Mobile Operators’ Path to IoT Monetization
Daniele Pe - Associate Partner
Francesc Casademunt - Team Leader
Dino Saric - Senior Research Specialist
While IoT traditionally was a domain reserved for an incumbent telecom operator with a fixed footprint and a strong positioning within B2B and Government clients, today IoT is an opportunity that can be accessed by any operator, whether they are mobile-only operators or even challengers.
There are three main reasons for this:
- LTE, NB-IoT and now 5G are creating a significant opportunity in mobile IoT;
- IoT is moving beyond B2B to the consumer side, especially in developed markets;
- Technology advancements in the larger IoT ecosystem have reduced the investment required to compete in the IoT space to a fraction of what it used to be.
By leveraging insights from operators IoT strategic efforts over the past few years, the following article outlines different strategic approaches and monetization paths that operators ahead of the curve have followed when entering the IoT space. It assesses the pros and cons of each approach, as well as monetization opportunities.
Acknowledging that there is no silver bullet for IoT strategy as the best approach depends on factors such as the existing operator execution capabilities, investment or the local competitive landscape, the paper aims to provide a primer for operators looking to enter the space and to accelerate the steep learning curve required whenever assessing a new business opportunity.
What is the value at stake for Telcos?
While IoT has been around for years, and not without hype, it seems we are now finally reaching a critical point. Delta Partners estimates that global IoT tech spending will rise from around $260 billion currently and to reach more than $980 billion by 2025 (33% CAGR).
Figure 1: Expectation for IoT industry revenue to accelerate rapidly in coming years: ~$1 trillion by 2025
This is due to several ecosystem developments:
- NB-IoT technologies are driving down cost of connectivity by 10X opening up the potential of a massive increase in the number of connected devices;
- 5G will enable new range of mobile opportunities and open-up new high bandwidth / low latency use cases (e.g. industrial robots, autonomous vehicles, remote surgery);
- Cloud providers are now catering for IoT in a way that will drive adoption and define “standards”;
- New technologies such as blockchain, AI and mobile edge computing will help overcome some of the key ecosystem challenges currently limiting the IoT potential (security and interoperability being the main one);
- Similarly, ecosystem players moving towards more collaborative approaches will help overcome fragmentation and create more value to the end-user.
In terms of value chain, it is unsurprising that connectivity’s revenue share is small – around a tenth – and is expected to fall over time. Lower cost connectivity and competition are the key drivers.
Hardware revenues are also expected to follow a similar pattern, while value share growth is expected in end-solutions layer, as pricing evolves from cost-plus focus to cost of failure / value add models, and as well in the platform layer, as more and more functionalities get added.
Figure 2: Connectivity value small and diminishing shifting towards platform and solutions
Of the $980 billion opportunity, we estimate that wireless operators can target around $300-350 billion, or 30-35%, of total IoT revenues by 2025. These revenues exclude 5G-related fixed solutions, non-addressable hardware revenues and non-addressable platform revenues, as illustrated in Figure 3.
Figure 3: Mobile operator addressable market of $300-350 billion, or 30-35% of total IoT revenues by 2025
1. Three distinct monetization plays for Mobile operators
In general, Telcos have three distinct clients in the IoT space: solution providers; end user businesses; and consumers
- Solution providers package the different IoT components (hardware, connectivity, platform, application) into an end solution ready for consumers or businesses. These players will need to source IoT connectivity from Telcos (or from resellers). On top of that, solution providers will typically source from vendors other products that speed up the development of the end solution, such as hardware, IoT platforms or APIs.
- End user businesses can either buy end solutions bundled with connectivity or buy connectivity separately from the end solution. Businesses will source connectivity from Telcos or resellers and end solutions from solution providers or aggregators like System Integrators (Sis) and Telcos.
- Consumers typically buy end solutions bundled with connectivity via retailers – e.g. online retailers, electronic retailers, supermarkets, etc.
