It’s no secret that devices other than phones will fuel huge growth in wireless data traffic over the next few years. As Stacey noted last week, data accounted for more than 30 percent of carriers’ per-user revenues in the U.S. in the first quarter of 2010, according to the latest reports from analyst Chetan Sharma. And data traffic will continue to ramp up in the quarters ahead, even as the U.S. mobile market nears the saturation point.
According to Sharma, mobile penetration among U.S. residents over the age of 5 exceeds 100 percent. But that hasn’t stopped the growth of data traffic. Why? In part because of the growth of connected devices. Sharma notes that in the first quarter of 2010, both AT&T and Verizon added more connected devices to their networks than postpaid subscribers. He notes: “Given the slow postpaid growth in, operators are fiercely competing in prepaid, enterprise, connected devices, and M2M segments. ” That trend will force carriers to find ways to ease congestion as they strengthen the bottom line.
Machine-to-machine (M2M) services, in particular, are a promising opportunity for carriers. The segment promises to boost revenues with minimal network taxation by delivering lightweight data transmissions to everything from e-readers like the Kindle to railroad cars and home appliances. Harbor Research has predicted that shipments of so-called “intelligent devices” will grow from 73 million in 2008 to 430 million in 2013, while total device revenues will exceed $12 billion by 2013.
For software developers and hardware manufacturers, then, the question is how to tap the new market for connected devices. How do you add connectivity to existing products, or create entirely new intelligent devices, and what kind of business model should you employ?
Carriers open their arms to M2M
The first point of contact for those looking to jump into M2M is the carriers themselves. Network operators have long struggled to monetize data services on their own, due in part to an overzealous desire to “own” the customer. That’s changing, though, as operators have come to understand the value of supporting devices and services that may not carry their brand. All four tier-one U.S. carriers have built out their M2M offerings over the last two years to help entrepreneurs bring connected gadgets to market — although some have moved more quickly and effectively than others.
Operators have streamlined certification processes and invested substantially to help developers bring products to market as quickly as possible. Verizon Wireless, for instance, has formed nPhase, a joint venture with Qualcomm, and partnered with Vodafone to boost M2M deployments in the U.S. and Europe. Sprint last year formed its “Emerging Solutions Unit,” and T-Mobile USA has developed an embedded SIM card to support M2M offerings. For its part, AT&T has opened a lab in Austin, Texas, specifically to test and certify gadgets connected to its network. Such efforts underscore a new eagerness on the part of carriers to work directly with developers and manufacturers to bring connected devices to market as quickly as possible. The process can take as little as six months or as long as 18+ months, depending on factors such as the simplicity of the device and the number of players involved.
Despite the industry wide efforts, not every carrier has achieved the same degree of traction. Sprint gained early success with a deal to power Amazon’s Kindle but lost tremendous ground last year when the online retailer instead looked to AT&T to provide connectivity for its e-reader. T-Mobile USA hasn’t broken out M2M revenues, but the company claims its business has experienced 105 percent growth every every year since 2006. Verizon Wireless has enjoyed success thanks largely to its relationship with GM’s OnStar. And AT&T appears to be setting the pace for the rest of the field, adding 1.1 million connected devices in the first quarter of 2010 to reach a total of 5.8 million.
While the major carriers have moved aggressively to make it easier to deploy M2M devices and services, some other factors must be considered in choosing a carrier partner. Deployments through Verizon or Sprint can be more expensive, due to the costs of licensing CDMA technology, but CDMA can provide superior coverage in rural areas — a key advantage for segments like utility communications, which must cover broad areas. Meanwhile, carriers who have yet to build much of an M2M business may be more flexible on price than their more established counterparts.
A variety of business models
So what kind of business models can entrepreneurs expect to see as they enter the M2M arena? A wide variety of them, actually. That’s because M2M is a brand-new space where the ground is constantly moving. While some carriers have moved aggressively to prepare for the new world of M2M – and some have not – the business models are still in an early stage of evolution. And they can vary dramatically from scenario to scenario.
