NETWORK STRATEGIES


MACHINE MARGINS M2M COMMUNICATIONS


Telcos are eyeing the chance to derive new revenues from machine-to-machine (m2m) services, but they will need new models and scale to make margin. By Joanne Taaffe


they will struggle to translate that into profit margin unless they sell connec- tions on a large scale as part of a wider managed service and dramatically reduce the cost of provisioning m2m services. With typical ARPUs for m2m devices


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languishing at an average of US$1–$7 per month, some telcos could look to m2m services predominantly as a way to win big enterprise accounts . AT&T currently leads the way among


operators in terms of the number of connected m2m devices, according to Berg Insight , surpassing Verizon Wireless last year (see box opposite page). By February, AT&T had interconnected 11 million machines to its network, roughly split between consumer and enterprise devices, says Abhi Ingle, the company’s vice president, industry and mobility application solutions. Analysts forecast further strong m2m


growth: Berg Insight says wireless m2m connections will reach 294.1 million in 2015, representing 4% of total cellular connections worldwide; some 2% of all mobile network connections were used for wireless m2m communications at the end of 2010. In terms of device units, the company says the worldwide installed base of m2m devices will reach 95.7 million in 2015, up from 81.4 million at the end of last year. Further out, Analysys Mason esti- mates the number of m2m connections will rise to 2.1 billion in 2020 . A mix of falling component prices and


regulatory changes is helping spur growth. “Around seven years ago an m2m module cost $60, now it’s at $10,” says Erik Brenneis, head of m2m smart services at Vodafone Global Enterprise. He says EU legislation means that 80% of all electricity meters in Europe will be read remotely by 2020; and under the European Commission’s e-call scheme every airbag in new cars will be connected to emergency services through


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perators are finally starting to clock up volume sales of machine- to-machine (m2m) units. But


a wireless connection. Operators in developed countries have


been investing in m2m communications in recent years for another simple reason: the market for connecting consumers is saturated. But they face significant chal- lenges both in terms of generating ARPU and developing strategies. “They face major challenges in market-


ing, sales, OSS/BSS readiness and partnerships,” says Steve Hilton, a princi- pal analyst at Analysys Mason. Orange in February announced a joint


venture with Deutsche Telekom to deliver standards and improve quality of service for cross-border m2m services. The companies will work together to ensure m2m service continuity when roaming and, critically, aim to cut the cost of testing and deploying m2m devices and services. Operators need to acquire large econo-


mies of scale in order to counter low average revenues per device, but the m2m sector does not lend itself easily to a one- size-fits-all approach. “ In m2m there are hundreds or thousands of device manu- facturers and they never have the resources to test [devices and applications] with the [telecoms] network,” says Macario Namie, senior director of marketing at Jasper Wireless, which provides m2m service delivery platforms. What’s more, customers in different


industry verticals—such as healthcare, automotive, smart grids and energy—all


need to connect different machines that run sector-specific applications. “It’s a very segmented market with an enormous necessity to have specialist knowledge,” says Hans-Martin Lichtenthäler, a spokes- man at Deutsche Telekom. “There are different suppliers [for m2m modules] and testing every module takes three months.” The partnership with Orange aims to reduce the need to test each module for different networks: “Deutsche Telekom and Orange will say if the other [operator] has tested it …so that way we don’t dupli- cate [tests],” he says. Namie at Jasper Wireless says it is


crucial for telcos to automate device support and reduce both provisioning and customer support costs if they are to build a viable m2m business. Today operators’ business models “are designed around [getting] $50 ARPU [from customers] and if you apply the same systems and approach to [m2m] it won’t work”, he says . Monthly revenues generated by an


m2m device range from $0.50 to US$40 for certain telematic services in the trans- port and automative industry, but the average is just $5–$7, according to Hilton at Analysys Mason. Others give a lower average of just $1-$3, and the biggest growth areas such as smart metering typically generate the lowest ARPUs. By comparison, Vodafone in its results to the end of December recorded total averaged ARPUs from consumer services of E15.5


‘If you apply the usual operator models, systems and approaches to m2m services it won’t work’


m2m and wireless services margin model


Metric Average Revenue per subscriber Customer Acquisition Cost/Additional Sub Service delivery and Customer Mgmt Cost/Sub Network Usage per sub Total Costs/sub Profit/sub* Margin*


m2m $3.00 $0.75 $0.15 $0.60 $1.50 $1.50 50%


Wireless Service $50.00 $13.00 $10.00 $5.00 $28.00 $24.00 44%


* Depreciation removed (i.e. EBITDA profi t and margin). Source: Current Analysis www.totaltele.com March 2011


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