analysys_mason_m2m_iot_operator_opportunities_apr2016

M2M AND INTERNET OF THINGS (IOT) OPPORTUNITIES FOR TELECOMS OPERATORS

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Contents

Introduction p 3

Operators’ strategies for IoT are guided by three main motives p 4

M2M is a USD8 billion opportunity in Asia–Pacific that is attracting the interest of the region’s CSPs p 6

Recent IoT investments show telecoms operators (gradually) moving up the value chain p 8

Telehealth remains a small but interesting vertical for CSPs to target in the next 5 years p10

LPWA: Established operators need to rethink their strategy or risk failure p12

Telecoms operators need to maintain relevance in M2M/IoT by building on their strengths p14

Analysys Mason’s expertise in IoT and M2M p16

About Analysys Mason p18

Facing a relatively flat market for core services, IoT and M2M is a rare bright spot offering significant growth potential and the opportunity to take a role in new vertical markets, such as automotive, healthcare and smart cities. Operators though have many challenges with IoT. Connectivity, the entry point into IoT, is only one component of a solution and one that commands only a small share of revenues. Operators are trying to understand where and how to play a role in IoT.

This brochure outlines some of our thinking on these important topics, and describes our past project experience. Analysys Mason helps clients in all geographies and parts of the value chain to develop their approach to IoT. Our assignments range from rapid reviews of existing plans to full strategy development.

The articles featured in the brochure cover the following topics:

• Operators’ strategies for IoT are guided by three main motives. We provide an overview of three motivations that are driving the telecoms sector’s involvement in IoT.

• M2M is a USD8 billion opportunity in Asia–Pacific that is attracting the interest of the region’s CSPs. This article explores the M2M market in Asia–Pacific, and examines how CSPs can pursue opportunities in a variety of vertical markets.

• Recent IoT investments show telecoms operators (gradually) moving up the value chain. We explore what IoT investments by telecoms operators tell us about their involvement in IoT.

• Telehealth remains a small but interesting vertical for CSPs to target in the next 5 years. This article examines the telehealth opportunity and the challenges for CSPs entering the market.

• LPWA: Established operators need to rethink their strategy or risk failure. Operators also need to defend their core connectivity role. This article builds on Clayton Christensen’s thinking on disruptive technology to illustrate how telecoms operators can use LPWA technology to their advantage.

• Telecoms operators need to maintain relevance in M2M/IoT by building on their strengths. In this piece, we look at how operators can build on their own unique strengths to maintain relevance in IoT.

We hope that you find these opinion pieces and commentary of interest and value. We welcome your feedback and encourage you to contact the authors directly if you would like to discuss any of the points raised, or are looking to understand how a specific issue or trend will affect your business.

We look forward to working with you.

TOM REBBECK Research Director [email protected]

Machine to machine (M2M) and the broader Internet of Things (IoT) market represent a key opportunity for telecoms operators.

Introduction

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If claims for the Internet of Things (IoT) are to be believed it will involve billions of new connections,1 generate trillions of dollars in economic value2 and have an impact on every vertical market. Against this expectation, telecoms operators looking at their existing IoT-related activities may feel underwhelmed. Operators’ base of machine-to-machine (M2M)/IoT-related connections is dwarfed by their core business,3 and each M2M SIM typically generates just a fraction of the ARPU of a handset.

The IoT market is only just beginning to emerge, and the telecoms industry (like many other sectors) is just beginning to understand how to address IoT. In this article, we provide an overview of three motives that are guiding the telecoms sector’s involvement in IoT.

OFFERING MORE THAN CONNECTIVITY IS LIKELY TO DILUTE MARGINS

An obvious ambition for an operator is to earn a larger share of spend on IoT by moving along the value chain. However, the

decision to provide more than connectivity is not as straightforward as it may seem. From estimates produced by Analysys Mason (see Figure 1), operators may well dilute their margins if they take on a wider role in IoT, for example by providing a complete solution that incorporates device, application, service provision and integration as well as connectivity.

If operators take up a different position in the value chain they will also face new competitors, from starts-ups to Internet giants, against which they may have few unique assets.5 All of this means that operators are understandably cautious when deciding where to invest in IoT.

Despite this caution, operators are investing in IoT for three main reasons, as outlined below. They are moving up the value chain in all three cases, but they are not necessarily doing this to create incremental margin: their motivations are often more closely tied to the core connectivity business.

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Operators’ strategies for IoT are guided by three main motives

An obvious ambition for an operator is to earn a larger share of spend on IoT by moving along the value chain. However, the decision to provide more than connectivity is not as straightforward as it may seem.

“ ” TOM REBBECK

Research Director

An obvious ambition for an operator is to earn a larger share of spend on IoT by moving along the value chain.“

”FIGURE 1: GENERIC VALUE CHAIN FOR IOT SERVICES, INCLUDING SHARE OF VALUE AND TYPICAL EBIT MARGIN FOR EACH COMPONENT4 [SOURCE: ANALYSYS MASON, 2015]

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MOTIVE 1: USE IOT TO GENERATE NEW CONNECTIVITY REVENUE, ESPECIALLY IN AUTOMOTIVE

The connected-car market involves millions of new mobile connections, each of which could create demand for large quantities of data, making it one of the few M2M segments with high ARPUs.6 This makes it an attractive opportunity for operators, purely on the grounds of connectivity revenue. In Q3 2015 alone, AT&T added more than 1 million new cars to its network, taking the total to 5.8 million.7 By the end of 2020, Analysys Mason expects that more than 250 million passenger vehicles will have embedded connectivity.8

Operators’ aim is to win new connectivity contracts with car companies. They will do this by competing on the usual

parameters (i.e. coverage and connectivity price) but also by providing the manufacturers with additional services such as security, and even providing apps from third parties, as AT&T is doing with Drive. Operators may generate some upside from these additional services, but their central motivation is to win (and defend) connectivity contracts, rather than earn incremental revenue or margin.

