Cellular connectivity for the Internet of Things has seen, and continues to see, significant price erosion. The analysts at Transforma Insights have recently published a report ‘IoT connectivity providers need a hyperscale approach to counter the ‘$1 IoT’ scenario’. which proposes a very realistic scenario that within 5 years we will see ‘$1 IoT’, by which we mean that the median price paid for cellular connectivity will be just $1 per year.
The idea of paying just $1/year for low data connectivity is not at all far-fetched. 1NCE made a big splash in 2017 with its €10 ($11.54) for 10 years connectivity, albeit limited to 500MB of data over the lifetime of the device. Blues Wireless has a $49 for 10 years connectivity offer in the US. However, it represents a significant decline compared to the average revenue per connection for the existing user base. Current average revenue per connection for cellular-based IoT devices globally is typically somewhere between $0.5 and $1 per month. Some operators, such as Telia or Telstra, are substantially higher (often due to generating revenue from vertical solutions). Others, such as those in China, are much lower.
Some of the implications of price decline are, of course, positive. Reducing the barriers to entry for using cellular should open up new opportunities, both for greenfield IoT use cases, and for swapping in cellular for short-range technologies such as WiFi, Bluetooth and Zigbee. China, with its average cellular revenue per device sitting at between $1 and $2, has around 0.4 cellular connections per head of population. For the rest of the world, the equivalent figure is 0.1.
The risk is, however, that a market migrating to a pricing norm of USD1/year revenue is one where total connectivity revenue is likely to be static if the migration is slow, and more than likely falling. This is not an unusual market dynamic for the IoT space. The cellular modules market for many years saw price declines of a comparable level to the (healthy) market growth rates. The result was a static market in terms of revenue.
The big question is this: what do Communications Service Providers need to do to address this prevailing market trend?
One simplistic recommendation would be to ‘go up the stack’, pursuing vertical solutions such as fleet management, building security or retail. The majority of the revenue for any IoT application sits in this solution element, typically 50%-70%, compared to 5%-10% for the connectivity. The obvious thing for CSPs, the argument goes, is to move into that part of the value chain, selling vertical solutions. This is an easy recommendation to make and a difficult one to achieve. Any vertical solution market will typically be highly contested by specialist service providers with years of experience and highly evolved products, channels and go-to-market strategies. Most CSP offerings in such a market will be ‘me too’, with all the associated challenges of building market share. To succeed in this strategy a CSP needs a sustainable differentiator. This can come from M&A, typically acquiring a solution provider in the space, as with Verizon in fleet management, KORE in healthcare, and Vodafone in various sectors. Alternatively, it can come from long-term building of internal capabilities, such as Telefonica’s retail expertise in its OnTheSpot subsidiary, which in various guises has been running for over 50 years. The CSPs can also expand their service offering through, for instance, the sale of hardware, or the provision of consulting services.
Other strategies focus on making service delivery more efficient. This might include consolidation, of which we have seen a significant amount within the IoT MVNO world in the last 5 years or so. For MNOs IoT is too insignificant an element of their revenue for it to be a driver of consolidation. Wireless Logic, for instance, has been on the acquisition trail a lot in recent years, buying up companies such as Arkessa (UK), Com4 (Norway), Data Mobile (Liechtenstein), Matooma (France), and Things Mobile (Italy). For MNOs IoT is never going to trigger consolidation given that IoT typically only represents one or two percent of their revenue.
For MNOs, a more likely approach is to rethink the approach to IoT overall, shifting to a model focused on selling purely connectivity, with a large element of that being based on wholesale, i.e. supporting MVNOs. With that type of strategy comes a requirement to control costs much more closely, for instance for IoT-specific spending on things like NB-IoT and LTE-M upgrades. There is evidence that a number of MNOs are pursuing just such a strategy.
The most effective approach, however, will be to scale the delivery of IoT to reflect the new economics, and new scale. It is only by reducing onboarding and ongoing connectivity costs that a connectivity provider can offer the scalability to support the hoped-for billions of devices at the expected price points. To position themselves as Hyperscale IoT Connectivity Providers (as we term them), they will particularly need to focus on a few areas:
Transforma Insights will, on 28th October, publish its CSP IoT Benchmarking Report, which examines the approaches and opportunities for MNOs and MVNOs, including AT&T, Deutsche Telekom, KORE, Telefonica, Telia, Verizon and Vodafone, in IoT. This report examines how capable the existing CSPs are in all of these areas (and more) and therefore how capable they are of making the shift to being Hyperscale IoT Connectivity Providers.
As a supplement to that, on the 9th November, Transforma Insights’ analysts will run a webinar entitled ‘Best Practice for Communications Service Providers in delivering the IoT’ drawing on the results of our extensive work analysing and assessing the capability of MNOs and MVNOs, and particularly looking at how they cope with the changing dynamics outlined above.