In case you missed it, Ericsson announced on the 7th December that it was handing over its IoT Accelerator and Connected Vehicle Cloud businesses to Aeris Communications. I say ‘handing over’ but the rumour is that Ericsson paid Aeris to take it off its hands to the tune of around USD70 million. That’s for a pair of assets that are collectively losing close to USD100 million per annum according to Ericsson’s own press release. In exchange Ericsson gets a small stake in Aeris.
This deal was unexpected and caused quite a lot of speculation in the IoT connectivity space. In this blog post we explore the likely motivations and implications.
On one level it’s pretty obvious why Ericsson would make this move. The IoT business is a significant loss maker and Ericsson needs to turn its finances around. Getting shot of a loss-making entity completely makes sense.
But it’s not quite that simple. The IoTA offering is aimed at mobile network operators (MNOs) as their connectivity management platform (or one of several). Those MNOs spend a fairly modest amount with Ericsson for IoTA, to the tune of perhaps a few million dollars per year, depending on the size of the organisation. In contrast, many of them spend billions with Ericsson on mobile network infrastructure, most recently related to 5G roll-out.
The consensus amongst most users of third-party connectivity management platforms (CMPs), is that they have been underinvesting in the capabilities. This underinvestment reflects in part the lack of revenue coming from IoT. Perhaps more realistic forecasts (such as we provide) were required 10 years ago? Some of the operators that we’re speaking with for our forthcoming CSP IoT Peer Benchmarking Report (the findings of which will be shared at a webinar in February) were decidedly less than complimentary about the capabilities of such offerings, including one four-letter word (although not aimed at Ericsson)!
This underinvestment does three things. It puts the MNOs at a competitive disadvantage against rivals who have control over their own roadmap, including Vodafone and numerous non-MNO connectivity providers such as 1NCE, Emnify, Eseye, Kore and Wireless Logic. I’m going to use the term ‘IoT MVNO’ here even though several of the aforementioned don’t like it. These IoT MVNOs collectively are making increasing waves in the market. They’ve been able to build software platforms and functionality to rival operators and have in the last year or two put together viable offerings for multi-country support using combinations of multi-IMSI, local operator deals, eSIM profile donation and more. This isn’t an article about IoT MVNOs but they’re taking advantage of sluggish behaviour by the third-party CMPs.
Secondly, it encourages the MNOs to engage in a multi-platform strategy, typically by building their own platform to run alongside the third-party version, providing at least a cheaper option if not one with greater functionality. Examples include Telefonica’s KITE platform and DT IoT’s TMSP. That’s hardly a vote of confidence for the third-party platforms, plus it reduces the revenue coming in to those platforms since charging models were typically based on a revenue share, although Cisco has tweaked that approach in recent years. I characterised MNOs multi-platform strategies as being typically based on in-house development, but that’s not exclusively the case. Some operators have been looking at and engaging with some of the emerging platform vendors, including floLIVE, as an alternative.
Thirdly, it potentially sours the relationship between the vendor and the operators. For Cisco this isn’t such a big deal. It makes only a small proportion of its revenue from the telecoms sector, selling mostly to enterprise. If Control Center ends up being a tool for supporting enterprises rather than MNOs that’s fine. Ericsson, in contrast, makes 95%+ of its revenue from telco. It will be wary of anything that might sour that relationship. A less than stellar performing product, and particularly one that makes a loss, isn’t exactly something that should grace its product portfolio.
We have long taken the view that Ericsson was effectively treating IoTA (and its predecessor DCP) as loss-leaders, fees for which would typically be negotiated in the context of a client MNO’s total spend on networking equipment and other services. It’s easy to see how many MNOs may have adopted IoTA almost as an afterthought because it’s an easy option on the context of a wider relationship with Ericsson, and for it’s part Ericsson may not have focussed on negotiating long term viable commercial terms for the IoTA sliver of its business with larger MNOs. But justifying loss-leaders becomes more and more difficult in the current economic climate, and particularly not ones which their customers don’t particularly like.
A little background: Aeris Communications is an IoT-focused MVNO headquartered in San Jose, California with operations centres in Chicago, India, Japan and the UK. It connects about 15 million devices. The company has two main lines of business. The first is the Aeris Fusion IoT Network, which involves the supply of IoT cellular connectivity to enterprises. The second is the Aeris Mobility Suite which is a white label connected vehicle platform that launched in January 2020, based on capabilities that it had gained in the course of supporting the development, deployment and operation of connected car products for several years.
There are two aspects to this deal from Aeris’ perspective. Ericsson’s Connected Vehicle Cloud element sits very neatly with its Aeris Mobility Suite offering. Similar types of customers and no channel conflict. That part of the deal is fairly straightforward.
What’s not straightforward is the IoT Accelerator part, which constitutes the majority of the deal. As noted above, IoTA is used by Mobile Network Operators (and one or two MVNOs) as a Connectivity Management Platform, i.e. handling the onboarding, management and billing for their cellular-based IoT connections, plus a few other features like remote SIM provisioning, security, device management and cloud connectors.