MOTIVE 2: USE IOT TO SUPPORT AND DEFEND EXISTING BUSINESS

The second motive for exploring IoT is to protect existing connectivity revenue. Smart-home services are one area that operators like AT&T, Comcast, Deutsche Telekom (DT) and others are experimenting with. We do not believe that the central motive is, or should be, to generate significant incremental income or margin from these propositions.9

However, by offering a smart-home solution, an operator may be able to defend its core broadband revenue, protect against churn and help to justify price increases.

MOTIVE 3: USE IOT TO ENTER NEW VERTICAL MARKETS

In some sectors, potential connectivity revenue alone is not enough to attract the interest of operators. Consequently, they are exploring ways to generate revenue from deeper involvement in vertical market solutions.

An example of this is healthcare. As shown by Analysys Mason’s research,10 the volume of IoT connections from healthcare will be low – even by 2020, there will probably be fewer than 50 million health devices with a dedicated connection, and the average volume of data used by these devices will be relatively low. Purely in terms of

connectivity revenue, healthcare does not warrant investment. However, Telstra,

Telefónica, DT and others are attempting to move up the value chain by offering a platform of connectivity, hosting, security, BSS and analytics that can be opened up to healthcare companies. Most operators are not providing end-to-end health solutions, as this is typically left to healthcare specialists. Instead, they are trying to generate incremental revenue on top of connectivity by building on aspects where they already have scale.

WE EXPECT TELECOMS OPERATOR THINKING ON IOT TO MATURE FURTHER IN 2016

In 2016, we expect to see operators mature in their thinking regarding which aspects of IoT to address, and which to leave alone. Connectivity is likely to remain central to operator strategies, either as the main focus (as with the connected car) or as the entry point for providing a complete solution (as in healthcare). Despite their different motives, operators are broadly following a similar approach – by combining connectivity and other core capabilities (such as security and BSS) as part of a platform which can be open to third parties that can further enhance the offering.11

Analysys Mason helps clients in all geographies and parts of the value chain to develop their approach to IoT. Our assignments range from rapid reviews of existing plans to full strategy development.

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1 For example, Huawei is predicting 100 billion connected devices by 2025; see http://www.huawei.com/minisite/gci/en/index.html.2 For example, Cisco has predicted that USD14.4 trillion of value is at stake; see http://internetofeverything.cisco.com/sites/default/files/docs/en/ioe-value-index_FAQs.pdf.3 Analysys Mason estimates that M2M accounted for fewer than 4% of mobile connections worldwide at the end of 2015, and just over 1% of total connectivity revenue.4 The value chain, share of value and EBIT margin will all vary considerably by IoT service.

9 And, in any case, many of the underlying solutions (such as locks, heating or security) will be provided or supported by partners, which will limit operators’ share of the revenue.10 See The outlook for telehealth: opportunities for CSPs, available at http://www.analysysmason.com/Research/Content/Reports/telehealth-opportunity-CSPs-Sep2015-RDME0/#07%20September%202015.11 For further discussion on how platforms can form part of an operator’s approach to IoT and M2M, see http://www.analysysmason.com/Research/Content/Reports/M2M-IoT-operators-approaches-May2015/#12%20May%202015.

5 For discussion of an operator assets in M2M and IoT, see Operators’ strengths in M2M and IoT may lie beyond ownership of network or spectrum assets, at http://www.analysysmason.com/About-Us/News/Insight/M2M-operator-strengths-Nov2014/.6 For example, Tesla’s over-the-air firmware upgrades are typically multiple gigabytes in size.7 See http://www.att.com/Investor/Earnings/3q15/ib_final_3q15.pdf.8 See http://www.analysysmason.com/Research/Content/Reports/connected-cars-forecast-Jun2014-RDME0/.

Questions? Please feel free to contact Tom Rebbeck, Research Director, at [email protected]

Revenue from mobile M2M will grow by an estimated USD8.0 billion during 2013–2019 in Asia–Pacific, and will help to compensate for a decline in the revenue generated by mobile voice, mobile messaging, and fixed voice and narrowband services, which will contract by USD17.4 billion during the same period (see Figure 1). This is one of the key findings from our strategic report M2M in Asia–Pacific: market opportunities and challenges for CSPs, which discusses the dynamic and diverse M2M market in Asia–Pacific, and examines how CSPs can pursue IoT and M2M opportunities in a variety of vertical markets. This article summarises some of the headlines from this report.

M2M WILL ADD USD8 BILLION IN CUMULATIVE SERVICE REVENUE TO THE VALUE OF THE ASIA–PACIFIC TELECOMS MARKET DURING 2013–2019

Revenue from mobile M2M will help to compensate CSPs for a decline in the revenue generated by mobile voice, mobile messaging, and fixed voice and narrowband services, which will contract by USD17.4 billion during the same period.

