing price of M2M devices – the chips embedded into larger hosts that communicate with M2M applications. Together they add up to a potent opportunity for a world of connected devices well beyond the limited number that are currently hooked up to networks. Industry watchers suggest that around a trillion devices could be connected in 20 years’ time compared to the mere millions participating in M2M applications today.
And as networks go all-IP, the result could be an “internet of things” communicating with each other. Yiru Zhong, Frost & Sullivan’s ICT analyst, Europe, points out that China is already talking about a national plan for the Internet of Things (IOT).
Mobile operators want to be right at the heart of the connected devices revolution. Late last year, Sprint formed its emerging solutions business unit “to place a laser focus on the M2M space,” says Tom Nelson, group manager, partner programs of the emerging solutions unit. “This whole area is exploding across a number of different areas – asset and people tracking, digital signage, fleet telematics, healthcare, insurance, retail point of sale, smart metering and consumer devices.” In fact, the Amazon Kindle – launched in 2009 – and this year’s launch of the Apple iPad, both market-changing consumer devices with built-in wireless connectivity, are credited with opening many companies’ eyes to the possibilities of the broader universe of connected devices.
A universe of collected devices
Connected devices, embedded mobile, IOT, M2M – the number of terms used to describe this “exploding” opportunity are growing. M2M is considered by some market players to be a sub-category of the connected devices universe while to others, it is a completely separate category of non-consumer- oriented connected devices.
Erik Brenneis, head of smart services at Vodafone’s M2M venture, Vodafone Global Enterprise, further differentiates between connected consumer devices and personal mobile devices. In the case of the former, the connected device company has the relationship with the customer, not the operator. “Amazon Kindle buys airtime for hundreds of thousands of book downloads and bundles this into a service for its end customers so they don’t even know which mobile operator they are using,” Brenneis explains. Now satnav companies, car manufacturers and white goods companies are getting in on the act. Vodafone Global Enterprise has a deal with Tomtom in Europe under which Tomtom is rolling out wireless-enabled satnav systems to millions of customers, connected in M2M mode to its traffic data and other applications across Vodafone’s network. The intelligent fridge, a one-time symbol of the connected consumer device of the future, has yet to come to market but connected cameras, digital picture frames and other consumer electronic items are seen by some market watchers as the M2M area with most potential.
The scale is huge
Zhong, however, disagrees. “I can’t see that consumer devices such as e-readers or digital photo frames will have higher revenue-generating ability than market sectors that are driven by regulatory requirements, such as utilities and automotive,” she says. Governments across the world are beginning to mandate the implementation of smart metering, for example. In the EU, the 2009 Internal Market for Electricity and Gas Directives recommend that member states “ensure the implementation of intelligent metering systems”, with a target of 80% of the EU population becoming equipped with smart meters by 2020. This recommendation is likely to become mandatory if the EU detects any national dragging of feet. Italy and Sweden lead Europe in the deployment of smart meters while Vodafone Global Enterprise is behind a British Gas roll-out of one million smart meters in the UK over the next two years. Brenneis attributes a large proportion of the 40% to 50% growth rates it is seeing in the M2M market to regulatory requirements, expecting a further boost from European legislation that will mandate the installation of M2M devices in vehicles. Such devices will automatically alert the emergency services in the event of a crash.
The high hopes of M2M market growth and revenues are founded on very small beginnings. In 2008, fewer than 1% of Deutsche Telekom’s mobile subscriptions were M2M and even the largest operators like AT&T and Vodafone number M2M-connected units in the low millions. ARPUs are very low compared with mobile phone ARPUs and “not all connections will yield the same level of ARPU depending on whether they have always-on connectivity or send data in batch mode, and the value of the data they are transmitting,” Zhong says. Nevertheless, Accenture’s Zimmerman does the sums and points out that even if the market scales to 100 billion devices, rather than the forecast trillion, and each device yields $6 of revenue a year rather than $12, “the scale of this market is huge”.
Emerging value chains
The questions for operators are how much of the projected revenue can they hang on to as the M2M market develops and how can they avoid M2M becoming an over-the- top play like mobile data and content delivery, where telcos are increasingly being reduced to a dumb delivery pipe and/or “relegated to the position of provider of last mile facilities,” according to Michael Gazier, senior director in the office of the CTO at Ciena. He takes the position that new M2M applications are coinciding with the rise to prominence of data centres in the cloud. M2M applications will, of course, run in the cloud, in data centres that are increasingly rented as a service from non-telco cloud providers.
Such cloud providers, including Amazon, Google and Akamai, are building their own networks, which Gazier views as “alternative internets” out to the edge, controlling the quality of service, location and security of applications like M2M within their networked data centre domain.
Mobile operators are therefore feeling their way into the new, emerging and today, highly fragmented, M2M value chains, with different aims and propositions according to their perceived strengths and assets. At the same time, a new class of network-agnostic M2M intermediaries is appearing which can provide connectivity across multiple mobile operator networks across the world. One of the best known of these is five-year-old M2M connectivity specialist Jasper Wireless, in which KPN bought a stake this year. Like Vodafone Global Enterprise, Jasper Wireless enables M2M value-chain partners to bundle connectivity with their applications and devices. But whereas Vodafone wants to exploit its own properties’ footprints globally, Jasper Wireless is working with partners in different areas of the globe, including AT&T, Rogers, KPN, Telcel and Vimpelcom with announcements pending regarding new partners in Asia-Pac.
