The IoT Promise NOT Realized?

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IoT has become a persistent theme in telecom industry conversations. Few strategy plans for operators do not mention IoT, and for some operators (including, Orange, Verizon, and Vodafone), IoT is of central importance. This focus is understandable: although the worldwide mobile telecoms industry is only forecast to grow at a 1% CAGR between 2016 and 2025, Analysys Mason has calculated that revenue from IoT solutions enabled by mobile operators (that is, the total spend — including devices, applications and connectivity — on IoT devices with a SIM) will exceed $200 billion in 2025, representing a CAGR of 18%. This is equivalent to 22% of the total spend on mobile services worldwide ($888 billion) for the same year. However, IoT connectivity revenue will only reach $28 billion by 2025, representing just 3% of worldwide mobile telecoms revenue.

If IoT is to become a new growth area within the telecom industry, it needs to contribute significantly more revenue to the overall business than connectivity alone can generate.

Operators need to adopt new strategies to win a share of the $173 billion spend on devices and applications. And while connectivity represents just a small proportion of the total spend on IoT solutions enabled by mobile operators, by 2025, revenue from application development and enablement will represent $123 billion, and hardware will account for $50 billion.

Mobile operators are seeking additional incremental value by offering other components. However, this may present challenges because mobile operators do not typically have the skills required to build a viable proposition. To capture a larger share of hardware or application revenue, mobile operators should consider the following strategies.

Strategy #1
Create an independent entity to target the IoT opportunity
An IoT business unit should be able to make decisions independently of the legacy business. Its performance metrics should be commensurate with a new growth area, and it should be granted a fair degree of autonomy to make its own investment decisions. Investment in hardware and application services should be focused on growing the IoT business and should not be hindered by legacy business considerations.1

Strategy #2
Leverage in-house capabilities to build IoT enablers and applications
Operators need to build platforms and enablers to operate in new areas of the value chain. Some operators have separate R&D and ICT divisions that focus on developing new capabilities and solutions that target specific industry sectors.

For example, Deutsche Telekom’s ICT business, T-Systems, developed a healthcare platform (e-Health Connect), which supports IoT applications such as remote patient monitoring. In addition, Verizon has developed ThingSpace, and Indosat has developed NexThing to build the developer ecosystem to support their initiatives.

Strategy #3
Foster partnerships to bring IoT propositions to market
Not all mobile operators have all the skills required, or in-house expertise, to develop hardware and application solutions. Even those operators with an established IT division (such as Deutsche Telkom) will depend on partnerships for certain components. Most operators need to build partnerships to enter new areas of the value chain, either in capabilities such as application enablement platforms or by bringing end-to-end solutions to market.

Strategy #4
Make bold moves in investment and acquisition.
Mobile operators have been relatively cautious in terms of acquisition in the IoT space. There have been a couple of major exceptions. Vodafone acquired Cobra to compete in every part of the automotive IoT value chain. Similarly, Verizon has made a spate of high-profile acquisitions totaling $3.5 billion to compete in fleet management. On a smaller scale, Telia has invested in Springworks to enable its connected car platform, and it recently acquired Fältcom to compete in smart-city applications.

IoT currently represents only a small share of operator revenue — even for those operators with a large IoT business. For example, Vodafone reported that IoT accounted for only 1.3% of its revenue in 3Q 2016, and Verizon reported that IoT accounted for only 0.8% of its revenue in 4Q 2016. For IoT to grow to a sizeable share of revenue — that is, 10% or above — and be considered an important driver for growth, operators need to capture some of the $123 billion application revenue or $50 billion hardware revenue that we have forecasted for 2025.

Addressing these areas of the value chain requires significant investment and carries a higher risk of failure. EBIT margins which are relatively high for connectivity at around 10% likely will be lower in these areas. However, if operators want to remain visible in IoT and develop strong revenue streams, they need to increase their appetite for risk and invest accordingly.

Endnotes
For more information, please see “IoT will have little impact on revenue for most mobile operators”, April 24, 2017. Knowledge Centre. AnalysysMason.com. http://www.analysysmason.com/About-Us/News/Newsletter/iot-will-have-little-impact-on-revenue-Apr17?utm_term=IoT will have little impact on revenue for most mobile operators&utm_campaign=Analysys Mason Quarterly | Late

1. See Analysys Mason’s Mobile payments in emerging markets — beyond m-pesa. Please visit www.analysysmason.com/About-Us/News/Newsletter/mobile-payments-in-emerging-markets-Jan17/

About the Authors

Tom Rebbeck is Research Director, Enterprise and IoT, for Analysys Mason. Tom leads the Enterprise and IoT research practice drawing on more than 16 years of experience in the telecoms sector. He is a specialist on the IoT and other enterprise services, and has written widely on the role for operators as telecoms markets develop. He rejoined Analysys Mason from Telefónica, where he was a Global Project Manager in the Mobile Data Group. For more information, please email tom.rebbeck@analysysmason.com, call +44 20 7395 9000, or visit www.analysysmason.com.

Michele Mackenzie is a Principal Analyst for Analysys Mason’s IoT and M2M Solutions research programme, with responsibility for M2M and LPWA forecasts. She has 17 years of experience as an analyst. She produces reports and forecasts on M2M and IoT in industry sectors such as transport, healthcare, and smart cities, and analyzes the impact of IoT network technologies such as LPWA networks. Prior to joining Analysys Mason in 2014, Michele was a freelance analyst with a focus on M2M and IoT technology and trends. Before that, Michele worked for Ovum for 12 years. For more information, please email Michele.Mackenzie@analysysmason.com or visit www.analysysmason.com.

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About Author

Tom Rebbeck is Research Director, Enterprise and IoT, for Analysys Mason. Tom leads the Enterprise and IoT research practice drawing on more than 16 years of experience in the telecoms sector. He is a specialist on the IoT and other enterprise services, and has written widely on the role for operators as telecoms markets develop. He rejoined Analysys Mason from Telefónica, where he was a Global Project Manager in the Mobile Data Group. For more information, please email tom.rebbeck@analysysmason.com, call +44 20 7395 9000, or visit www.analysysmason.com.

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