In the developed Asia–Pacific region, CSPs’ share of mobile M2M service revenue will amount to USD2.0 billion between 2013 and 2019

The number of cellular M2M device connections in developed Asia–Pacific (DVAP) will increase from 18.3 million in 2014 to 59.2 million in 2019, at a CAGR of 26.4%. The strong adoption of M2M in DVAP is partly driven by the high cost of labour, where the monthly average wage is about 4.5 times higher than in emerging Asia–Pacific (EMAP). The business case for deploying an M2M solution to improve the efficiency of business processes is justified when the cost of deploying an M2M solution is less expensive than the equivalent cost of manpower. It is easier for firms to make an M2M business case in markets where wages are higher – as they are in DVAP.

In the emerging Asia–Pacific region, CSPs’ share of mobile M2M service revenue will reach USD6.0 billion during 2013–2019

The number of cellular M2M device connections in EMAP will increase from 63.1 million in 2014 to 250 million in 2019, at a CAGR of 31.6%. Growth in the M2M market in EMAP is largely driven by China, while M2M adoption in other countries in the region is slower. Government led initiatives and policies will drive the adoption of M2M in countries like India and Indonesia.

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M2M is a USD8 billion opportunity in Asia–Pacific that is attracting the interest of the region’s CSPs

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MORGAN MULLOOLY Analyst M2M business is an attractive option for

communications service providers (CSPs) that are aiming to develop new revenue streams from the digital economy. ”“

FIGURE 1: TELECOMS RETAIL REVENUE GROWTH BY SERVICE TYPE, ASIA–PACIFIC, 2013–2019 [SOURCE: ANALYSYS MASON, 2015]

SEVERAL FACTORS HAVE ALIGNED TO MAKE IT A SUITABLE TIME FOR CSPS IN ASIA–PACIFIC TO DEVELOP AN M2M LINE OF BUSINESS

Three of the factors that will drive the adoption of M2M in Asia–Pacific are as follows:

• In the private sector, the pursuit for a competitive edge is driving companies to invest in connected machinery, equipment, products and services: Companies in Asia–Pacific are determined to remain competitive within the worldwide economy, and want to use M2M to add more features and value to their offerings, rather than simply as a means to compete on price. To give just one example, Vodafone is helping ICE – a Chinese cleaning equipment company – to compete with western market leaders, on more than just price. M2M connectivity helps ICE make its equipment smart and connected, and helps ICE develop a reputation for advanced high quality machinery outside of its domestic market.

• Many governmental agencies in Asia–Pacific are promoting the adoption of M2M: Many Asia–Pacific countries, including China, India, Malaysia and Singapore, have formulated national M2M policies and policy roadmaps to promote M2M deployment to improve the lives of citizens in their cities and to also boost industrial activity.1

• Consumer demand for smart connected products is rising: Consumer demand for digital lifestyle goods and services (such as connected cars and smart homes) is increasing as mobile broadband connectivity becomes more ubiquitous in the region.

CSPS NEED TO UNDERSTAND MANY CHALLENGES ASSOCIATED WITH PROVIDING M2M SERVICES IN ASIA–PACIFIC

Three challenges affecting the ability of CSPs to provide M2M services in the APAC region are:

• The regulations around M2M – including roaming, taxation and data usage – are prohibitive or unclear in many countries: Regulators and governments impose various conditions on M2M service providers that relate to roaming, customer data and communications, taxation, lawful interception, access to premises, and other issues. Uncertainty over the regulatory feasibility of deploying telecoms and cloud-based services in a given country can often lead to delays.

• Many CSPs do not have wide network coverage, which is essential for some M2M applications, such as asset tracking: The breadth and quality of cellular infrastructure varies significantly by country in Asia–Pacific. Satellite service providers such as Iridium Communications and Orbcomm are rapidly expanding their M2M

activities and are well placed to win M2M contracts in the APAC M2M market because they can boast more-extensive geographical coverage than mobile CSPs, which have mainly focused on urban coverage – particularly in EMAP.

• CSPs will need to be cautious when choosing to partner with local or worldwide players, judging each opportunity on its own merits: Local partner solutions are often very simple and straightforward, but are still a good fit for the local requirements. However, in many countries in Asia–Pacific there are only a few local partners in some parts of the value chain, including application service providers and application enablement platforms providers. Worldwide players’ solutions generally have more-advanced features, but end users in the local market may not need them.

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Questions? Please feel free to contact Morgan Mullooly, Analyst, at [email protected]

1 For example see http://www.analysysmason.com/Research/Content/Comments/M2M-roadmap-India-Apr2015-RDME0-RDRP0/

The number of cellular M2M device connections in developed Asia–Pacific (DVAP) will increase from 18.3 million in 2014 to 59.2 million in 2019, at a CAGR of 26.4%.

“ ”

TOM REBBECK Research Director Recent investments by telecoms operators are

encouraging, but more are needed for operators to make significant moves along the value chain.

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Recent IoT investments show telecoms operators (gradually) moving up the value chain

”“

In mid-2014, when Analysys Mason reviewed more than 100 Internet of Things (IoT) investments and M&A deals, only 5 of these involved telecoms operators (and 4 of these were Vodafone investments). At the time, we discussed the gap between telecoms operators’ stated ambition to move up the value chain and their actions (or lack of them). In 2015, however, the picture is changing. In the first half of 2015 alone, at least eight telecoms operators have made one or more investments in an IoT company (with notable activity summarised in the table below). So, what do the latest investments tell us about telecoms operators’ involvement in IoT?