Macario Namie, senior director, product marketing, at Jasper Wireless, argues that smart metering, automotive, satnav and other companies with M2M interests come to Jasper Wireless because they have no experience of being a network service provider. “In the connected devices market, the M2M device company has the relationship with the customer so it is responsible for provisioning, connecting and managing all end-customer devices. It needs an OSS/BSS stack to do this and there is no way such a company is going to go and buy a $1 billion BSS/OSS stack from Amdocs,” Namie says. “The operational platform must be purpose-built for its cost point and should be tightly integrated with multiple network operators for geographic range.”
Jasper Wireless provides such a set of OSS/BSS to would-be M2M players, as well as helping them with the business case for a connected device, device development, and the negotiation of SIMs and rate plans. As AT&T has aligned itself with Jasper, Verizon has teamed with Qualcomm to create its own intermediary, nPhase, though this seems to be little more than a marketing front at present.
Distribution of value
Vodafone’s Brenneis believes that many operators “will be sceptical about using key system components that are owned by a competitor like KPN. We don’t believe Jasper is the way to go because we wouldn’t be able to differentiate if we used its platform. Our strength lies in the level of optimisation and integration we have between our dedicated platform and our network.” Sprint has also decided to set up its own organisation to target the M2M market, leveraging the wholesale platform it has developed to support its mobile virtual network operator (MVNO) business, but it aims to differentiate itself by the range of connectivity options it can offer. “Often hybrid network solutions are needed to meet the complete needs of the customer,” Nelson remarks. “We take customers through all the possible options, including CDMA, 2G, 3G, 4G, iDEN and even Wifi, Zigbee (a competitor to Bluetooth) and RFID.” Sprint is unique in its ability to offer such a range of choice at present, from its 1990s iDEN radio data network to 4G Wimax.
Fabio Mungo, CTO for Accenture Mobility Operated Services (AMOS), Accenture’s managed platform for mobile data application development and hosting, points out: “If you analyse the way value is distributed across the M2M value chain, the connectivity component accounts for 10% to 15% of the total value.”
Mungo and Zimmerman believe that telcos will need to move into vertical markets, such as healthcare, and telematics, to help enterprise customers wring business value out of M2M applications. This is classic Accenture territory since “the integration of vertical applications with end users and third-party infrastructure needs deep industry knowledge and systems integration expertise. Most carriers are in no position to offer this,” Zimmerman says. By partnering with Accenture and linking to the AMOS platform, Zimmerman suggests that mobile operators will put themselves in a much better position to “joint sell into promising vertical markets for M2M” on a revenue share basis. Accenture expects to announce “a series of such arrangements in the coming months” where mobile operators have “integrated AMOS into their infrastructure and have agreed to sell a couple of M2M applications, either pre-built or developed for a third party.”
The possibilities associated with M2M are at last capturing the imagination of all kinds of companies and this market is set to accelerate over the next five years. During that time, today’s confused and fragmented M2M value chain is likely to shake out and become more coherent and established. Because M2M is inherently about connectivity, operators will have a large part to play and they have the opportunity now to start shaping their future roles. They need to decide whether to get into the market quickly through partnership with companies such as Jasper or Accenture or whether M2M is strategic and large enough for them to build their own business as Sprint, Vodafone, Orange, Telefonica and Telenor are doing. As for wholesale carriers looking for the next big service they can offer mobile operators, “we’ll continue to watch this market with interest and course-correct as needed if growth starts to go in a different direction from the accelerated business-as-usual growth we currently expect,” according to Max Clauson, director of offer management for Level 3.
Implications for wholesale
Mobile operators are at the sharp end of the evolving M2M market and need to adjust their business models, back-office systems and even their radio access network capabilities, according to analyst firm ABI Research, to deal successfully with growing volumes of M2M traffic. But such changes have not yet translated into opportunities for the wholesale market.
“We are anticipating significant growth in traffic volumes over the next five years and beyond in the mobile market. But M2M growth is not about large objects or streaming video like the mobile broadband market,” says Clauson. “M2M involves a high volume of relatively low-bandwidth messages – it will look similar to the exchange of SMS messages. It’s still an interesting market to us but because we’re built to support scale and can provide a range of transport services to support cell towers and mobile data aggregation points, we don’t think we will need to change anything to support M2M.”
“There is no immediate surge in traffic demand associated with M2M,” Frost & Sullivan’s Zhong agrees. “Data transfer rates are still low and traffic is batched rather than real-time. Smart metering, for example, will just involve data rather than video and can be sent off-peak across the network. However, once we see M2M widely used in surveillance applications such as in oil pipeline security or in healthcare, the need to support constant video streams will become significant and customers will be prepared to pay for high quality, real-time visual information. This will give the wholesale community the opportunity to supply higher margin, class of service connectivity.”
DT ICSS similarly regards M2M as an access network challenge: from a wholesale perspective, it will require the same connectivity capabilities as any other application, including the existing ability for M2M data to be transported across IP and legacy networks. Zhong suggests that international carriers, such as DT ICSS, will benefit from M2M demand for global connectivity. Vodafone Global Enterprise and Jasper Wireless, for example, tout their international footprints as a selling point to automotive, white goods and consumer device manufacturers which want to roll out the same M2M devices and applications in multiple regions.
Carriers are aware that they will need to deal with the looming issue of IP addressing. Sam Lucero, practice director, M2M connectivity, at ABI Research, points out that at the beginning of 2010, the Numbers Resource Organisation reported that less than 10% of IPv4 addresses remain unallocated. As more types of M2M devices connect to networks – and ABI Research forecasts that there will be 225 million of these by 2014 – the shortage of addresses will become particularly acute outside north America, where IPv4 address allocations were much lower to start with. This means that non-US carriers may have to implement IPv6 ahead of their north American counterparts. As far as Level 3 is concerned: “IPv6 is on our roadmap, we recognise the need for it and we intend to roll it out but the constraints are not there yet so we don’t have a timescale for this,” Clauson says.