Ready, Steady, Build! (Or Enable):

Ready, Steady, Build! (Or Enable):

The Delta Perspective

The Role of Mobile Operators in Emerging Market M2M

Authors Xavi Anglada - Partner -
David Buchanan - Senior Associate -
  • For mobile operators, M2M represents not only an opportunity for incremental profits from connectivity, but a platform for expansion into lucrative digital value chains as well
  • This opportunity for operators is as real in emerging markets as it is in developed markets, but operators in emerging markets will have to carefully define the role they will play in M2M: – In certain countries with immature M2M ecosystems, operators may play the role of market builder, developing and marketing end-to-end M2M solutions for targeted verticals – In other countries, operators may play an enabler role, deploying M2M platforms in order to efficiently provide value-added M2M connectivity
  • Understanding the role to be played in M2M requires in-depth knowledge across: The needs of the targeted industry verticals, the depth of local M2M ecosystems (such as service providers and application developers), the current competitive situation and the value at stake at each link in the M2M value chain
  • Regardless of the role to be played in M2M, operators will need to move beyond their core business of providing pure connectivity services into a broader range of activities across the M2M value chain to seize the market opportunity for M2M in emerging markets

Introduction: The opportunity beyond connectivity

The machine-to-machine communica-tions (M2M) market has graduated from buzzword status to a significant source of growth for mobile operators. In 2012, an estimated 26m1 new M2M SIMs were added to the market globally, generating an additional US$1.1bn in connectivity revenues alone.
With a recent explosion of new applications, M2M has become an important opportunity for mobile operators to not only increase their connectivity revenues, but also to kick-start strategies to move from being a “dumb pipe” to providing value-added services beyond connectivity. As such, operators and service providers around the world are taking steps to capture their share of the estimated US$6bn in M2M connectivity and US$30-100bn2 value in M2M services.
The opportunity in M2M is as relevant for emerging market operators as it is for the developed world. However, many emerging markets present specific challenges to be overcome by operators. This whitepaper presents Delta Partners’ perspective on the opportunities and approach for emerging market operators to capture the opportunity in M2M, based on our extensive experience engaging with key players across the globe, and answers the following questions:
  • What is the opportunity in M2M in emerging markets? -Does the market size and – expected growth warrant focus from telco players? -Where is the value – concentrated? Does it lie in connectivity, or services? In which business lines and –industry verticals is the value concentrated? -How do we assess the maturity – of each market?
  • What are the key challenges facing M2M in emerging markets? -How do immature M2M – markets affect operators’ positioning and role?
  • How should operators approach these challenges to capture the opportunity? -What roles can operators – choose to play?-How can operators – differentiate their offerings in M2M?

Current state of M2M in emerging markets

M2M services are hardly new to emerging markets. Only a handful of markets across Africa, emerging Asia and Latin America are without operators providing commercial M2M offerings3 . This increasing relevance of M2M to operators is further emphasised by the increasing mentions of M2M in operators’ annual reports and press statements.
In addition, global telco groupsincluding Telefónica and Vodafone are pushing their emerging market
operating companies to access their global M2M platforms (such as the Vodafone GDSP or Telefónica Digital) with the aim of expediting the development of local offerings.
One of the fundamental keys to success in M2M lies in understanding that it is not a single service, but rather an enabler of many highly-verticalised services. The key verticals for M2M services vary greatly across markets and are determined by the specific, local demand drivers that exist in each market – a specificity common to both developed and emerging markets.
For example, demand for M2M in many Sub-Saharan African markets is concentrated in applications such as vehicle tracking and security and surveillance, which are particularly suited to markets with high property crime rates, or in applications that serve the specific needs of mining or logistics firms. By contrast, demand for M2M in many Asian markets has a different set of key applications driving demand, namely eHealth, smart metering and consumer electronics.
M2M applications require more than just connectivity to enable a service – a supporting value chain or ecosystem of devices, software, systems integration and operational capabilities is required. The exact mix of enablers varies widely, depending on the specific M2M application.