Depending on the target segments, mobile operators would offer different IoT services across different elements of the value chain.
We clustered the role of mobile operators into three main distinctive plays, depending on type of clients and role in the value chain: Wholesalers; IoT Solution Providers; and IoT App Enablers.
Figure 4: Alternative IoT strategic plays
1.1. The Wholesaler
The wholesaler strategy is the most common today. Telcos provide different types of IoT connectivity – NB-IoT, LTE-Cat 1, 2 or 3 – to solution providers or the end business customers for a fixed fee or as-a-service. The fact that the operator sticks to the core business means it’s a highly scalable approach, with little investment required and a clear path to execution.
However, operators with limited experience in the IoT business will need to adapt to the intricacies of the industry. Device certification, or the evolution of the IT stack to effectively manage the onboarding and provisioning of thousands of IoT devices, is among the most common areas that require investment to fuel IoT wholesale connectivity growth.
Providing plain vanilla connectivity is not enough. Solution providers and end users increasingly ask to provision or cancel connectivity on demand, programmatically, through their IoT platforms. This requires deep integration of the network core with IoT cloud platforms. Solution providers also value other feature-rich capabilities like running their own network diagnostics on their devices.
In the next 2-3 years, operators also have the unique opportunity of enabling end-to-end APIs fully exposing network centric assets and the ability for application developers to leverage network slicing, edge resources, setting advanced policies and ensuring a new dimension of QoS.
There are three main drawbacks for operators pursuing a wholesale-only strategy:
- The low ceiling on how much the top line can grow, due to the low revenue share of the connectivity stack (7-10%);
- The emergence of new pricing models is driving lower ARPUs for connectivity, with aggressive global IoT MVNOs aggravating the situation.
- Monogoto and 1NCE are examples of MVNOs that leverage their new IT stacks and global partnerships to offer plug-and-play connectivity at very low price-points
- Vodafone launched a global SIM with very competitive rates and with several value-added features of connectivity management, like device diagnostics, reporting and embedded security;
- If an operator provides only connectivity, it may be the case that its offer becomes less competitive than that of other operators bundling connectivity with other services (app enablement services and end solutions). This may mean that the wholesaler may struggle to keep their fair market share when it comes to IoT connectivity.
1.2. The IoT Solution Provider
The operators that are unsatisfied with the size of the IoT connectivity market will try to enter the solution provider space. The main rationale for Telcos to move to this space is that they can leverage their strong distribution power in the consumer and enterprise space to upsell new services to existing and new clients.
The main issue Telcos have encountered with this business to date has been the implementation risk. Selling – not to mention developing or onboarding – IoT solutions requires different capabilities versus the core connectivity and handset businesses. Operators that have already diversified in the enterprise or ICT solution space may find it easier to adapt than others.
Based on our experience advising operators in the space, we recommend the following:
- Focus on a few verticals and products initially
- Test the strategic assumptions and capture early market feedback before scaling concept to other verticals
- Keep a focused execution and don’t spread assets too thinly
- Entering new verticals is a new venture for most Telcos and requires investment in new expertise, partner management and solution development, so a selective approach is advisable;
- Get the right verticals
- We recommend pursuing mature verticals –fleet management, asset tracking and selected cases of remote monitoring – that drive revenues in a broad number of use cases and industries and potentially placing some long-term strategic bets
- For B2B, operators should also consider the mix of the customer base in terms of size – Small-to-medium business mid-market, large enterprise. For example, if the operator has a large base of transportation clients it may launch a fleet management solution or if its focus is healthcare then target e-health solutions.
- To succeed, it is also important that the operator fully understands the verticals. This can be done by building/acquiring internal capabilities or via strategic partnerships and channel partners.
