It might go without saying that large access providers have different strategic problems and opportunities than smaller providers. For bigger providers, losing “billion dollar a year markets” means creating new markets of at least similar size, just to maintain current revenue magnitudes.
Growth requires more than that, of course. Smaller service providers face different issues, generally related to scale.
The mobile business, once highly fragmented, has become a scale business. The video subscription business has similar characteristics, meaning it is difficult for small providers to compete effectively.
Likewise, one might argue, many of the promising new markets, including many machine-to-machine or Internet of Things opportunities in the automotive, healthcare, energy, transportation, connected home and retail verticals, require national scale.
The same might be said of mobile wallet, mobile e-commerce or mobile payments opportunities.
In other words, creating new revenue sources to replace lost voice revenues often requires scale, human and capital resources that do not exist.
At the same time, some of the most-important new revenue sources, such as entertainment video, are themselves subject to disruption by online-delivered video.
Important niches do exist. The reason value added resellers and telephone interconnects and resellers in general exist is because it is inefficient for tier one service providers to provide service, or conduct sales operations, in many customer niches, small business being the salient example.
So the strategic issue remains: what can small service providers do to reposition themselves for vastly-different future markets? There are few obvious and easy answers. Small rural telcos, for example, do not have much “overhead” they actually can cut, to improve profit margins.
Few opportunities generally exist to significantly reposition to serve business customers, rather than consumer accounts.
The larger “rural service providers” (including Windstream, CenturyLink and Frontier Communications) already have made big acquisitions to reposition as providers of business customer services to a significant percentage of the U.S. customer base.
That option does not exist for most small telcos or cooperatives.
The latest study by the Telergee Alliance illustrates the issues. Rural and small telco profit margins are dropping, part of a three-year trend that saw an overall five percent drop over the last year. Profit margin on new or non-regulated services were up by about that amount, but margins on voice services dropped more than 15 percent.
Most--if not all--small telco video operations lose money, while mobile operations likewise face declining average revenue per user. Average revenue per user was $35.51 a month, down from $37.12 in 2009 and $40.93 in 2008.
Internet access revenues and margins for out-of-territory business-focused operations rose significantly. The issue is how many small telcos can conduct such operations.
Tier one telcos face different issues.
When big existing markets are shrinking, big new markets are required to replace those lost revenues, it goes without saying. But tier one service providers also have the scale to invest in, and operate, new services that require big service footprints, large numbers of potential customers, and account scale.
Machine-to-machine connections likely feature average revenue per connection of perhaps $4 a month. But those amounts could drop to $1 a month between now and 2020. Only a big firm can achieve enough scale to make that business case work.
There are 4.4 billion machines or devices now connected to each other or to servers, growing 10.3 billion by 2018, a study sponsored by Vodafone predicts. At $48 a year, that implies potential revenue of about $211.2 billion of connection revenue.
Assume average ARPU for an M2M device of about $2 a month, or $24 annually, in 2018. That implies revenue of about $247.2 billion.
That is a market big enough to be interesting to any number of service providers.
Compare that to global subscription TV revenues will grow at a compound annual rate of growth of 3.5 percent over the next few years to $236 billion in 2018.
In other words, M2M connectivity services of the “dumb pipe” sort represent a relatively near term revenue opportunity as big as all linear subscription video services. M2M likely is an opportunity for mobile service providers, while linear video mostly benefits fixed network service providers.
But it is worth considering the type of revenue upside. Linear video is an example of a “value-added application,” the sort of revenue source service providers constantly say they want, as opposed to “dumb pipe” access services.
But the M2M opportunity shows the danger of simple thinking about “dumb pipe,” as opposed to value-added services and applications. Both simple connectivity and apps can represent big opportunities. And the dumb pipe revenue arguably has more scale benefits, as a general purpose or horizontal service, compared to the vertical linear video subscription app.
Within three years, most firms will be embedding M2M into the actual products and services sold to customers, the Vodafone survey suggests.
But the M2M or Internet of Things market consists of “hundreds of micro-markets,” not a single industry, the report also suggests.