In emerging markets, M2M ecosystems tend to be highly immature, with many elements on the value chain non-existent. For example, an operator seeking to deploy a M2M smart metering solution in Western Africa may find that there are no firms with the field team capacity to help deploy the service, or find few system integrators with the capabilities to design the accompanying billing system.

The few complete ecosystems that do exist in emerging markets are typically owned in their entirety by M2M service providers. This is a consequence of M2M entrepreneurs being forced to build all the supporting elements required to provide the end service.
Where no such entrepreneurs or supporting M2M ecosystems exist, operators may have an opportunity to take the lead in developing and marketing M2M solutions. In doing so, they can capture a more substantial share of the total value in M2M: For many applications, connectivity represents only 20-30% of the total service value (the exact share of the value varies by market and application).
Estimating the overall opportunity size in M2M for operators is challenging, especially for emerging markets. The projections of market size and growth differ greatly by whether analysts choose to seclude operators’ roles in M2M to just connectivity, or if they consider the overall solution value.
This ambiguity in market definition has led to widely divergent – and somewhat opaque – projections of overall M2M market size. However, there are three incontrovertible facts about M2M in emerging markets that can be drawn from operators’ actual reported performance:

1.M2M connectivity is already a large  business for operators in emerging markets, with many operators generating more than US$50m in incremental M2M connectivity revenues annually. Global connectivity revenues in M2M likely exceeded US$6bn in 2012


2.Reported growth rates for M2M in  emerging markets have exceeded those for developed markets in recent years and will likely continue to do so, given the following market drivers:
M2M services have proven – utility in meeting the real business and consumer needs present in emerging markets
-M2M services have proven utitility in meeting the real business and consumer needs present in emerging markets
-The low M2M penetration rates relative to developed markets have latent potential for sustained growth
-An increase in the supply of –M2M service enablers, such as technical platforms and low cost devices
3.Providing end-to-end solutions, rather than pure connectivity for M2M, can generate two-to-three times more value for operators
These three facts help dispel the uncertainty that can arise from the highly divergent market forecasts. Nonetheless, an in-depth local M2M market assessment is necessary to reveal the true opportunity in each emerging market.

