M2M Business Briefing 2013: Cyber society

Texting cows…crime-busting sensors… smart delivery vans - the future of mobile telephony may lie in the constant chatter of machines, not humans. Richard Irving investigates.

Vincent Crocq no longer spends countless chilly nights pacing the mud-splattered floor of his calving barn, waiting for Mother Nature to take her course.

In fact, in the two years since he signed up to a state-of-the-art wireless monitoring system, he has rarely had to leave the comfort of his bed at all. For every one of his 80-odd Holstein cows, which graze on the lush pastures around the hamlet of Gaec des Jums in Brittany, are fitted with sensors that can detect when their waters break. Those sensors pass the information, via a data collection device in the barn, to the farmer’s mobile phone on his bedside table.

These days, when Mother Nature comes calling, Crocq gets a text.

The system is the brainchild of Medria Elevage, a small agricultural firm based in Chateaugiron, about one hour’s drive south of the French fishing port of St-Malo. The company, which currently generates revenues of around E4 million a year, was founded in 2004 by Jean-Pierre Lemonnier, the son of a dairy farmer who trained as a wireless engineer with both Alcatel and Lucent. Lemonnier hopes that his cutting-edge technology, combined with a specially designed SIM card, will bring animal husbandry into the new millennium.

For his part, Crocq, whose family has been raising cattle the old way for generations, is hooked. A single uninterrupted night’s sleep is alone worth the E5 a month that it costs to run the system through a Deutsche Telekom mobile tariff. The gains in productivity are an added, though much-welcome bonus: “It’s a real boost to my lifestyle – I do not need to get up needlessly during the night”, he says. “But more importantly, I am able to run my business far more efficiently.”

So excited is Deutsche Telekom at Medria’s potential, that the operator has signed a partnership deal to help roll out the monitoring system to 5,000 farms across Germany.

The firm is one of more than one hundred digital developers that feature on DT’s new M2M Marketplace – an online arena where buyers and sellers of so-called “Machine-to-machine (M2M) devices can meet to develop and market new applications.

Medria – and thousands of other start-ups like it – represents the future of the wireless industry – a brave new world that could be worth anything up to $1 trillion a year, where machines, not humans will end up doing most of the talking. Also known as the “internet of things”, the market is already redefining mobile telephony and DT, like many of its competitors, wants a big slice of the action.

Hype or reality?
An oft-quoted study into the potential for the market, initially published by Ericsson in 2010 but still widely regarded as being relevant, suggested that there are likely to be four times more machines connected over fixed line and mobile networks than humans by 2020.

The network equipment maker expects the M2M market to grow by a staggering 60% a year between now and the end of the decade, by which time, it forecasts, there will around 50 billion devices hooked up to networks in one form or another. Around 5 billion of those, it estimates, will use wireless technologies.

Some industry observers are more cautious. Matt Hatton, a London-based analyst at Machina Research, for example, estimates that the number of M2M connections will jump from around 1 billion today, to 12 billion by 2020 – a compound annual growth rate of 28%. Analysys Mason, meanwhile, puts the current number of connected devices at just 100 million but reckons that this will explode twentyfold by 2021 to 2.1 billion devices.

This huge disparity in forecasts stems from the fact that the internet of things means different things to different people and that the M2M arena is not so much a market in its own right, but a huge pool of diverse products and services with almost limitless potential.

One European mobile operator has highlighted no fewer than 180 separate business verticals where it sees growth potential, although most operators prefer to stick to a handful of sectors ranging from transport and logistics to the connected home, healthcare, retail and agriculture.

Whatever the predictions, it is a measure of the wireless market that it consistently remains one of the few trillion dollar industries capable of reinventing itself for the modern age.

And with the advent of M2M, mobile operators have done it again. Already, some of the bigger players are delivering profits. DT says that its M2M unit will generate revenues of more than E1 billion-a-year within four years, while Vodafone, which does not break out key financial indicators for its stand-alone M2M operation, says that connections are growing at between 30-40% a year. Orange Business Services, meanwhile, is on track to break through the 3 million connections barrier in the coming months and claims to command around 10% of the European market.

Fuelling the potential for growth is a raft of regulatory initiatives coming out of the European Union that, among other things, will require utility companies to install smart electricity meters in 80% of households by 2020 and wireless-enabled safety features in most new cars by 2015.

But the impetus is also coming from industry itself: as the price of wireless electronics continues to fall – according to PA Consulting, the average M2M module now costs less than $10 – manufacturers are looking to cut costs and bolster efficiencies by encouraging machines to talk to one another.

Operators, too, are playing their part, expanding network coverage through roaming agreements and strategic alliances and investing in increasingly sophisticated operating systems that allow customers to turn devices on and off whenever they want and to perform over-the-air upgrades.

The floodgates open
The result is a veritable torrent of new applications coursing through the R&D pipeline and slated to hit the market over the next 18 months. Macario Namie, vice president of marketing at Jasper Wireless effectively sums up the mood thus: “I have the great privilege of seeing what’s under development right now and I can say that 2014 will be the banner year for M2M deployments.”

Namie should know: his company provides the infrastructure services for six of the world’s top 20 M2M providers.

“This is a very, very exciting time”, he adds.

Some unlikely players are already ahead of the game; In Santa Cruz, for example, police have cut the crime rate by 19% after trialing PredPol, an M2M-based application that predicts where muggers and burglars are likely to hit next. Meanwhile, Ocado, the British online grocery store, has rolled out of an M2M module the size of a thumbnail that monitors temperature fluctuations in its fleet of 700 delivery vans.

You name the problem, says Russell Mosburg, a director of emerging solutions in Sprint’s M2M unit, and someone, somewhere is working on an M2M application to solve it.