That likely has implications for the role of the mobile service provider in the ecosystem. If the application settings are highly fragmented, the easiest role for an access provider to adopt is “horizontal,” not “vertical.”
In other words, mobile service providers supply the communications function, not primarily vertical applications, much as the primarily value provided to business or consumer customers is mobile access (for phones, other personal devices and sensors), with a couple of general purpose applications (text messaging and voice).
In other words, mobile service providers likely can generate more gross revenue, at higher margins, by supplying general purpose “dumb pipe access” for M2M application suppliers, than they will in most vertical markets.
About 22 percent of 600 executives involved in machine-to-machine strategy say they already have at least one active M2M deployment in operation, up about 80 percent in 2014, compared to 2013, according to a new study sponsored by Vodafone and conducted by Circle Research.
The three leading industries, in terms of deployment, are the consumer electronics, energy and utilities, and automotive industries, each with a minimum of 30 percent adoption by respondent firms.
By 2016, the percentage of respondents with at least one M2M deployment will be 74 percent, the study predicts, based at least part on the embedding of M2M features into products such as thermostats and kitchen appliances.
Energy and utility respondents will have boosted M2M deployment to about 62 percent by 2016, based on smart meters and grid monitoring programs.
Use of M2M in the transportation and logistics verticals will be 57 percent in 2016, based largely on fleet logistics applications, and adoption in the healthcare and life sciences industry will be identical, the Vodafone survey found.
Automotive segment adoption will reach 53 percent, while retail deployment reaches 51 percent. M2M deployment in manufacturing will be at least 43 percent, though self reporting might be underestimating the actual state of deployment, given the widespread use of automation in manufacturing. Some respondents might not call what they already are doing an instance of M2M deployment.
Safety and security applications are the leading uses of M2M in automotive settings, partly because in many regions they are being driven by regulation, such as the eCall programme in the European Union.
Consumer electronics is at present the leading adopter of M2M, with the highest adoption
of external-facing strategies, at 71 percent.
Those applications primarily include tracking mobile assets including shipping containers. But
20 percent of all company executives surveyed in the consumer electronics segment already are selling connected devices directly to consumers.
Asset tracking is expected to be important in the energy and utility segment, monitoring in health care, connected car services in the auto industry, monitoring in manufacturing and connected cabinets or asset tracking being lead apps.
Early adopters tend to say productivity and cost savings are the deployment drivers, with projects tending to be in the internal processes areas, rather than external operations visible to customers.
At the moment, adoption of at least one active deployment is highest in the “Africa, Asia, Middle East” region, a rather broad category of limited analytical usefulness, one might argue. But 27 percent of executives surveyed in that region had projects underway.
The study included respondents from Australia, Brazil, China, Germany, India, Italy, Japan, the Netherlands, South Africa, South Korea, Spain, Turkey, the United Kingdom, and the United States.
In Europe, 21 percent of respondents reported they had at least one M2M project in action. In the Americas, 17 percent of executives said they had at least one project in progress.
But Vodafone expects that, by 2016, deployment profiles will be quite similar, with more than half of all respondents supervising actual deployments.
The survey, carried out by Circle Research, captured the views of more than 600 executives involved in setting M2M strategy in seven key industries across 14 countries.
Automotive is the most mature of the sectors where M2M is now seen as an enabler for additional services such as remote maintenance and infotainment. M2M adoption in energy and utilities is also growing rapidly as ‘smart’ home and office services such as intelligent heating and connected security gain popularity.
This uptake is being fuelled by the use of M2M in connected devices such as smart televisions and games consoles. The research shows that nearly three quarters of consumer electronics companies will have adopted some form of M2M by 2016, whether for new products, logistics or production.
Similarly, the report anticipates that 57 percent of healthcare and life sciences companies will have adopted M2M technologies by 2016.
All telcos have revenue issues. All face a loss of key legacy sources. But options for addressing those problems, aside from mergers and acquisitions, are severely limited in the small telco space.