With this deal, the dozens of operators, including very significant players, that use IoTA have found that their CMP has been handed over to a company which is ostensibly a competitor. Aeris does have some history of acting as a Mobile Virtual Network Enabler, but it’s not a significant part of the business today. It is, to all intents and purposes, exclusively an IoT MVNO today. That said, the vast majority of Aeris’s business is in the US, where there are currently no major operators using IoTA (although KORE struck an agreement earlier this year to run the platform). This latest news has not gone down particularly well with Ericsson customers, echoing experiences with Jasper (when it was purchased by Cisco and Cisco sought to use it as a route to provide cellular connectivity services to enterprises), and Nokia WING (which had an initial vision of providing connectivity direct to enterprises). In all of these previous cases, sufficient pressure was applied by various MNOs that any desire to provide cellular connectivity direct to enterprises was quashed.
What would Aeris hope to do with this new asset? This is the crux of the matter. We see there being two options.
Aeris could simply decide that it wanted to operate a connectivity management platform business (and a connected car business). Running a CMP is a core part of what IoT MVNOs do. For instance, Jasper Wireless was initially set up as an MVNO before pivoting to just running its platform and then being acquired by Cisco. And every other MVNO has a CMP of some sort, although many are white label versions of someone else’s. It’s well within Aeris’ comfort zone to operate a CMP for carriers. It did a similar thing for Sprint a few years ago.
The implication is that it would stop running as an MVNO (perhaps maintaining that business just in the US where it has almost no conflict with IoTA customers) and would just run the platform. The question here is: can it do it cheaper than Ericsson? If Ericsson is loss-making with IoTA, will Aeris be any different? Well, potentially yes. Its operating model is probably leaner. And it won’t be scared of pushing up prices. The Ericsson model saw small set-up fees and the vast majority of revenue coming from revenue share. Cisco has recently moved somewhat away from that approach. While Ericsson might have been hesitant about doing something similar to jack up revenues, because of the huge revenue coming from selling infrastructure, Aeris will not have that constraint.
Regarding connected cars, it could act as the federator of connectivity between the various providers that are running IoTA.
In recent years, Ericsson has tried to add in functions to act as a clearing house for network operators handling inter-carrier billing and cross-charging for MNO-to-MNO collaborations. For instance, the IoT Accelerator Connect Hub is aimed at enterprises and providing connectivity options from multiple operators, and the IoT Accelerator eSIM Hub, is aimed at enterprises to provide eSIM profiles from Ericsson’s operator partners. The aim here by Ericsson was to pivot towards enterprise but without being a direct competitor for the operators, but to act as the operators’ friend. Essential given that third-party platform providers had their wrists slapped in the past for impinging on the operators’ turf by trying to go direct to sell to enterprise.
Aeris is, to an extent, not constrained by this limitation. It might hope to do what Ericsson was never able to do: use the presence in dozens of networks as a way to pursue global IoT opportunities with localised connectivity. However, these sunlit uplands may not be quite so sunlit. Just because IoTA handles the infrastructure for the operators doesn’t mean that it has any divine right to sell the connectivity of those operators. It, and the new Aeris entity, are still completely dependent on the operators wanting to allow that kind of relationship, i.e. with Aeris as a reseller. They may be happy with it, they may not. Given the newly enhanced connected car portfolio, which would be quite appealing for car manufacturers, it may prove to be quite an appealing proposition for many carriers, i.e. act as the host network for car manufacturers A, B and C, with basically zero acquisition costs.
Non-automotive is likely to work rather differently. It’s hard to see many operators being content to allow Aeris to be the federator of connectivity across all their networks. Hard, but not impossible. The direction of travel for many carriers is to retrench away from directly pursuing the IoT opportunity and instead work more in wholesale. This may be quite appealing for some. Particularly if Aeris is able to hold together a genuinely global network of providers. But this will only apply to some. The larger players will wonder whether they’re losing out on high value business to a company which is a core supplier of theirs. There will be a fragmented set of views.
The above is the logic of this being an acquisition by Aeris of Ericsson. But we think that it’s equally valid to see this as a reverse acquisition by Ericsson IoT of Aeris for the purpose of spinning that company out. Ericsson looked for a company in a similar kind of market space and that was somewhat down on its luck to act as the vehicle for that. Much easier than actually spinning it out as a separate business.
Aeris has been a leading IoT MVNO for many years, but it has had its own problems over the last few years, trying to cope with 2G and 3G switch-off in the US, particularly CDMA, which removed a healthy slug of its most valuable connections. Growth has been hard to come by and the market has become a much more fiercely contested one (as evidenced by our IoT MVNO Market Landscape 2021 report). The company has had a number of offers on the table in the last few years and has accepted none of them. Today the valuations of connectivity businesses are well down on twelve months ago, with a return to the long-term valuations of around 2x revenue replacing those of 4-5x revenue that happened in the last couple of years.
Exit? There’s no indication of this. Well, perhaps not, but there is an inescapable logic. Ericsson wants rid of the IoTA/CVC businesses. It’s painful to spin them out themselves. So they find a willing receptacle in the form of Aeris and hand over the assets to them (while taking a small stake). That business then could be turned into a publicly traded company via a SPAC-type arrangement. The majority of the business is then floated while Ericsson still retains a small share of that new entity. There's more that an outside chance, although the timing isn’t ideal for a high valuation. Or, as another alternative, it may be part of a bigger roll-up in the IoT connectivity space.
This blog post is rather more speculative than most, awaiting further guidance from either Aeris or Ericsson on firm plans for the new organisation, although the lack of feedback from the companies concerned leads us to suspect that next steps may involve further acquisitions and/or restructuring.