As connected devices ramp up, how should operators define them?

Lynnette LunaConnected devices sort of came into their own during the third quarter as Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T) announced connected device additions that outpaced their postpaid additions. But how significant are these numbers when we don't know what devices operators are talking about?

AT&T Wireless said it added 1.12 million connected devices in the third quarter. Verizon Wireless said it added 251,000 net "other connections" to bring Verizon's total "other connections" base to 7.9 million at the end of the quarter. T-Mobile said it added 300,000 "connected device customers," but Sprint Nextel (NYSE:S) so far has refused to report any connected device numbers. Danny Bowman, president of the integrated solutions group at Sprint said at the Open Mobile Summit that the company is waiting for the industry to define a "connected device" before it jumps into the fray.

All of this looks impressive. Connected device additions are masking slower growth in the postpaid wireless subscriber market, and they apparently aren't having much of an effect on average revenue per user firgures. (T-Mobile, however, did see a fall in ARPU. Wireless industry analyst Chetan Sharma recently pointed out in a report that T-Mobile's postpaid ARPU came in at $52 instead of $55 in the third quarter, which he said was because of the dilutive effect of connected devices.)

Currently, connected devices account for just 3 percent of operator data revenues, according to Sharma. Of course, that number is expected to rise exponentially as everything from cameras to refrigerators begin coming to market with wireless chips embedded in them. But herein lies a new problem: How should operators be reporting these devices?

Click here for a slideshow of some notable connected devices. According to Susan Welsh de Grimaldo, an analyst with research firm Strategy Analytics, there is little consensus at this point. She pointed out that some embedded devices could be classified as prepaid devices, while others may come on the network as wholesale and retail devices. Moreover, some connected devices generate monthly revenue from data use, while others just generate a monthly revenue with no or little data use. In short, there is no one definition of a connected device, she said.

So I really wonder how long operators can continue to report this separate and nebulous "connected devices" category. Welsh de Grimaldo said there is talk of applying financial metrics that have to do with average margin per user rather than ARPU so as not to spook Wall Street, which prizes high ARPUs.

At any rate, operators need to come to a consensus soon about how to measure connected devices. I suspect the process will go through the same growing pains it did in the early days of prepaid. For instance, operators at one point had different definitions of when a prepaid subscriber churned. --Lynnette