M2M profits tempting, but not assured

As featured on TM Forum's Inside Revenue management newsletter
There has been a lot of hype around what will be the next big revenue stream for CSPs. Like the elusive ‘killer app’ there will likely be a number of smaller new revenue streams rather than one that will save the universe.
One area getting a lot of airplay is machine to machine (M2M), and most analysts have already come out with dramatic predictions as to the worth of that market. Based on Informa’s World Telecoms Financial Benchmarks database, which tracks the financial performance of the world’s 40 largest operator groups, this would indicate an M2M market value in excess of $65 billion (€53.4 billion) by 2015. But how much of that will end up in the pockets of CSPs, and what exactly is it they will be charging for?
Today, CSPs are doing what they do easily and very well – selling connectivity. This represents almost 90% of M2M revenue in the current market, according to another Informa report sponsored by SAP, “M2M Communications - Turn Potential into Profit.” I realize our industry is bombarded with sponsored analysis and reports, but occasionally one comes out that hits the spot and answers many questions going through the minds of senior management at CSPs. Will we or won’t we and where’s the money being the two most common raised.
The report states that M2M connectivity revenues will continue to grow robustly. But the choice for CSPs is whether they want to tap into other revenue streams – or if a bit-pipe role offers sustainable profitability. The analysis indicates that either choice demands change in how M2M operations are run today.
M2M market dynamics mirror those of global telecommunications in the late 1990s, a heady time when liberalization was sweeping across the world. Wholesale – selling communications services to intermediaries – was a common entry strategy into newly competitive markets.
Today, many CSPs’ M2M operations report into a wholesale division, and are wholesale focused. As in the 1990s, carrier alliances and wholesale traffic exchanges are multiplying to help service providers operate globally.
Revenue growth expectations are as bullish now as they were over a decade ago. Seven out of every 10 CSPs we surveyed believe that M2M will generate 5% or more of their revenues within the next three years – despite the fact that it makes them little or no money today.
Tomorrow – certainly within three years – Informa anticipates that revenue distribution will make an inexorable shift to what end users want to do with M2M, such as supporting business decisions with M2M data intelligence, securing and manage M2M data, identifying and create new applications for M2M.
Tantalizing nuggets collected in the research interviews explain market enthusiasm. Gross margins of up to 70% are achievable. Likewise with deals exceeding half a million M2M endpoints. Contracts of 10 years’ duration are achievable as well.
Quoting further from the report, “Parallels with the 1990s are also warnings. The headlong rush into wholesale communications resulted in market crash because there was little differentiation between service providers except price, which fell below the cost of supply. By focusing on building digital superhighways for each other, service providers lost sight of what end customers were willing to pay for.”
It’s also notable that 60% of the survey respondents expect that telecom operators will largely play a bit-pipe role in the M2M market, while others assemble the pieces required to deliver an M2M service to end customers. Certainly, a connectivity-centric role can be successful, but only if M2M connectivity becomes industrialized, with predictable revenues and profits.
But M2M revenues and profits are not certain. M2M service providers are currently riding an M2M rollercoaster with many dips and curves. There is extraordinary breadth in reported deal size and ARPU. Many stress that there is no ‘typical’ M2M deal.
The biggest deals in terms of M2M end points, typically in smart metering, can yield ARPUs of 50 cents per SIM per month and need little bandwidth. The smallest deals, typically in digital signage, can yield ARPUs exceeding $10 per SIM per month and do need broadband connectivity. Contracts for smart metering can be 10 years long, but other M2M contracts are more likely to range between three to five years. Yet, whether M2M ARPUs trend high or low, M2M service providers still bear the same underlying costs to deliver the same functions.
Informa estimates of gross profitability for M2M services range between 20% and 70%. This extreme variability reflects issues including how M2M service providers allocate network costs, which networks and M2M modules are used, and if they are subsidized. For example, M2M services delivered over 2G can be highly profitable, because the network may be depreciated and 2G M2M modules are cheap.
Customers buying an M2M service today will first be offered a national or international data plan. Many M2M service providers say they are not equipped to support more complex business models. At the same time, some are not yet willing to offer more. M2M stakeholders can agree that table stakes for market success are end-to-end service management and flexible billing for varied M2M applications and traffic profiles. Aren’t these the types of services our industry keeps saying it excels in?
Tony Poulos is a market strategist at TM Forum