Key challenges of expanding M2M services in emerging markets

Due to their typically low level of maturity and specific, local needs, M2M businesses in many emerging markets often operate in fundamentally different ways to those elsewhere in the world:
1.Enabling the non-core activities  may require partnerships or acquisitions. Operators that opt to develop and market their own M2M applications need to build capabilities in the M2M ecosystem that are often non-core to their traditional business.
For example, building a business in vehicle tracking demands technical capabilities (to provide the specialised devices and develop the tracking application software), operational capabilities (including investing in a vehicle monitoring centre, vehicle recovery teams and billing systems) and go-to-market capabilities (including sales channels, a network of garages to install the devices into cars and support channels).
Different markets may also place greater value on different links in the value chain. For example, in the South African vehicle tracking industry, the claimed success rate of recovery teams is an important differentiator for firms. It is easy to imagine and contrast how the value chain elements might differ in another M2M application, such as electricity metering or eHealth.
Due to the risk and cost of internal development, the most appropriate route to building these non-core capabilities for operators might be to enter into targeted partnerships or acquisitions. Knowing when and where to enter into a partnership or an acquisition may be tricky as the perfect match of skills and capabilities may be difficult to find in emerging markets and will invariably need to be supplemented by the development of internal functions as well.
Almost paradoxically, operators may have much of the technical and go-to-market infrastructure already in place. Operators can leverage their existing marketing, sales, distribution and support channels and skilled technical resources. Operators’ brands are also among the most trusted and familiar in many markets.
2.Monetising M2M connectivity may be difficult in certain markets. Despite growth prospects, there is still a relatively small number of active M2M SIMs in certain emerging markets. As an example, Nigeria and Ghana each have active M2M bases in the low 100,000s, representing less than 1% of total market SIMs. Other markets including China, Brazil and South Africa have active bases of several million SIMs each, however.
The second challenge of monetising M2M connectivity is that many markets have historically low average revenue per connection (ARPC). For example, in Ghana, where most M2M traffic is billed at the same tariffs as consumer broadband, M2M ARPCs are typically US$1 or less, substantially lower than typical global ARPCs of US$4.
Low postpaid uptake is the final challenge of monetising M2M connectivity. In many markets M2M devices may be sold with a removable prepaid SIM, rather than an embedded postpaid SIM. This leads to lower annuity revenues from M2M SIMs and lower customer stickiness.
3.Operators tend to have limited existing organisational and commercial focus on M2M. Many emerging market operators do not distinguish between their M2M and traditional mobile customers. A recent Delta Partners Intelligence Unit benchmark revealed that only 35 out of the more than 800 operators worldwide reported any M2M connections in 2012. Wireless Intelligence, a research provider, reported that only four out of 10 operators worldwide claim to offer M2M services.
This lack of focus is often a result of operators serving their M2M customers through the same commercial model as their traditional mobile customers, including the same tariffs, sales and support channels. This prevents operators from meeting the specialised needs of their M2M service provider customers.
4.Many operators lack a suitable M2M enablement technical platform. The M2M business is characterised by high volumes and low ARPCs. Due to these economics, minimising the cost to serve and support each SIM is critical for operators.
However, few operators in emer-ging markets have the necessary technical capabilities in place to support the scale of M2M. The M2M business processes in such operators are managed over the same BSS as the rest of the mobile business.
An M2M SIM lifecycle manage-ment platform allows operators to automate or outsource much of the administrative overhead of managing tens of thousands of M2M SIMs to M2M service provider customers themselves.
Vendors such as Jasper Wireless, Sierra Wireless Ericsson or Comarch enable a self-management portal for operators’ M2M service provider customers to administer their own SIM bases, including activation, provisioning, tariff changes, testing and end-of-life.
Such a platform helps operators build a powerful value proposition in M2M connectivity as they reduce cost and complexity for customers. SIM lifecycle management platforms are typically a stepping-stone to further value-added services in M2M, such as developer environments, global SIMs and managed connectivity.

Potential approach for operators in M2M

Given the global growth in M2M – and the specific untapped opportunities in emerging markets – each operator needs to develop a tailored strategy for M2M. The core of each operator’s strategy needs to define what role they will play in M2M, which verticals they will target, and how the offering will be enabled (i.e. through internal development, partnerships or acquisitions).
Operators will need to play different roles in M2M in different markets, depending on the maturity of the existing M2M ecosystem. These roles are diverse and require different actions, capabilities and levels of investment. Operators should choose to play one or both of the following roles:
1.Become a market builder In markets where there are no M2M service providers, the application ecosystem does not exist, yet the opportunity in solutions is sufficiently great to justify the investment, operators can take a proactive stand by becoming a “market builder”.
Such a role involves deploying a complete M2M solution by enabling all the necessary value chain links. The risk and investment required to build the market could be minimised by partnering or making selective acquisitions to enable the value chain links which are not core to mobile operators.
There are numerous examples of operators achieving success with this role, including Airtel’s end-to-end vehicle tracking solution in Ghana and Maxis’ fleet management and field force solutions in Malaysia. 

2.Become an enabler Operators can also choose to play an “enabler” role for M2M service providers, rather than competing directly for end-customers with service providers. This role requires operators to implement a technical platform, develop a wholesale value proposition and build a supporting commercial and operations structure to meet the needs of M2M service provider players.
The enabler role offering drives higher market share, higher revenues per connection and greater customer stickiness. The enabler role can be complemented by entering into select partnerships with M2M service providers to capture greater market share.
An additional, and complementary, strategy to expand along the value chain is to move from pure connectivity to providing value-added connectivity for M2M. In its most basic form, value-added connectivity involves providing M2M service provider players with self-care portals to enable them to manage the entire lifecycle of their SIMs, including activation, provisioning, tariffing, roaming, billing and deactivation.
The enabler role is highly complementary to the market builder role and the combination of the two allows operators to enable an integrated value proposition in M2M – selling high-value solutions to new and select verticals, and capturing a large share of the connectivity revenues to M2M service providers in other verticals through the value-added connectivity offering.
Each role requires its own combination of technical, commercial and operational capabilities in order to achieve the desired positioning and commercial success:
  • Becoming a market builder may require either entering into strategic partnerships with firms to enable the non-core elements of the value chain (such as the go-to-market elements) and to share the associated risk. This may necessitate a strategic acquisition of an established firm to kick-start market entry.