• Telecoms operators are cautiously exploring a different role in the value chain. Investments in SIGFOX look like defensive moves by telecoms operators trying to shore up future connectivity revenue. All other investments (and arguably even the SIGFOX deal) look like an attempt to branch out from commodity connectivity revenues.

• There is still no standard approach for telecoms operators in IoT or digital economy initiatives. The investments made by telecoms operators are hard to classify, with no obvious common theme emerging. Investments have been made in horizontal capabilities (e.g. investments in Actility and Springworks are essentially about gaining capabilities that can be applied to multiple vertical markets). Investments by Telstra (in health), Orange (in fleet management) and

before them by Vodafone and Verizon (in automotive) illustrate the diversity of opinion over what position to take in the value chain, or which verticals to focus on.

• Telecoms operators are still marginal players in IoT investment and M&A. According to some estimates, over

USD10 billion has been invested in IoT companies or acquisitions in 2015 (though some of these estimates include deals in which IoT was only a small part). Telecoms operator investment in IoT over the same period was well under USD100 million. Only Vodafone, Verizon and Telstra have made significant bets on IoT.

KPN, Orange, Swisscom

Telstra

Orange

Telefónica, NTT DoCoMo, SK Telecom

TeliaSonera

Actility

Anywhere Healthcare

Ocean

SIGFOX

Springworks

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Acquisition of unit by Telstra. No pricing information provided3

Acquisition by Orange4

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Equity investment (with TeliaSonera reportedly taking a 30% stake). No pricing information provided6

Actility is developing a platform of services around the LoRa low-power wide area networking technology2

Videoconference platform for remote healthcare. Telstra has made at least seven investments in health companies, spending over USD100 million

Fleet management company with over 2000 clients

The telecoms operators invested alongside other industrial and pure financial investors

Springworks has developed interfaces for IoT and has an IoT data analytics platform

Telecoms operator investor(s)

Target Investment details

Notes

FIGURE 1: NOTABLE M2M AND IOT INVESTMENTS BY TELECOMS OPERATORS IN 2015 [SOURCE: ANALYSYS MASON, 2015]

The absence of more significant investment in IoT from telecoms operators is due to various reasons. For example:

• Many telecoms operators lack a clear vision for their role in IoT. As we said in a recent paper, many telecoms operators still appear to be taking a tactical and ad-hoc approach to M2M and IoT.

• In comparison to the core business of basic voice, data and messaging, IoT and M2M are still relatively small. Few operators earn more than 5% of their total revenue from IoT and M2M services. As a result, IoT and M2M teams may have little management attention and access to only limited resources.

• As well as the obvious financial cost, M&A and investment activities are time consuming and can be a distraction from operators’ day-to-day business.

• Operators have been unsuccessful at M&A in the past and want to avoid repeating their mistakes. Although successful M&A activity between telecoms operators is relatively common, many of them have a poor track record of purchasing or investing in non-network companies.

The extent of telecoms operators’ involvement in IoT cannot be judged purely on the basis of their M&A or investment activity: other activity, such as partnerships and internal developments, also need to be considered. However, with the exception of a handful of telecoms operators, the lack of investment activity indicates an unwillingness to commit to strategies that generate more than connectivity revenues. The recent investments by telecoms operators are encouraging indications, but more are needed for operators to make significant moves along the value chain.

Analysys Mason is active in IoT and in providing transaction support. As well as working on more than 20 IoT projects for clients in the past year, we also publish research as part of our IoT and M2M Solutions programme. During the past five years we have worked on more than 200 due diligence assignments across the telecoms, media and technology (TMT) sectors.

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In the first half of 2015 alone, at least eight telecoms operators have made one or more investments in an IoT company.“

”

1 See http://www.thingpark.com/en/news/internet-things-specialist-actility-announces-25-million-funding-round-led-ginko-ventures-kpn-0 2 See http://lora-alliance.org/What-Is-LoRa/Technology for more information on the LoRa Alliance and technology.3 See http://www.telstra.com.au/aboutus/media/media-releases/telstra-health-secures-operation-of-medibanks-anywhere-healthcare.xml

6 See http://www.teliasonera.com/en/newsroom/news/2015/teliasonera-invests-in-renowned-swedish-iot-firm-springworks-/

4 See http://www.orange.com/en/press/Press-releases/press-releases-2015/Orange-Business-Services-acquires-Ocean-to-strengthen-its-vehicle-fleet-management-activities5 See http://www.businesswire.com/news/home/20150211005248/en/SIGFOX-Global-Leader-Internet-Connectivity-Secures-Record#.VYvZLvlViko


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MICHELE MACKENZIE Principal Analyst The telehealth market, long identified as a

significant opportunity for communications service providers (CSPs), has been slow to gain traction.

Telehealth remains a small but interesting vertical for CSPs to target in the next 5 years

“”The technical capabilities to support the

telehealth market have long been in place, but regulatory concerns, coupled with supply-side issues such as business models, have restricted market growth. Most early movers have struggled to build and scale their telehealth offerings beyond the pilot phase. We estimate that there were only around 0.7 million remote patient monitoring connections globally in 2013, a small fraction of the total 500 million machine-to-machine (M2M) connections. To stimulate market growth, CSPs will need to invest in platforms to support telehealth services, make long-term commitments and prepare for long-term returns. The rest of this article examines the persistent barriers to CSPs entering the market, and the opportunity that telehealth may present for CSPs in the long term.

