Blin: The next multibillion-dollar opportunity in wearable devices, connected cars and M2M

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Julien Blin

With wireless penetration now over 100 percent in the United States, wireless postpaid growth continuing to decline year-over-year, and 70 percent of the handsets sold in the U.S. being smartphones, the country is reaching the saturation point.

Moving forward, this will make it difficult for U.S. carriers to maintain steady annual subscriber growth. On top of that, most OEMs are facing low margins in the smartphone and tablet markets as well as increased competition from low-cost Chinese OEMs like Huawei and ZTE.

As a result, U.S. carriers and OEMs are looking beyond smartphones and tablets to offset these trends and grow their top line.

Where will future growth come from?

Verizon Communications CEO Lowell McAdam recently said in an interview at the 2013 Consumer Electronics Show: "We are going to encourage thermostats, healthcare devices, your car and all of those things to be connected over the Verizon network."

AT&T Mobility CEO Ralph de la Vega is very vocal about AT&T's plan to move beyond smartphones to generate new revenue opportunities, with the company asserting leadership in the machine-to-machine market and recently sponsoring both an M2M Challenge and a Connected Car Challenge for developers at its AT&T Summit Hackathon last month.

Sprint Nextel is also looking at new opportunities, as reflected in its recent deal with Softbank, Japan's No. 3 carrier, known for taking market share from entrenched giants and delivering data to smartphones, tablets, cars and even bicycles.

These and other wireless players are already making big bets and investments in M2M, connected cars, and wearable computing devices, three of the most promising new areas of growth for U.S. carriers and OEMs. Here is a quick overview of the opportunity:

M2M

Providing network connectivity and value-added services for M2M devices like smart meters, retail kiosks, thermostats and digital signage presents an important new opportunity for U.S. carriers.

M2M revenues make up only a fraction (less than 5 percent) of U.S. carriers' revenues today (for instance, AT&T's emerging devices business generates about $1 billion per year, a meaningful but small fraction of overall sales). However, the M2M market is growing at a white-hot pace. M2M is a very attractive opportunity to carriers, as it has the potential to be a high-volume and low-churn business marked by coveted long-term contracts.

Wearable computing devices

This year we are seeing a lot more activity in the wearable device arena, especially from the major OEMs like Samsung Electronics, Sony, and LG Electronics, which are already offering connected watches and other devices. Apple is rumored to be working on a connected watch that could be introduced this year. Carriers are also looking at this area.  At CES last month, Verizon Wireless showcased some new Golden-i headsets, which are embedded with regular and infrared cameras, voice and gesture sensors, facial recognition technology and LTE connectivity.

I expect some of the smaller wearable device players to be acquired by OEMs and carriers in the coming years as they seek both the technology and the talent they need to execute their own wearable computing devices roadmap. Companies like Muse (brain sensing headband allowing users to play games, focus, de-stress, and heighten memory capacity), Pebble (connected watches), Misfit (sensor based activity tracker), Amiigo and FitBit could be M&A targets based on their recent momentum and the quality of their products.

Connected cars

Over the past few months, service providers Verizon, AT&T and Sprint and OEMs BlackBerry, Nokia, LG and Samsung have been forging deals with automobile manufacturers to take advantage of the growing opportunity that connected cars present. Although it can't generate the volumes seen in the tablet and smartphone markets, the connected car business holds the significant promise of high average revenues per device (ARPD), and in turn, better margins and profitability.

In the future, I envision connected cars will be embedded with artificial intelligence (think Google Now integration), super maps, "highlight" apps integrated with social media, video calling capabilities, and capable of learning and predicting driver and passenger needs. For instance, a connected car could suggest to a driver to get out of the car and go for a walk if he or she did not burn enough calories on a particular day, or notify a driver that friends are nearby. These features will require the car to be constantly connected to a cellular network, which is where the opportunity lies for carriers.

Granted, the monetization models currently available are not mature and it remains to be seen how much people will be willing to pay for connected car features, but over time we expect price to come down and solid monetization models to emerge in the long run, helping drive adoption in the process.

Bottom line

The wireless business as we know it will be very different five  to 10 years from now. Smartphones will be available in different shapes and forms, such as watches, glasses, and car dashboards, as connection capabilities become the norm. Many wearable computing devices will be embedded with W-iFi or Bluetooth to keep the price low, while SIM cards and LTE chips will be leveraged to enable calling. Devices will be truly context-aware and intelligent, embedded with AI solutions "on steroids" capable of learning, assisting and predicting customer behavior in real time wherever they are.

It is evident that relying on smartphones and tablets to drive future growth won't be enough for carriers and OEMs in the years to come. Forward-looking service providers and OEMs recognize that they must adapt their business models to the emerging environment of M2M and connected, wearable devices to take advantage of future growth. Those that do not could be left behind.

Ultimately, as more and more devices connect to carrier networks, it will become critical for carriers to add these new devices to consumers' shared data plans to drive demand, and to fully take advantage of these new revenue opportunities.

Julien Blin is Directing Analyst for Consumer Electronics and Mobile Broadband at Infonetics Research. A mobile device expert formerly of Samsung, IDC, Ovum and Wedbush Morgan Securities, Julien now authors mobile, broadband and pay TV research and advises Infonetics clients. He can be found on Twitter @jblin.