The rise of the machines

As the global market for machine to machine (M2M) communications accelerates, business models are far from mature. George Malim reports

The rise of the machines

Wireless M2M connections are increasing. Analyst firm, Berg Insight has reported that machines now account for 1.4% of mobile network connections worldwide and those figures are higher in the EU and the US where wireless M2M has a 2.4% and 4.3% share respectively. Berg also forecasts that in the next five years, the total number of wireless M2M connections will grow at a compound annual growth rate (CAGR) of 25.6% to reach 187.1 million connections in 2014.

Tobias Ryberg, senior analyst at the firm, points out that M2M is now starting to generate substantial revenue streams for large operators in spite of the typical monthly ARPU of around 4. He anticipates that 2010 will be a positive year for the global wireless M2M market with hardware shipments returning to growth and a continued increase in the number of network connections. New M2M initiatives launched by major operator groups are set to increase demand, stimulating the large-scale projects.

However, for many organisations assessing the advantages of M2M communications, the investment required, along with the time needed to generate a return, is substantial. Carriers historically haven’t been interested in subsidising that investment and many of the systems integrators and hardware manufacturers that support enterprise users don’t have the scale or financial muscle to take the financial risks themselves.

Non-subsidised M2M services

That’s partly by design with operators seeking to ensure M2M remains a non-subsidised service from its inception. ‘Operators spotted M2M a long time ago and put their mark on it,’ says Jean Schmitt, managing partner of venture capital firm, Sofinnova Partners. ‘The system, by its construction, ensures that you have to pay.’

Phil Cole, sales director at Wireless Logic, sees that holding back the market’s development. ‘In M2M, SIM cards have never been subsidised,’ he says. ‘M2M networks want a different model to the traditional consumer one but there’s obviously far more need for subsidy in M2M with some PDA-type devices costing in excess of £1,500.’

Extend that figure to a deployment involving 10,000 machines and that’s a device cost of £15m. Couple that with long-term connectivity agreements with carriers typically generating 4 per device per month ARPU and the connectivity cost of the deployment would be £480,000 per year. Those are attractive figures for financing but the carriers have been unwilling to get involved in the subsidy route.

The systems integrators that are often at the heart of the M2M market, in terms of developing solutions for specific enterprises, often don’t have the financial strength to underwrite those sorts of figures. Of course, there are far cheaper terminals and hardware and as volumes increase price points will come down.

‘The hardware side is a very depressing business,’ says Schmitt. ‘It commoditised itself before it even started.’ He points out that some 2.5G chipsets can be purchased for five or six dollars – including software.

Operator cost

Schmitt however, sees M2M as a great business for network operators. ‘It’s exciting that operators can make money from  2 ARPU from Indian consumers,’ he adds. ‘They can therefore make tons of money at 4. Machines are marvellous from an operator perspective. They don’t use customer care and they use almost no bandwidth. Operators are trying to maximise the number of low bandwidth applications with a favourable data plan. The downside is that bandwidth hungry applications will be super expensive.’

Even allowing for cheaper hardware there will remain a vast spread of requirements, costs and business models. ‘Financing depends on the business model,’ says Macario Namie, senior director of product marketing at Jasper Wireless.

‘Some businesses look at connectivity as a cost while others look at it as a revenue enabler. For utilities, it’s a cost and they have to pay for every end point and every connection with contracts ranging between eight and 10 years in length. Utilities are large enough to embed that cost in their charges to customers and the total cost of ownership for smart metering over the long-term does pay off but a lot of those costs are upfront.’

The ideal finance model for M2M

Erik Brenneis, head of M2M smart services at Vodafone Global Enterprise, doesn’t see a single answer to the financing issue. ‘With regards to financing, there cannot be a standard answer,’ he says. ‘We need to look at it sector by sector and what the project is doing will decide who is going to fund it.’

Cole has been trying to construct a model for the financing of M2M for several years and has only recently had success in getting financial institutions to engage with the M2M proposition. That hinged on giving them a new understanding that airtime is a valuable asset.

?‘We’ve spent two and a half years going round the banks trying to develop a subsidy model for M2M,’ he explains. ‘We’ve now created a managed service which allows us to finance airtime, connectivity and software. Now, rather than saying to customers we’ll get a return on investment in month 15 of the deployment, we’ll get the banks in and the solution will be subsidised to the end user from day one with the service, connectivity and devices all charged for under one monthly fee.’

Namie adds that handling the investment required has traditionally been the job of the provider of the service, not the network operator. ‘This has been one of the challenges to mass market deployment,’ he says. ‘A tremendous amount of risk is incurred by the hardware manufacturer and the provider of the service as they have to make long-term commitments to operators on the amount of data the service will use.’

The importance of monitoring

?Brenneis acknowledges that; ‘Operational efficiency, I think, is really the business case. When you look at M2M, the more valuable and more critical an application the more value lies in remotely tracking it. All large construction machines and oil pipelines are monitored and today small companies provide those services to the likes of Caterpillar or Gazprom,’ he says.

‘The investment and financing is initially for hardware and installation and needs funding by the [vehicle] manufacturer. The monthly management and communications cost is an operational expense usually included in the service cost that a relatively small company charges to Caterpillar or Coca-Cola in the case of vending machines with M2M capability. Usually the business case in these scenarios is made on how much operational efficiency will be gained.’

‘The initial capital expenditure, especially in situations where it isn’t absolutely crystal clear that you need to adopt M2M communications, presents a problem for the development of the market,’ he adds. ‘I think the market could be stimulated by someone taking the set up cost away and putting it into the monthly management fee.’

That’s just what Cole is aiming to do with his proposition. He claims 25 of his systems integrator customers are already signed up to Wireless Logic’s financing programme and is upbeat about the effect such schemes will have on the market’s development. ‘It will drive uptake like it did with mobiles,’ he says. ‘It will make it simple to use up the line. Companies just want to know that if they want vehicle tracking, for example, it will be £30 per vehicle, per month on a rolling contract.’

Whether it’s Wireless Logic, hardware manufacturers, service providers or network operators that provide the financing, there is now a clear recognition that it is necessary for some options to be in place in order for the market to grow. Brenneis at Vodafone Global Enterprise expects his business to have role.

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