NEAR TERM BARRIERS TO TELEHEALTH ADOPTION REMAIN

The traditional healthcare market has provided significant communications and IT services opportunities for CSPs. Some CSPs, such as Orange and Deutsche Telekom, have been very successful in targeting this vertical. However, telehealth applications face new challenges, few of which are technical. CSPs face a fragmented demand-side healthcare market, and the key challenges impacting telehealth adoption are:

• Funding and reimbursement: healthcare systems tend to be decentralised and fragmented, often making it difficult to source funding for telehealth delivery models. In addition, healthcare providers may

not be reimbursed by insurers or payers for telehealth services because medical procedures outside of healthcare facilities are not always formally recognised.

• Scale: it has been difficult to scale products and solutions for a number of reasons. For example, each healthcare authority has different requirements with regard to medical devices, most of which operate proprietary interfaces and can be costly to integrate. There are few proof points of large-scale deployments of remote patient monitoring, making it difficult to prove the business case.

• Regulation: there is stringent, well-established regulation around medical devices in most markets, but new delivery mechanisms require new regulation. The regulation governing patient data is also a major concern, specifically how to protect it in a more open market where data is shared with application providers.

All of these factors have served to create market uncertainty, making it difficult for providers to formulate a telehealth strategy.

CSPS ENTERING THE TELEHEALTH MARKET WILL NEED TO FORMULATE A LONG-TERM STRATEGY

Governments and healthcare stakeholders are seeking to transform the healthcare sector in many developed markets to curb the spiralling costs of provision. The sector recognises that telehealth applications have the potential to address some of the weaknesses in the current approach to delivering healthcare services and introduce more sustainable delivery models, but these changes will take many years to happen: CSPs entering the healthcare sector will need to plan for the long term.

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PLATFORM SERVICE PROVIDER• Connectivity plus value add• Technical and commercial value add• B2B and B2C• High risk, high visibility• Healthcare provider?

ENABLER PLATFORM PROVIDER• Connectivity management plus some

value add, such as data, BSS• Own solution or partner• Low to medium risk• Some joint marketing

••••

CONNECTIVITY PROVIDERConnectivityLow RiskLow visibility roleCustomer market the service

FIGURE 1: CSP ROLES IN THE TELEHEALTH VALUE CHAIN[SOURCE: ANALYSYS MASON, 2015]

CSPs may adopt different strategies for different applications or customer groups. Telehealth is a highly complex market and to move up the value chain requires significant long-term investment. Forging relationships in the complex and fragmented ecosystem is not easy and CSPs will need to develop strategic partnerships for capabilities such as devices, systems integration and medical expertise. There are three main routes to market which are illustrated in Figure 1, and which are discussed in more detail below:

• Connectivity provider: this is a low-risk, but low-visibility (and lower-value) role in the value chain, and is subject to fierce competition and low returns. Connection volumes are not sufficient to generate large revenues, hence connectivity is a low-value opportunity in healthcare. However, it also requires low investment and may scale for certain target customer groups such as the pharmaceutical market.

• Enabler platform provider: this is a low-to-medium risk role and requires more investment with regard to leveraging platform capabilities such as data storage and business support systems (BSS) as well as partnership building. It is an attractive role for CSPs as it generates higher value, but will also

be subject to intense competition. Maxis Malaysia has adopted this strategy for its remote patient monitoring service. Maxis Malaysia has adopted this strategy for its remote patient monitoring service.

• Platform service provider: this role involves significant long-term investment and will most likely require senior-level backing. CSPs will need to consider partnerships and acquisitions to bring services to market. They will adopt a more holistic approach to providing a platform of technical and commercial capabilities to support the healthcare ecosystem. Operators including Deutsche Telekom, Telefónica and Telstra are moving towards a platform service model.

The telehealth market is complex and adoption is slow, and will likely remain a niche M2M sector for the foreseeable future. Any CSP entering the sector should take a long-term view on strategy and be prepared for some failures along the way. Connectivity alone is not much of an opportunity and success will require investment and long-term horizons.

CSPs that intend to play higher up the telehealth value chain will need to commit long term, invest significant technological and commercial assets and look for synergies across the different application groups that they provide. They should also consider partnerships and acquisitions to bring end-to-end services to market.

Questions? Please feel free to contact Michele Mackenzie, Principal Analyst, at [email protected]

TOM REBBECK Research Director

LPWA: Established operators need to rethink their strategy or risk failure

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Operators need to accelerate their commitment to LPWA and structure their organisations to match the opportunity.”“

Low-power, wide-area (LPWA) networks are a hot topic among telecoms operators. All of the major established telecoms operators are experimenting with various forms of this new technology. However, many of these efforts risk failure, unless these operators take a new approach. To benefit from this disruptive technology, companies need to accelerate commitments and structure their organisation to match the opportunity. This article builds on Clayton Christensen’s thinking on disruptive technology to illustrate how telecoms operators can use LPWA technology to their advantage.

THE INNOVATOR’S DILEMMA – OPERATORS ARE SLOW TO COMMIT TO LPWA BECAUSE THEY ARE UNCERTAIN ABOUT ITS POTENTIAL

In his book, The Innovator’s Dilemma, Clayton Christensen describes how new technology has disrupted many industries and established companies have failed to react as ably as smaller start-up companies.

The development of LPWA networks fits many of the conditions described by Christensen.

