Internet Of Things: Gold At The End Of The Rainbow For Telcos?

Stephan Gatien

The combined forces of next-generation broadband, 5G, and Internet of Things (IoT) promise a short-term future made up of ultra-dense coverage, secure exchange of data, low latency, and high speed. This will transform all aspects of our lives, and we will see the number of connected objects dwarf the number of subscribers for communications service providers (CSPs). This in turn will change the way CSPs do business, creating new opportunities and challenges.

Some industry leaders, like CEO of Vodafone Vittorio Colao, speak about the huge benefits to come from a “gigabit society,” both for consumers (download an HD movie in 5 seconds) and enterprises (high-frequency, real-time trading platforms, collaborative online commerce). Others, like Jose-Maria Pallete, CEO of Telefonica, highlight the massive opportunity looming when an expected trillion sensors will be deeply embedded in the fabric of this hyper-connected society and provide a tenfold increase in the flow of data over the next 3 to 5 years.

As pressure continues to mount on the industry—pressure caused by increased market saturation, disruptive new entrants, and ongoing threats from OTTs—can the telco industry successfully surf the IoT wave? Can this industry transform and shape the society of tomorrow while simultaneously transforming itself beyond a classic network operator role into a role of digital service provider? Is there gold at the end of the IoT rainbow for telcos?

IoT: the new battleground for telcos

Recent studies suggest that telcos need to move quickly to capture this new market. The estimated size of the market varies greatly based on sources – but all agree that it is massive. A recent Analysys Mason report estimates the market will be at US$200 billion by 2025. Some estimates are even more optimistic: a  paper from the World Economic Forum (Digital Transformation Initiative: Telecommunications Industry) clearly identifies IoT as the new “battleground” for CSPs as they look to capture new revenue streams from the massive deployment of sensors, analytics, and machine learning.

The industry is paying close attention, with a number of operators already actively engaged in this domain. According to the analyst firm Berg Insight , mobile operator revenues generated from the Internet of Things reached more than $11 billion in 2016, with large players like AT&T and Verizon posting more than US$1 billion in revenue annually. Operators like Deutsche Telekom are also capitalizing on the opportunity with a multi-IoT platform in the cloud (Open Telekom Cloud) that offers starter packages to companies interested in developing IoT solutions.

But the path to success with IoT is still a quagmire for some CSPs. Though substantial, the $1 billion revenue from players like Verison & AT&T does not represent even 1% of their overall revenue. For some industry players, the way they define, develop, and best monetize the potential of the IoT is unclear. But for many, the path to revenue will reside in the capacity of operators to implement successful strategies for moving up the value chain beyond pure connectivity.

It’s time to move up the IoT value chain

Connectivity. Connectivity is, and will remain, the underlying foundation of any IoT portfolio for service providers. As recently highlighted by Ovum in its Digital Economy 2025 report, IoT-related connectivity opportunities will only amplify going forward for the industry. Though revenue is low ($1-$1.50 per connection per month in the U.S., for example), margins are at this point attractive. However, these margins will rapidly erode under the competitive pressure and a race to zero or few cents in order to control the base. To provide value, digital service providers will need to evolve from pure connectivity providers to value-added service providers

An IoT platform-as-a-service. Digital service providers may choose to offer an open IoT platform-as-a-service (PaaS) that powerfully integrates connectivity, devices, sensors, applications, data, and analytics together in the cloud. This would allow CSPs to better drive integrated solutions in order to capture a larger share of the revenue. More importantly, it would enable them to attract the right ecosystems (developers and partners) to fast-track innovation.

Industry-specific applications. A recent Ovum report acknowledges the essential role the industry will play in some of the key vertical markets of the digital economy. The automotive industry is a perfect example, as vehicle connectivity alone was responsible for 32% of U.S. cellular connections in the first quarter of 2016, edging for the first time all the other connectivity categories. Beyond connected cars, connected/smart cities and connected healthcare have already gotten a lot of attention and investment from CSPs. By establishing or acquiring deep expertise, CSPs will be able to develop and offer relevant vertical stacks that can allow them to position themselves as value-added solution providers. It is probable that M&A will continue to be an important factor to accelerate the acquisition of some of this vertical expertise, as already illustrated by many transactions closed by Tier 1 players like Verizon, Telstra, and Vodafone.

Innovative capabilities. To further establish themselves as broad actors in the IoT space, CSPs will need partners that can embrace and augment the solutions and platforms they will offer. Without the scale that a rich ecosystem can provide, it will be very difficult to deliver the innovation, speed, and agility that the market might expect. The success of companies like NTT docomo, with its +d ecosystem initiative, illustrates the potential for service providers to entice partners to co-create value in joint domains like vertical markets or targeted IoT applications.

Data analytics & insight. Without Big Data analytics, the millions of petabytes of data created by billions of devices and sensors will only be noise. Data analytics will become the critical layer of intelligence required to allow IoT to evolve to a more sophisticated version of itself beyond automation monitoring. Digital service providers will have a unique opportunity to insert themselves in this market to deliver cloud storage, analytics services, and data monetization capabilities to their business customers.

There is no doubt that the opportunity exists for CSPs to leverage the Internet of Things to both transform themselves into digital service providers as well as to transform many facets of the society we live in. To do this, they will need to fully leverage their network investments to take full control of the connectivity layer and develop strategies to grow their IoT footprint from there. They can choose to become IoT applications or solutions providers, to offer an IoT platform in the cloud, to focus on specific vertical markets with integrated offerings, or to grow a healthy ecosystem. For those who can do this, there will undoubtedly be a pot of gold at the end of the IoT rainbow.

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Stephan Gatien

About Stephan Gatien

Stephan Gatien is global head of Telecommunications for SAP. He is responsible for the company's vision and strategy in the telecommunications industry, overseeing product and solution management activities and working with product development teams to ensure that SAP products support the unique needs of telcos.