Mobile subscription growth of 38 per cent in a mature market is something operators haven't seen for many years. Remarkably, this is what the world's top ten operators experienced last year with machine-to-machine (M2M) subscription adoption, according to Berg Insight, leading to around 3.4 per cent of their aggregate subscriber base of 2 billion being connected to machines and not people.
In terms of the total number of global mobile subscribers though, these are still small numbers, and perhaps the reason M2M has slumbered in the backwaters is that operators poured resources into the more glamorous smartphone business.
Click here for the GSMA's forecasts.
But this growth, together with the particular characteristics of the M2M business--very low service costs and almost non-existent churn--are catching the attention of those operators in urgent need of finding new revenue sources. Indeed, the GSMA said last October that the connected device market represents an "addressable revenue opportunity" for mobile operators of nearly $1.2 trillion by 2020--more than seven times the revenues generated from connected devices in 2011.
Building the business model
Key to building M2M into a growing and profitable sector is the design of the business model. Up until recently, operators were struggling to identify what the model was and how to construct a platform and value chain that was flexible enough to cope with the scope of M2M, according to Ton Brand, the programme director of connected life at the GSMA.
"M2M has been an eye-opener for operators in terms of the radically different business model that is required in comparison to their handset operations," Brand said. "Now, the top 20 operators around the world have started to understand M2M, and are not only looking at how to make money from M2M connectivity but what is the value-added service component they can deliver on top of this."
An indication of how M2M differs from the handset business comes from Jasper Wireless, a leading provider of M2M platforms.
Macario Namie, vice president of marketing at Jasper, noted that M2M average revenues per user are typically significantly less (below 10 per cent) of what operators achieve from their handset customers. As such, Namie maintains that adopting the same systems and processes that operators have been using for the past few decades for the handset-based business cannot be used to make M2M profitable.
"Operator should look to automate many of the costs in reaching, acquiring and supporting M2M customers," he said. "The metrics for M2M should not be based on ARPU but on margin, and can be a very profitable business."
This view is also supported by Rodolphe Fruges, vice president of the Internet of Things and M2M at Orange Business Services.
"You definitely cannot use the same ARPU model for M2M as we use for current voice and data subscribers," he said. "Data traffic can vary enormously depending on the M2M application, from digital signage and CCTV security cameras requiring near-constant high-bandwidth connectivity down to a smart meter sending one SMS per day. Using ARPU to measure this one text message today will produce very strange metrics."
Need for new model
This change to the accepted model has prompted Marc Overton, vice president of wholesale and M2M at Everything Everywhere, to call for the mobile industry to agree a set of metrics for M2M to better understand how this business is evolving and where the real value is heading.
"Our M2M business has some of the most profitable subscribers and highest ARPUs--such as CCTV, and some of the lowest with a smart meter that only reports once a month," says Overton. "ARPU could be misleading to measure M2M given that you may have a particular M2M subscriber for tens of years, albeit that their monthly revenue could be very low."
Of note, Everything Everywhere only started announcing its M2M subscriber numbers in its last quarterly result. The company counts a little over one million M2M customers, but it declined to report how much revenue was generated by this sector of its business.
Overton added that the operators were today more focused on gaining M2M connections, but would quickly move to basing the business on the lifetime value of the subscriber. "M2M is in a land grab phase at present," he said.
This scramble to gain a meaningful M2M footprint is evident within the majority of major European operators as they position their business models to gain future revenues from adding value to the overall M2M solution, according to Robin Duke-Woolley, CEO of M2M market research firm Beecham Research.
"What's front of mind for operators is driving up the number of M2M connections and not worrying too much about the revenues generated. There are many different ways of adding value in the future," Duke-Woolley said. "For example, as the devices generate data, this can be collected by the operator and then analysed to provide useful and chargeable information. This is valuable business intelligence by identifying trends and needs in particular markets."
"Mobile operators are looking at how they can become data managers in the future and not just connectivity providers," he added.
M2M data traffic not a problem--for now
However, some think the push to add value to the M2M value chain shouldn't be at the expense of understanding the impact M2M can have on an operator's existing cellular network.
While the volume of M2M data traffic doesn't present a problem right now, Ericsson's M2M expert, Miguel Blockstrand, cautions that M2M devices are "chatty" by nature and can generate traffic unpredictably--somewhat similar to smartphones.
"While this problem is not likely to appear in the near-term, operators should start to consider within their M2M business models how they should dimension their networks or add smartness so they can recognise and manage M2M traffic," he said. "This could include the enforcement of predefined network policies, such as various subscription packages to provide certain M2M devices with a better QoS, monitor PoS terminals for fraud, locking a module to a certain site and only allowing it to communicate at a certain time."
While networks and the business model are important to ensure the success of M2M, the overall complexity of the solution worries those close to the sector.
Issues that still require better understanding include international roaming, managing the deployment of projects involving millions of devices, the reliability of connections and understanding how M2M can radically change an industry.