M2M Forecast Illustrates a Problem for Big Service Providers

Verizon executives have been saying for years that machine-to-machine services (the Internet of things) is one reason why mobile penetration ultimately would reach into the four hundred percent range.

"It's safe to say this is a market potential of billions in the 2020 time frame," Lowell McAdam said. This should translate into a market with "hundreds of millions of dollars in revenue for a company the size of us."  Reuters reports. 

To be sure, with expectations that billions of sensors will be using mobile networks for connectivity, Verizon has reason to be optimistic. 

The longer term issue is precisely how big M2M services will be for individual service providers. Hundreds of millions in revenue is not a bad start, but will not really move the needle much, for firms the size of Verizon, unless revenue reaches into the billions. 

Certainly Verizon Wireless reasons that can happen. Some idea of how big M2M would have to be, to have a serious revenue impact, can be illustrated by noting the change $1 a month in mobile customer account revenues would have, either in a positive or negative direction. 

Verizon Wireless had about 96 million customers at the end of the third quarter of 2012. It probably had something closer to 98 million customers by the end of the fourth quarter of 2012. If Verizon never added another net customer, its business fortunes would be far more significant if it can grow each "phone" account by about $1 a month. 

Such growth per "human" account represents about $1.2 billion in annual revenue, either positive or negative. In other words, by 2020, assuming Verizon did have an M2M business worth hundreds of millions, those business results would be dwarfed by incremental changes in revenue from "human" accounts. 

That illustrates the huge challenge for large service providers: the magnitude of revenue or earnings impact from the legacy business, even for small incremental changes, is much more significant than even big success with many of the newer businesses service providers are growing. 

As pundits often observe, it makes sense for company executives to pay attention to the relative handful of things that really can affect a company's financial performance.

It is essential that service providers continue to look for new revenue sources. But it also is helpful to remember just how big those new revenue sources have to be, to really affect the overall revenue picture.