“The one thing that’s constant in this space is change, most certainly. I equate it a bit to the wild, wild West,” said Macario Namie, senior director of product marketing for Jasper Wireless, which handles M2M for operators such as AT&T, Canada’s Rogers Wireless and the Dutch carrier KPN. “You have e-readers, you have connected digital photo frames, you have connected cars, but in all those instances the business models vary wildly. They can vary wildly by company or by product line, because what they can get from the end user in terms of revenue can be very different… I think five years from now we’ll see some standardization.”
Indeed, the emergence of M2M is forcing carriers to expand beyond traditional monthly subscription models and tinker with alternative strategies. While AT&T and Amazon haven’t disclosed details of their Kindle deal, the pay-per-download model gives the carrier an opportunity to take a piece of every transaction. Alternatively, Amazon may have figured the cost of connectivity into the price of the device, keeping download revenues but paying AT&T for use of the network. Before losing the Kindle contract to AT&T, Sprint generated an estimated $2 per month for every one of Amazon’s e-readers on the market — not a lot, to be sure, but an attractive figure considering the minimal traffic Kindle users generate.
We’re likely to see business models break down according to how devices are being used. A gadget that intermittently receives premium content at irregular intervals — like an e-reader or connected music player — is a natural fit for pay-per-use models where carriers take a share of the purchase price. Scenarios that require more consistent connectivity but consume little bandwidth — a mobile heart monitor, say, or applications that track energy usage — are likely to leverage traditional subscription models at flat rates. And gadgets like an in-car video system, which require lots of bandwidth but might be used infrequently, could incur metered billing or tiered price plans based on how much data is consumed. The key for both operators and their partners will be in developing attractive pricing models and applying the right one to each use case.
And as M2M evolves, it will require carriers and their partners to develop far more sophisticated business models: a mobile healthcare device, for instance, will have to generate revenue not just for the carrier and manufacturer but also the app developer and healthcare provider. So while end users (or health insurance providers) may pay a single bill for such a service, that payment will have to be split three, four or five ways — or more. That scenario also leads to a host of other issues that will need to be hashed out including who is responsible for billing the customer and who provides customer care. Those hurdles are new for the telecom world, and they won’t be solved by simple boilerplate solutions.
The space has also given birth to several sub-segments. Jasper Wireless supports operators’ M2M customers with technical expertise and hosts M2M.com, a forum for developers, regardless of applications and regardless of carrier. Competitors include Aeris Communications and Kore Telematics. And the nascent industry is beginning to see the rise of aggregators such as Numerex, which effectively functions as a mobile virtual network operator for M2M deployments. Such arrangements allow aggregators to provide services directly to customers, with the operator providing connectivity but playing a lower-profile role.
In these early days, the variations in business models give an edge to both carriers and developers who demonstrate flexibility as they deploy M2M offerings. So while the segment includes its share of deep-pocketed players — including high-profile manufacturers such as Ford, Honeywell and John Deere — a diverse group of innovative smaller players is emerging.
Consumer electronics is perhaps the first segment to begin to get legs in M2M as mobile connectivity comes to established devices such as cameras, e-readers and gaming systems. Automakers have joined the space, too, and have begun shipping vehicles with embedded connectivity systems to provide onboard navigation and entertainment. Utilities are beginning to tinker with devices and services that can ease energy consumption. And wireless healthcare is expected to be a massive industry, although the space will lag behind other segments because of multiple regulatory issues.
Perhaps the most important thing for entrepreneurs to keep in mind when entering M2M is the simple fact that it’s a very different business than one-off hardware sales. The world of connected devices and services is one that requires multiple partners and complicated business models. “There are hidden costs these companies don’t think about,” Namie said. “If you’ve been shipping unconnected devices for years, you’ve got a good business model; your DNA is designed for a hardware business. But when you add connectivity, you are in effect becoming a service.”
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