• “The larger and more successful a company becomes, the weaker the argument that emerging markets can remain useful engines for growth”.1 LPWA could generate connectivity revenue of just USD1 per connection per year. This is likely to seem too small to be worthwhile for telecoms operators that earn billions of US

dollars in revenue per year from existing business. Even if established players launch LPWA, scepticism about the market potential within the business may undermine these efforts, for example if the product development or marketing support that it needs are denied. The counter argument is that LPWA networks may open entirely different, new markets, which could involve billions of devices. With the right support, investing in LPWA could give established players more options in the future.

• “Incumbent firms are likely to lag in the development of technologies that only address customers’ needs in emerging [opportunities]”. Again, this can be applied to LPWA networks. Operators have concentrated on migrating to 4G, driven by the needs of mobile handsets, while the demands from new markets are given less priority (see Figure 1).

• “The essence of the attacker’s advantage is the ease with which entrants, relative to incumbents, can identify and make strategic commitments”. For a smaller company, like SIGFOX in France, exploiting a disruptive technology is simpler than for larger players, such as major telecoms operators. Start-up companies do not have revenue from a legacy business and are therefore excited about new revenue opportunities, even if they are (initially at least) relatively small. Perhaps more importantly, start-up companies can focus on what these new markets require. They are not focused on moving to the top right of Figure 1.

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FIGURE 1: TYPICAL PERFORMANCE OF 2G, 3G, 4G AND LPWA RELATIVE TO EXAMPLE USES2,3 [SOURCE: ANALYSYS MASON, 2015]

13

1 In this context, Christensen means ‘emerging market’ in the sense of emerging opportunities, not countries.2 Note that the chart is illustrative. It is populated with what we consider to be a reasonable estimate of typical speeds and not actual data.3 The basic design of this chart is based on that of similar charts created by Christensen in his work on disruptive innovation.

4 The only established operators to have launched commercial networks that we are aware of are Bouygues, KPN, Proximus, Tele2 (through AEREA in the Netherlands) and Telkom SA (through FastNet). Swisscom has launched a trial network in a few cities.5 This is not just an issue for telecoms operators. SIGFOX licensees (such as Abertis in Spain and Arqiva in the UK) are launching services from within the parent organisation.


Operators that are bold and willing to support LPWA with the requisite resources could find themselves well positioned to exploit this opportunity.

“ ”

ESTABLISHED OPERATORS CAN MAKE LPWA WORK IF THEY RESPOND CORRECTLY

Christensen provides recommendations for how established companies should respond to new disruptive technologies. Again, these can be applied to LPWA.

• “In disruptive technologies, there are strong first-mover advantages”. Christensen argues that when dealing with disruptive technologies, established players should not assume that they will be able to catch up when the new market has been proven. To benefit from the disruptive technology, the established player needs to be an early adopter.

• “Match the size of the organisation to the size of the market”. Christensen advises companies to set up separate divisions that will get excited about the opportunity, rather than trying to chase the opportunity using legacy structures. A USD10 000 contract is small for an established player, but a major contract win for a start-up. Rather than launch LPWA services as part of the core enterprise team, operators should consider creating a separate division or company to pursue the opportunity.

• “The popular slogan ‘stay close to your customers’ appears not always to be robust advice”. Christensen suggests that rather than focus on the needs of current customers, who will probably want more performance from existing products, companies should search out new opportunities from different types of customers.

Few established telecoms operators are following this advice in terms of their approach to LPWA.4 Only a small number are early adopters of LPWA. Of those that have launched a network, only Telkom in South Africa has placed it in a separate division and its LoRa network is operated by its FastNet division (a company of 200 people compared to 20 000 in the parent).5 Many operators have separate M2M teams, but these teams may not have the required autonomy or independence to build and exploit a new type of network. Equally, most operators, when faced with a choice between meeting the needs of existing customers or investing in LPWA, are choosing the former (that is, most operators would invest an additional EUR10 million in 4G upgrades rather than LPWA).

The potential opportunity for LPWA is huge and could be greater than traditional cellular in terms of numbers of connections. That said, it is emerging new market that is full of uncertainty. Operators that are bold and willing to support LPWA with the requisite resources could find themselves well positioned to exploit this opportunity. For other established players, making a delayed commitment or making LPWA fight against the core business for resources, are likely to see their efforts fail.

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Telecoms operators need to maintain relevance in M2M/IoT by building on their strengths

TOM REBBECK Research Director Operators’ retail stores, 24/7 support capabilities

and ability to bill millions of customers may be more valuable than network ownership in the IoT market.”“

Telecoms operators could find their role in the Internet of Things (IoT) reduced to that of a managed connectivity provider because they lack expertise in the ‘things’ – that is, products. In this article, Tom Rebbeck looks at how operators can fill this knowledge gap and build on their own unique strengths to maintain relevance

TELECOMS OPERATORS COULD BE MARGINALISED IN THE IOT MARKET IF THE ‘THINGS’ ARE MORE CRITICAL THAN THE INTERNET

“What makes smart, connected products fundamentally different is not the Internet, but the changing nature of the ‘things,’” claim Michael Porter and James E. Heppelmann in a recent article for Harvard Business Review (HBR).1 Telecoms operators face a significant challenge if the Internet of Things (IoT) is more about the ‘thing’ than the Internet. They may aspire to increase machine-to-machine (M2M) and IoT revenue – particularly by selling more than just connectivity – but they know and understand the Internet, and not ‘things’.

