Jeff Zucker of NBC Universal coined the prescient expression “Trading analogue dollars for digital pennies” in 2008 to describe the huge gap that he was observing between the lucrative promises of online and digital advertising and the reality of the meager revenues that it was in fact producing. Could the same be true of the Internet of Things (IoT) revolution? Are we trading the hundreds of dollars that we are generating from mobile users for the pennies that providers get for connecting “things”?
Connecting the 50 billion projected devices, or things, to the Internet is the cornerstone of the Internet of Things. Given the challenges of remoteness, mobility and the cost of wiring up these devices, many of these connections will be made over mobile networks. In fact, Beecham Research estimates that the number of cellular machine-to-machine connections will grow to 1 billion by 2020, up from 172 million in 2013. It is no wonder that the mobile operators are salivating at the prospect of all this new revenue to be earned from connecting inanimate objects. This windfall is especially at a time when there traditional mobile business is under attack. Changes in voice usage and bundled minutes are causing voice revenues to decline and data revenues are under attack from Wi-Fi connections and over-the-top providers (see The Mobile Paradox).
Like the analogue to digital advertising shift, the shift in IoT connectivity is not a straight substitution. Let’s look at the economics. The average mobile user in the U.S. spends $589 annually for his mobile phone service ($381 per year in Europe). Connecting things is a lot different than connecting chatty or data hungry mobile users. In the IoT world, many devices simply convey their status on an occasional basis and then remain dormant until this status changes. For example, I am familiar with an interesting company that provides a compelling solution to cities to better manage their public trash. Each of the trash bins that are located on sidewalks, parks and other public venues is connected to the Internet, communicating its status to the city operations so they know when the bins need emptying. As a result, the city only has to empty them when they are actually full, saving considerable money from not having to send out crews to collect half-empty trash bins.
Because these bins are conveying very little information (“I am full; “I am empty”), at infrequent intervals they do not require the fast 4G LTE connectivity that allows us to quickly browse the web and stream videos on our smartphones. In fact, they get by with a decade’s old technology – SMS. The same technology that we use to send each other messages on our phones. For that, the mobile operator charges the company 50 cents per bin; or, annual revenues of just $6. That means that a mobile operator would have to connect close to 100 bins to equal just the revenue of one mobile user.
Of course not all devices will require simple mobile connectivity. But, when we talk about IoT the majority of the use cases are like my trash bin example – sensors monitoring the temperature of transportation cargo, parking sensors alerting when a spot is free, or smart meters communicating daily energy consumption. This would mean that these 1 Billion new M2M connections could represent just 1 percent of the revenue that the industry would have traditionally collected if those connections had been to people and their smartphones, rather than to inanimate “things”.
So, while IoT promises huge numbers of new mobile connections, the economics are fundamentally different than the traditional mobile business. IoT offers mobile operators huge quantities of connections but potentially very little new revenue. If providing mobile connectivity is nowhere near as lucrative as it would appear, how are mobile operators to prosper from the IoT revolution? The obvious answer is to move up the value chain, providing a wide variety of value-added solutions and services that are required for successful IoT implementations and realization of business value.
In a future article I will explore what these value-added services and solutions are and who will be the winners in the Internet of Things revolution.
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