  • The enabler role may necessitate entering into strategic commercial partnerships with the key M2M service providers in the market. 

For both roles, operators need to enable a minimum set of M2M technical platform functionality

Conclusion: Ready, steady, build! (Or enable)

In summary, operators in emerging markets need to address the following considerations in defining their strategy to capture the opportunity in M2M:
M2M services is a rapidly growing business in emerging markets, and the prize at stake can be substantial… 
-The immature M2M – ecosystems in emerging markets represent an opportunity to capture a significant share of the value chain through providing solutions, rather than just pure connectivity
But operators there face  significant challenges in addressing the opportunities 
-Challenges include finding – the correct technical and commercial partners, building connectivity revenues from a low base, creating the organisational focus and ensuring the technical enablers are in place
The first step to begin overcoming these challenges in M2M is to define the role to be played…
-Launching end-user M2M – services requires that operators adopt a market builder role. Operators choosing to enhance the connectivity value potential in M2M can adopt an enabler role
but defining the role in M2M
requires careful understanding of the existing M2M application ecosystems and the competitive landscape -The role to be played should  be a function of the size of the opportunity and the maturity of the ecosystem, necessitating a detailed assessment
-Regardless of the role – selected, a M2M platform including SIM management functionality is at the core of the IT infrastructure required to enable a competitive offering in M2M
Delta Partners is well placed to collaborate with operators to address these considerations and to define the strategy to capture the opportunity in M2M, having worked with key operator groups and in some of the world’s most dynamic markets for M2M. Delta Partners has recently collaborated with operators to:
1.Understand the overall market  opportunity that exists in M2M. Understand the key global and local trends shaping the M2M landscape. Identify the target applications and customer verticals and understand their needs. Evaluate the current competitive situation in the market and size the overall commercial opportunity
2. Assess the required IT transformation and/or enhance-ments to build the platform for M2M. Understand current IT stack capabilities and the transformation that is required to meet customer needs and be competitive in the market
3.Understand the local M2M  ecosystems in-depth. Create a highly detailed view as to the maturity of each M2M application ecosystem, size the value chain opportunity and define actions that will need to be taken at each link of the value chain in order to bring products to market
4.Devise the overall strategy to capture the opportunity. Delta Partners has worked with clients to devise comprehensive strategies to capture the opportunity in M2M, including defining the target verticals and applications, defining the role to be played for each, defining how to address the opportunity (e.g. Go-to-Market) and setting the guidelines to ensure the targets will be achieved
5.Make it happen Having set the strategy, Delta Partners has worked closely with clients to transform commercial and technical operations to start realising real customers, revenues and profits in M2M, including identifying and launching pilot opportunities
Operators need to act quickly to maximise their share of the value in the M2M services market. The current fragmented and immature M2M ecosystems in emerging markets present a rapidly closing window of opportunity, given the forecast growth and intensifying competitive focus.
Defining the strategy to adopt the correct role, positioning and put in place the technical and commercial enablers is the critical first step that operators need to take in order to capture this opportunity.

Without the correct strategy in place – one that is tailored for the particular market maturity, competitive environment and internal technical and commercial capabilities – operators risk the undesirable outcome of remaining confined to a narrow segment of the M2M value chain.
To do so would be to forego the transformative promise of M2M to expose mobile operators to the value and upside of providing solutions to customers beyond that of pure connectivity