“When you start to look at the innovation that is happening around the connected device, then the growth predictions really do start to become believable. There is a huge amount of development work currently being tried and tested out in the field.”

Telus’s Brian DeMuy agrees: “A lot of people may be jaded to the narrative of hockey stick growth, but we are unquestionably at an inflexion point.” DeMuy, a director of products and services in the Canadian operator’s M2M unit adds: “Quite definitively, demand is outpacing our ability to supply the market and that is rarely the case around mobile applications in general.”

As growth predictions become more reliable, so too will revenue expectations.

Analysys Mason estimates that revenues associated with M2M activity among mobile operators will surge from $5.7 billion in 2011 to just under $51 billion in 2021 while Machina Research says operators will probably hit the $50 billion mark a year earlier.

The US and China will lead the way, accounting for around 38% of total M2M revenues by 2020, although the European market could be worth as much as $260 billion a year. In all, 82% of all M2M revenues by 2020 will come from the top twenty mobile markets.

These are big numbers in anyone’s books but they mask a critical challenge for mobile operators: for while the market is potentially massive, the revenues that network operators might expect to earn from traffic flows alone are tiny by comparison. This is because most M2M applications require very little bandwidth to run: the majority of devices need only send a tiny burst of data over infrequent, albeit regular intervals and indeed the majority of applications can be measured in terms of the number of kilobytes of data, rather than megabytes that they consume.

KORE Wireless, for example, reckons that every M2M device in existence in 2016 will be able to run on a sliver of just 5 mHz of spectrum on a single 2G network. “You could aggregate the capacity demands of every M2M device out there today and it would pale into insignificance compared to the demands on the network during the launch of a new i-device”, agrees Jasper’s Namie.

That might soothe any lurking fears that the exploding M2M market could overload networks already creaking under the weight of the tablet and smart phone revolution. After all, any network that is provisioned to cope with the growth in bandwidth-hogging devices will surely be able to absorb the growth in M2M traffic. But traffic revenues from M2M devices will not alone compensate for the impeding saturation of the handset market.

Indeed, Machina’s Hatton estimates that mobile operators will make as little as E4bn in total a year from M2M traffic alone by 2020 – equivalent to just 1.4% of total mobile data revenues and a tiny fraction ahead of where it stands today.

The connectivity conundrum
In the end, as ever, it comes down to that age old conundrum: should mobile operators bow to what some observers say is their destiny and content themselves with the business of providing fat but well-utilised “pipes”, or should they stride out along the value chain and fight for their share of higher margin add-on business?

Martin Croome at Option Wireless, a maker of M2M modules, maintains that carriers should concentrate on what they do best: “I’m baffled as to why operators continually try to avoid thinking of themselves as pipes”, he says. If carriers were to stick to the basics and concentrate on optimizing connectivity, he argues, they would be able to come up with flexible pricing structures that could support M2M innovation at the grass-roots level. “The carriers need to step back and let the little guys win.”

Not everyone agrees. “If all that mobile operators end up doing in the M2M market is carrying traffic, then they are not going to be in a good place”, Hatton says. “There’s a huge amount of money to be made from moving up the value chain, but fortune will only favour those who move aggressively.”

Hatton believes that the market could be worth upwards of $338 billion a year to operators if they can capture the entire M2M proposition from end-to-end, though in reality, he expects them to make around $50 billion a year, largely on the back of value-added services such as software integration and data hosting.

But there are considerable challenges with such an approach – aiming too high up the value chain can be both risky and expensive in terms of investment while overly cautious operators risk handing vast swathes of the most profitable sectors to the likes of Google, which seemingly has a considerable risk appetite for M2M applications in and around the home.

“We believe we should be around 20% up the value chain”, says Hans Dahlberg, head of global M2M services for TeliaSonera. Dahlberg, whose firm has “sanity-checked” Ericcson’s predictions and believes the forecasts are robust, says that the key priority is to ensure that networks have good coverage: “A lot of M2M technology is behind thick walls or in basements, so the first thing is to ensure that you can pick up a signal.”

Only then, he adds, is it worth considering what services to bolt on: “The higher you go up the value chain, the more it is going to cost in terms of investment and the less margin you might end up with. If you stay relatively low, you can still attack the market. With every vertical you may only catch 10-20% of the possible revenue, but there are a lot of verticals and it soon adds up.”

Vodafone, too, has the appetite to edge out along the value chain. It will provide pre-tested hardware that can plug straight into a customer’s own device, connectivity via a dedicated SIM card and any IT help that a customer might need to turn all that data into meaningful information.

The aim, says Marc Saulter, head of global M2M business development, is to strip as much complexity out of the process as possible, in order to speed up the time it takes for a customer to get his product to market and for the operator to start generating revenues.

But in a market where commoditisation will undoubtedly rear its head at every turn, it is perhaps Germany’s DT that has hit on the one link in the chain that could prove the most resilient to eroding margins. For while the price of hardware is already falling sharply and the supply of integration services is becoming increasingly abundant, the M2M Marketplace sits alone as a unique service where developers and end customers can find each other.

Jürgen Hase, head of DT’s M2M Competence Centre says the initiative is already profitable. Developers must pay a notional charge to put their products on to the market and there is an expectation that DT will seek a revenue-sharing agreement for any devices that take off. But there is no requirement for any party in the Marketplace to sign up to DT’s mobile network.

“It’s important that the initiative is seen to be neutral – an ecosystem where all the different players can come together”, says Hase. “A lot of the companies developing devices in this arena are very small and it can be difficult to break into the global market”, he adds.

In the end, it all comes back to the cows. “I like the cow story. It shows that few markets, if any, have as much potential for growth as the M2M sector”, says Hase. You herd it here first.

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