IHS Markit's Watson: Follow the Money in IoT Past Connectivity to Services

Mobile network operators have great opportunities to monetize the Internet of Things. The dynamic is changing, however. Julian Watson, the senior principal analyst of Internet of Things (IoT) connectivity research at IHS Markit, tells Telco Transformation that carriers can't rely on connectivity revenue. That, he said, is not substantial, and will shrink over time.

In part one of a two-part Q&A, Watson suggests that MNOs need to focus on providing services to vertical industries. How they achieve this -- whether through partnerships or developing expertise in-house -- will vary. But the reality is that the money is in being more than a data conduit.

Telco Transformation: What is the difference between wired and wireless networks efforts to monetize the IoT?

Julian Watson: When you're looking at mobile connectivity, the business model tends to be some type of recurring monthly fee for access. So, the enterprise that wants to connect devices has to pay a pretty low monthly fee for M2M connectivity.

Within the wired IoT space, you have some traditional fixed wired infrastructure that is used in IoT. But you have an awful lot of fixed infrastructure that is being deployed privately. For instance, within the manufacturing sphere you're seeing a lot of Ethernet connectivity within the factory that is not generally provided by an operator who charges a monthly fee for each device count.

TT: Where are things now for IoT monetization in the MNO sector?

JW: MNOs have tens of millions of M2M customers. These are primarily 2G-, 3G- and increasingly 4G-based technologies. The main revenue stream for operators is providing the connectivity.

One key vertical is energy. Smart metering, for instance. Another key vertical is automotive, telematics and infotainment. They make on average about $3.4 or so globally per month [from connectivity]. So, it's very, very low ARPU compared to the types of ARPU they make from consumer mobility or pay-TV.

TT: Is this sustainable?

JW: I think revenue from connectivity ARPU will continue to decline. In the first place, there is a natural price erosion that you see with ARPU pretty much across every segment of the telecom space. Secondly, and this specific to cellular IoT, you have some of the low-cost, low-power, wide-area networks being rolled out that enable very low-cost connectivity.

The two key technologies here are NB-IoT and LTE-M. They have very good power capabilities. For instance, they support batteries in a remote device for over ten years. They enable very deep coverage, both over very long distances and deep into buildings, into basements. The modules are getting cheaper and cheaper. So, it's getting cheaper to deploy NB-IoT and LTE-M and that is making it more affordable for enterprises to connect devices, particularly remote devices that they couldn't connect before.

So, I think what you'll see is continued pressure on connectivity ARPU alongside very strong connection growth. This is really driving operators to try and diversify away from connectivity, to become less dependent on connectivity and build a broader range of solutions to specific verticals.

For instance, look at what Vodafone, AT&T and Verizon have been doing. They have been building up very strong automotive or fleet management propositions. They sell connectivity but they also sell software platforms and value-added services and consulting on top of that. And, in Vodafone's case, they actually sell the sensors as well.

TT: Do you think an MNO will build one horizontal platform for all the verticals or aim at specific verticals and build one-off solutions?

JW: That's the key question. I think most operators will take a hybrid approach. They will have a platform that has enough generic functionality to support many vertical use cases. They will offer basic connectivity but also partner with providers of sensors, gateways and modules to offer closer to an end-to-end solution. They won't control all of the revenue by any means but just offer concierge solution.

And then there will be other verticals that the operators will go after very aggressively, with their own end-to-end solutions, controlling far more components of the overall solution than they would in a horizontal play. Vodafone and Verizon have built out a play in automotive and fleet management, primarily through acquisition. Vodafone bought Cobra Automotive and Verizon has made a couple of acquisitions in the auto and fleet management space.

There's also the option for operators to build out an end-to-end capability in-house. The challenge with that is that it's very cost intensive. Generally operators are quite cautious about putting a lot of resources into projects that are not going to turn around money quickly. So there's a natural caution. I think what we're seeing is that the bulk of the activity is through horizontal platforms, which include partnerships with third party platform providers, third party module makers, gateway providers and system integrators.

TT: Which carriers are excelling?

JW: I'd say Vodafone and Verizon in particular are very forward thinking. There are some other operators that are doing some interesting things. For instance, Telenor created a dedicated IoT business unit called Telenor Connexion. I think they've taken a very proactive approach toward IoT. The IoT is somewhat different from consumer mobility or the traditional fixed and pay-TV business. They need to spin off or create a dedicated division that focuses on IoT business needs. They're not the only one. Tele2, another Nordic-focused carrier, has followed suit.

In emerging markets, you're also seeing the likes of Reliance, which is a major Indian carrier, create a dedicated IoT business unit. And I think that really reflects, as I've said before, the reality that actually selling IoT into enterprises is a completely different proposition to selling products like voice or mobile or broadband. In the IoT, an operator needs to actually understand what challenges an enterprise faces.

— Carl Weinschenk, Contributing Writer, Telco Transformation