The risk for telecoms operators is that companies with a background in ‘things’ will marginalise their role in the IoT market to little more than the provision of managed connectivity. They will be competing with companies like PTC, whose CEO co-authored the HBR article with

Porter. PTC develops product design and product lifecycle software, and has spent about USD300 million since 2013 acquiring two IoT platform companies –Axeda and ThingWorx. Other than Verizon, and possibly Vodafone, no telecoms operator has spent more on IoT acquisitions.

TO PLAY MORE THAN A PERIPHERAL ROLE, OPERATORS NEED TO FOCUS ON THEIR UNIQUE STRENGTHS

First and foremost, operators need to decide and articulate what role they aim to play in IoT. Many are unable to articulate their aims in this market clearly, other than the generic ambition of increasing revenue. They have two broad choices, outlined below. Operators should be clear about which choice they have selected and communicate this choice clearly both to the market and internally.

• Become a ‘thing’ company, at least in certain vertical markets: Operators can opt to provide an end-to-end solution to customers. For example, they could provide a fleet tracking solution that includes the device, application, connectivity and ongoing support for small and medium-sized enterprises (SMEs) that run a small vehicle fleet. The operator would need to have specific knowledge of a vertical – either internally (typically through acquisitions, as Verizon and Vodafone

have done) or through a partner (as Telefónica is doing for fleet management with Geotab and Masternaut).

• Provide ‘horizontal’ solutions for IoT to support a range of vertical markets: Operators can provide the supporting capabilities for IoT, such as offering an application platform that can be applied to multiple industrial sectors. For example, the operator could provide the tools with which a partner or reseller could create a fleet tracking tool, but the operator would not sell or support this tool. Many operators are selling managed connectivity as a horizontal tool, but few are doing more than this (few are providing application support, for example). Again, this route can be taken through partners – PTC is one of several application platform providers2 – or through acquisition (Telenor Connexion bought a small integrator, iOWA, to build its horizontal capabilities).

Operators also need to invest in networks that are fit for the IoT. Cellular operators have focused on building networks for smartphones – that is, devices that demand ever higher bandwidths and whose batteries can be recharged daily. Many, if not most, IoT devices need only very low-speed connections (1Kbps is often acceptable), but need the battery to last a year or more. Operators in all countries (and not just developed countries) should look at investing in low-power, wide-area networks, such as Sigfox, Semtech, Weightless or LTE-MTC, that cater for the specific needs of IoT devices.3 If they do not, operators risk losing the connectivity revenue and, in so doing, possibly lose the opportunity to gain other IoT revenue.

Telecoms operators have extremely strong assets beyond networks that can be applied to M2M and IoT, as we argued in a recent article.4 Few other organisations can complete with a typical operator’s networks of stores, 24/7 support capabilities and the ability to bill millions of customers. These assets may be more valuable than network ownership because many IoT devices need little more than a Wi-Fi connection and no quality of service guarantee for some IoT services.

Telecoms operators may not have the same background expertise in products as some other organisations involved in IoT, but they can gain these capabilities – either through partnership or acquisition – and have other unique strengths on which to build.

Analysys Mason has supported operator clients on more than 20 M2M and IoT projects in the past year, and publishes research in its IoT and M2M Solutions programme. Recent projects performed by Analysys Mason include: helping an operator in Asia to develop its strategy for M2M by identifying the most attractive vertical markets to approach and identifying partners developing a model for an M2M platform vendor to help potential operator clients compare the cost of buying its solution with that of developing a platform internally.

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1 Harvard Business School Publishing (Boston, MA, 2014), See How Smart, Connected Products Are Transforming Competition. Available at https://hbr.org/2014/11/how-smart-connected-products-are-transforming-competition.2 Others include Bosch, Cumulocity, Digi and Xively3 For more on LPWA, see Analysys Mason’s report Low-powered wireless solutions have the potential to increase the M2M market by over 3 billion connections. Available at www.analysysmason.com/LPWA-Sept2014.


Operators also need to invest in networks that are fit for the IoT. Cellular operators have focused on building networks for smartphones – that is, devices that demand ever higher bandwidths and whose batteries can be recharged daily.

“

”

Our specialist consultants and analysts deliver maximum value to our clients, whatever their challenge and wherever they are in the world

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Analysys Mason’s expertise in IoT and M2M

OPERATORS

VENDORS

REGULATORS AND

INDUSTRY BODIES

• Operator clients in all regions• Operators of all types

– mobile, fixed and integrated operators– single country, regional and global operators

• Ericsson• Amdocs• A global IoT platform vendor• A global networking equipment vendor

• A development authority in South-East Asia • A western european regulator• GSMA

CLIENTTYPE

Examples of clients we have worked with

examples of recent iot and m2m client projects by client type

APPROACHES TO ADDRESS

CLIENTS’ CHALLENGES

Business casemodelling

Marketsizing and

forecasting

Go-to-marketstrategies

Strategysessions

Benchmarkingand competitive

analysis

Whitepapers

Total cost of ownership (TCO) model for Ericsson’s connectivity platform Review of international

opportunities by application area

Assessment of M2M resellers and MVNOs

Report on OSS/BSS requirements for IoT

Assessment of low power, wide area (LPWA) market

opportunity

Quantitative analysis of the embedded mobile

(M2M) market

Review of permanent roaming and data

sovereignty legislation

Review of national opportunities by application area

Report on policy implications of IoT for a

European regulator

Examples of recent IoT and M2M client projects, by value chain element

Sales channelDeviceNetwork Application

Billing and support

Regulation

Examples of recent IoT and

M2M client projects, by geography

Assessed the regulatory implications and regulatory feasibility for the implementation of a new M2M service in a dozen countries