- Get the right mix of develop versus buy versus partner
- A few operators have yet to venture into developing their own IoT solutions. Typically, they focus on their core strength and use partners or acquire product companies to build their product portfolio
- AT&T and Verizon have IoT solution revenues of more than $1 billion by building their portfolio with different strategies
- AT&T tried to partner with solution providers and resell their solutions, with white-labelling or co-branding, for a revenue share fee. For example, partnerships with HoneyWell (smart home), Aon (smart home), Linear/Nortek (smart security), General Motors (connected cars)
- Verizon focused on M&A to build its portfolio, with targeted acquisitions in selected verticals over time to strengthen its value proposition. For example, the acquisitions of Hughes Telematics (2012 connected car – Telematics platform), Glimpse (2014, Connected car/parking and navigation), Fleetmatics in 2016 (fleet management) or Skyward (2017 drone management)
- Commit to it
- Launching IoT solutions may mean much money and time invested at the beginning – e.g. building enablers such as resources and reorganizing, creating new commercial contracts and frameworks, IT and IoT platform updates. But the results may only come in several months later, and at times there is doubt whether this effort will pay off. Therefore, it is imperative that there is maximum commitment and alignment from the ExCom and shareholders of the company in this strategic move of going beyond connectivity, and that a solid business and launch plan is in place – even if it evolves over time
Beyond solution revenues, there is the potential to add further value by providing orchestration between different solutions sold to the end customer. For instance, a Telco selling smart home applications from different vendors could develop or partner with a platform that makes them work seamlessly with each other – so that the smart lock talks with the smart lightning solution to switch the hall light on or the garage door with the windows, so that the window sensors activate upon leaving the house.
1.3. The IoT App Enabler
A very different option from the previous two is to venture into the enablement layer for IoT developers and solution providers, as a way to accelerate the development of IoT solutions.
This a new domain for telcos, and largely dominated by Tech players. As such the role of the operator here is not to develop own IoT platforms, but rather to resell, orchestrate and enhance the variety of platforms already existing.
There are a variety of non-mutually exclusive areas where operators could add value including for instance:
- Orchestrating the variety of platforms required to deliver and IoT solution by providing a simple one-stop-shop access to the full app enablement layer;
- Embedding connectivity and device management capabilities into 3rd party platform providers;
- Create starter kits for developers - combined hardware and software that allows quick prototyping of a variety of applications for IoT;
- Develop an API layer on top of the platform layer to enable developers with new functionalities, such as standard data visualization dashboards, device location services and easy integration to cloud.
Below some examples of what operators have launched so far.
Figure 5: Examples of Telcos’ launches to date
The monetization potential for operators in this space is somewhat limited, at least in the short run, until the number of IoT devices really takes off, as the monetization model is a very small fee for connected device.
However, playing in this space, brings other benefits to operators:
- Potential increase of connectivity market share - In the commoditized market of connectivity, Telcos that offer starter kits and developer APIs may be more attractive and secure an upper hand with startups that contract the services the first time. If managed well some can become sizable connectivity clients;
- Capability to identify interesting solution providers that can later be onboarded as resell partners or important participants in the operator’s IoT ecosystem - A Telco may become familiar with a disruptive logistics startup because of their interest in the operator’s API for location-based services. In a few months, the operator can offer to resell their products to their B2B customer base.
The risk of pursuing an IoT enablement play strategy is mainly the execution risk – which is larger than in the Telco solution provider strategy. Developing specific software and hardware, or even orchestrating it, can be far from the core business and requires different profiles in the organization.
As such, it is prudent to first venture into the space with a partner, as telcos in the examples above have done.
2. Operator’s necessary capability build-up to tackle the IoT opportunity
Irrespective of which monetization strategy it follows, the operator must adapt its organization and way of working to cater for the specificities of the IoT business.
Below are five modules that operators ought to consider in their roadmap towards building an IoT business.
Figure 6: Modules that operators should consider for an IoT business
Delta Partners has extensive experience supporting leading Telcos in defining and implementing their IoT strategy and in securing strategic partnerships with players across the IoT ecosystem. If you are interested in learning more, please reach out to our Digital Practice team in Dubai.
© 2020 Delta Partners.