Conducted a study on international opportunities for a European operator

Provided an assessment of aM2M market opportunity fsoftware vendor

Produced a report on the use of M2M in the industrial sector for monitoring heavy equipment and dispersed assets”

Published a report entitled “Leadership and technology: M2M insights for mobile network operators”

Developed forecasts of M2M device connections and revenue for Brazil, the Caribbean, Latin America and worldwide

Conducted a study to determine demand for a satellite M2M product and end-user requirements for hardware and software

Development of a cost–benefit model for operators and enterprises for Ericsson

Sized quick-win opportunities in the international M2M market and helped to develop a long-term M2M strategy for a leading mobile operator

Supported a leading mobile operator in developing its strategy for IoT and M2M services

For a European operator, conducted a market assessment of a new type of sensor network

Overviewed fleet management in five South-East Asian countries

For a Japanese operator, delivered a report on sales channel for M2M/IoTservices and the role of European mobile virtual network operators (MVNOs)

For a major regional operator, conducted a workshop to assist with IoT and M2M strategy

For an operator client, developed a list of over 100 potential partners, with key information for each [e.g. details of existing contracts and partnerships]

Countries of IoT and M2M projectsCountries of other projects IoT/M2M client country

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360°perspective,

workingwith operators,

vendors andregulators

* over the past three years

UNIQUE INSIGHT ON IoT ISSUES

More than30* IoT

assignmentsin over 30countries

Globalspecialistswith local

knowledge

Excellentbusiness-planning

expertise Unparalleled

policy andregulatory

expertise andreputation

Range of techniques to

answer clients’questions

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We are world-leading IoT specialists, with extensive

thought leadership onthe topic

We combine global reach and knowledge of IoT

issues with local in-depth understanding of specific markets, both developed

and developing

Past IoT projects have used scenario planning, workshops, consumer research and expert interviews to answer

client questions

We learn by working on IoT issues from different yet interrelated perspectives, making sure that we provide value to

any type of client

Our world-class experienceof business planning in both IoT and telecoms enables us

to assess the emergingopportunities

We carry out over 100 regulatory projects a year, and have an in-depth understand-ing of IoT and related telecoms policy and

regulatory environments

Our expertise in IoT is built on projects performed in multiple regions

Examples of recent IoT and M2M client projects, by geography

OPERATORS

VENDORS

REGULATORS AND

INDUSTRY BODIES





CLIENTTYPE






Marketsizing and

forecasting


Strategysessions


analysis

Whitepapers






opportunity


(M2M) market





European regulator



Billing and support

Regulation

Countries of IoT and M2M projects Countries of other projects IoT/M2M client country

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Assessed the regulatory implications and regulatory feasibility for the implementation of a

new M2M service in a dozen countries

For a European operator, conducted a market assessment of a new type of

sensor network


For a Japanese operator, delivered a report on sales

channel for M2M/IoT services and the role of European mobile virtual network

operators (MVNOs)


For a major regional operator, conducted a workshop to assist with

IoT and M2M strategy

For an operator client, developed a list of over 100 potential partners, with key information for each [e.g.

details of existing contracts and partnerships]

Conducted a study on international

opportunities for a European operator

Provided an assessment of an M2M market opportunity for a

software vendor

Produced a report on the use of M2M in the industrial sector for monitoring heavy

equipment and dispersed assets”

Published a report entitled “Leadership and technology: M2M insights for mobile

network operators”

Developed forecasts of M2M device connections and revenue for Brazil, the

Caribbean, Latin America and worldwide

Conducted a study to determine demand for a

satellite M2M product and end-user requirements for

hardware and software

Development of a cost–benefit model for operators and enterprises

for Ericsson

Sized quick-win opportunities in the international M2M

market and helped to develop a long-term M2M

strategy for a leading mobile operator

We have performed projects addressing all parts of the value chain

17

We have a 360-degree perspective on IoT having worked with operators, vendors and regulators

We follow a wide range of approaches in our projects, tailored to our clients’ needs

OPERATORS

VENDORS

REGULATORS AND

INDUSTRY BODIES





CLIENTTYPE






Marketsizing and

forecasting


Strategysessions


analysis

Whitepapers






opportunity


(M2M) market





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Regulation



















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More than30* IoT



knowledge







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Connectivity

Description



5–30% 5–20% 30–60% 20–30% <20%

~10% <5% 0–30% 0–10% 10%


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Provide theactual






Systemsintegration

A

Traditional TV 81%

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100%

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and developing


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any type of client





OPERATORS

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CLIENTTYPE






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5–30% 5–20% 30–60% 20–30% <20%

~10% <5% 0–30% 0–10% 10%


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Provide theactual






Systemsintegration

A

Traditional TV 81%

DVR 8%





BVideoover

internet

100%

+9%

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and developing


client questions


any type of client





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Analysys Mason is the global specialist adviser on telecoms, media and technology (TMT). Since 1985, Analysys Mason has played an influential role in key industry milestones and helping clients through major shifts in the market. We continue to be at the forefront of developments in the digital economy and are advising clients on new business strategies to address disruptive technologies.

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